New Delhi, June 14: The Congress-led government is exploring the possibility of an investment allowance and restoring standard deduction to the salaried.
While the investment allowance will encourage more factories and the purchase of machines, the standard deduction will put more cash into the hands of consumers and boost retail spending. Standard deduction is a fixed deduction from salary, which has been discontinued from 2006-07.
However, the government is unlikely to make any sweeping tax concessions and may actually restore service tax to its earlier 12 per cent level. The tax was reduced to 10 per cent earlier this year to help out industry.
Besides, it is unlikely to do away with the fringe benefit tax, a major demand of industry.
We need to spur investment and we also need to increase consumer retail spending. Thats the way we can get the economy to grow, said top finance ministry officials.
Spooked by the global recession, a wave of job losses and salary cuts, both industry and consumers have postponed big-ticket purchases.
Currently, under Section 80C, 80CCC and 80CCD of the Income Tax Act, individuals can claim a deduction of up to Rs 1 lakh a year for investments in specific savings instruments such as life insurance, provident funds and NSC.
These help promote savings but not expenditure and right now to get out of the slowdown you need to boost spending. Even a small standard deduction allowance, which puts money directly into peoples pockets can help to pep up spending, pointed out the officials.
The government will push for the move only after a complete assessment of all its revenue sources and expenditure programmes.
In investment allowance, the government feels it is possible to accede to industrys request the sop will increase economic activity and spur greater excise and customs earnings.
India did have an investment allowance provision, but that was scrapped about two decades back. CII director- general Chandrajit Banerjee said, We have asked for an investment allowance of 25-30 per cent, and a little higher for small and micro industries.
In March this year, industry shrank 1.4 per cent, though a small rebound has happened in April and economists say, the figures for May could be reasonably good.
However, certain crucial sectors such as consumer non-durables, including processed food products, and capital goods posted negative growth in April. Processed food items declined by a massive 34 per cent.
Besides, the 1.4 per cent growth in industrial output was much lower than the 6.2 per cent growth in April 2008.
The officials said an investment allowance could help pep up the growth figure and more factories, especially in the small scale and other labour intensive sectors could mean more jobs, which is what all this economic stimulus packages are all about.
Some senior revenue officials have advised caution. These are tough times and we are certainly not to go around distributing tax largesse. So please do not expect tax slabs or rates to be changed. Nor are we in favour of scrapping fringe benefit taxes despite incessant pressure from industry, they said.
Industry wants an end to fringe benefit tax and has justified its move on the grounds of a limited revenue potential of the tax.
In the last fiscal, the government earned a mere Rs 103 crore from the tax, which was about 5.5 per cent less than what it earned the year before.
The finance ministry is also considering bringing the service tax rate back to 12 per cent. The government earned about Rs 62,000 crore last year from service tax.
Earnings from this indirect tax rose by as much as 18 per cent, while excise and customs duty collections were below expectations.
Officials said the government wanted to bring excise and service tax rates on a par so that the country could move quickly to a unified goods and services tax regime.