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Aligning DTC with tax rates will be a welcome measure

india Updated: Feb 13, 2011 21:40 IST
Poorva Prakash
Poorva Prakash
Hindustan Times
Budget 2011

It’s Budget time again and expectations are rife on how the government plans to deal with challenges such as inflationary pressures and a spurt in global oil prices.

High inflation along with inflation-linked revisions is hitting the cash flow of the common man. Therefore, there is a lot of expectations in terms of tax rates, restructuring or recasting of the slabs and especially expanding the exemption or investment-linked deductions limit in the budget.

Since DTC (Direct Taxes Code) is expected to be introduced next year, its alignment to tax slabs and restructured exemptions in this year itself may be a welcome measure as it addresses the concerns of a common man currently hit by runaway inflation. The implications are as follows:

Reduced tax rates: The personal income tax rates remain fairly competitive within Asia and the 30% of the top tax rate would most likely remain intact. However, the existing education cess @ 3% of the tax liability may be abolished for individuals falling in the lower tax bracket of below R8 lakh. This may provide a tax relief of R2800 per annum.

Restructured slabs: A higher income tax exemption limit in line with the DTC from the existing R160,000 a year to R200,000 has a potential to give tax relief of up to R4,000. This would be a big relief for the lower income group.

Enhancement/expansion in exemption and/or deduction: There would be expectation that the highest slab of
R8 lakh under the existing tax laws is realigned with the DTC upwardly to Rs 10 lakh. This would provide assessees tax relief of up to Rs 60,000 per annum at the maximum marginal rate of taxation.

There are also a host of tax benefits that provide a win-win situation for the taxpayer and the government. For example, enhancing the tax deduction limit for infrastructure or introducing power sector bonds will help in providing tax relief to individuals and mobilise long-term funds at competitive interest rates for the government.

Putting more money into the hands of the households temporarily helps in taking care of inflationary pressures. A higher purchasing power may put additional pressure on prices if the government does not appropriate fiscal measures along with stimulus.

Poorva Prakash is director Deloitte Haskins & Sells. The views expressed are personal.