Parliamentary Standing Committee’s recommendation on income tax is romantic than practical.

Income tax payers in the country may have got big hope after senior BJP leader and former Finance Minister; Yashwant Sinha headed panel’s recommendation on IT exemption limit of Rs 3 lakh. The panel also brought a group of pro-tax payer suggestions for personal income tax payers including higher deductions.  

            But the recommendations are difficult to find in the budget because their revenue loss implications are very big. The committee suggested raising the exemption limit to Rs 3 lakhfrom the current level of RS 1.8 LAKH.  Besides, total deductions were set at around 3 lakh rupees on various items including fixed deposit, expenditure on health, life insurance cover, and education expenditure. The deductions give more space for a large group of tax payers to avoid taxes. If the suggestions are implemented, an individual need not pay taxes even if his annual income is Rs 6 lakh provided, he is claiming the permissible deductions. Or in other words, this will lead to a situation where an individual with a monthly income of Rs 50000 is not paying any income tax at all.

            For the government, the lower tax slab group or individuals with income between Rs 2 lakh to Rs 6 lakh is a major contributor to income tax. Increasing exemption limit to 3 lakh means the 10% tax slab should be shifted upwards say, 3 to 5lakh and the 20% slab moving to say, 5-10 lakh bracket. This means that people who were paying at 30 % earlier are paying only 20%. The tax base has a pyramid structure meaning that largest tax payers are in the low tax rate group. So, exempting large number of them and raising lowering tax rate for the higher groups means low tax revenue.

            Hence, the implementation of the panel’s recommendation will lead to considerable revenue loss for the government. Because of deteriorating finances; this year is the worst year for the government to launch such a populist measure. Exemption limit may go up, but most probably land at Rs 2 lakh or in the extreme case Rs 2.2 lakh mark.