Income tax slabs set for a rejig

Finance minister P Chidambaram has sought to provide relief to 1.4 crore income tax assessees with annual taxable income of Rs 1,00,000 in the ’04-05 budget.

This segment — which accounts for 41% of the total 3.4 crore tax filers in the country — will not have to pay tax as their liability will be automatically rebated. But relief is limited and not being provided across the board for all tax payers. Existing I-T slabs also have not seen any changes.

The next budget could see a rejig in the income tax slabs based on the recommendations of Kelkar’s Task Force on the implementation of the Fiscal Responsibility and Budget Management Act, provided the government gears itself to absorb a revenue hit in the year of introduction. To offset the revenue loss, the task force has suggested eliminating standard deduction while moving to a two-slab rate structure. Right now, the standard deduction of salaried taxpayers is Rs 30,000 upto Rs 5 lakh and Rs 20,000 for those with income over Rs 5 lakh. The package also includes rationalising savings incentives into an Exempt Exempt Tax (EET) system under which withdrawals will be taxed. Also, tax concessions on interest income under Section 80L will go.

Tax payers opting for housing loans will not lose out, since the task force has suggested continuing exemptions on such loans. So is the case for exemptions to senior citizens. The effective average tax rates for all categories of tax payers would be lower with this package, according to an analysis by the Task Force.

If this year’s budget proposals are accepted, those with a taxable income of Rs 1,50,000 would have to pay Rs 19,380. The liability works out to Rs 10,000 in the structure proposed by the tax force. Similarly the tax liability of a person with a taxable income of Rs 3 lakhs a year works out to Rs 65,280. The liability works out to Rs 40,000 in the proposed tax structure.

For those with taxable income of Rs 5 lakh, the annual tax liability works out to Rs 1,26,480. The tax payer gets the benefit of slab rate of 10% and 20% while computing his taxable income.

The tax burden works out to Rs 90,000 in the proposed tax structure.

The task force is of the view that the benefits of a tax cut would be available to all categories of tax payers if tax slabs are broad-based.

While this may be true, the income tax payer would also have to absorb the extra burden of a 20% tax on goods and services in the new dispensation.