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Sops for taxpayers in the works

New Delhi, June 2: The finance ministry may raise the exemption floor for taxpayers from the current Rs 2 lakh in the Union budget. It also plans to make saving more attractive by raising deduction levels for investments in insurance and pension schemes.

Top officials said the government was likely to cherry-pick suggestions made earlier this year for the Direct Taxes Code (DTC) and include them in the budget. The Union budget is likely to be presented in the first week of July.

The BJP-led government feels that the middle class has not been given a fair deal in the last budget or in the DTC as far as the income tax exemption limit or tax incentives for savings were concerned.

“With inflation ranging between 7 per cent and 9 per cent over the last few years, the value of money has come down and that itself makes a case for raising the minimum exemption limit for income tax,” department of revenue officials said.

Veteran BJP leader and former finance minister Yashwant Sinha, who headed the parliamentary standing committee on DTC, had sought to raise the exemption limit to Rs 3 lakh over the next two years, with the limit raised partially this year. Officials said the suggestion might be implemented in phases, starting with this budget.

At present, tax is levied on annual income between Rs 2 lakh and Rs 5 lakh at 10 per cent; Rs 5-10 lakh at 20 per cent; and above Rs 10 lakh at 30 per cent. The minimum in the first slab is likely to be rejigged.

Besides, a hike in the deductions allowed on investments is being considered to give the middle class taxpayer some relief as well as raise the savings rate.

At present, the overall limit for claiming deductions through various savings instruments is Rs 1 lakh apart from Rs 15,000 as health insurance premium and up to Rs 1.5 lakh by way of interest on home loans.

Insurance and pension companies want the government to raise this ceiling or leave investments outside this general ceiling.

Realtors also want the government to raise the current limits of deduction on the home loan principal amount under Section 80C and interest deduction under Section 24 of the income tax act in order to encourage home buying.

The government, too, feels it needs to push measures to encourage savings to improve the savings-to-GDP ratio, which has declined from a high of 36.9 per cent in 2007-08 to 30.1 per cent in 2012-13. This has also impacted investment — gross capital formation has come down from 17.3 per cent of GDP in 2007-08 to 11.8 per cent in 2013-14.

Officials said the government was willing to risk giving some sops as it believes the economy was slowly coming out of its sluggish mode. In such as situation, putting more money in people’s hands would help to boost both savings and spending and thereby economic growth.

The HSBC Purchase Managers’ Index, which rose to 51.4 in May, seems to support this logic . Frederic Neumann, co-head of Asian Economic Research at HSBC, said, “The momentum in the manufacturing sector improved... thanks to higher domestic and export order flows.”

Excise relief

Officials said the excise exemption limit for small businesses was also likely to go up from the current Rs 1.5 crore. This has been a long standing demand from small scale industries, which feel the current economic slump has hit their margins the most. Rising raw material costs and interest rates have sent a large number of these companies into the red.

They have been consequently clamouring for some kind of a relief that would help them compete better with their competitors from China and Bangladesh.

Some 45 per cent of India’s exports of $312 billion are from small units who claim their interest cost had risen to 14-18 per cent compared with 6-8 per cent in competitor countries, while fresh funds and export financing have been hard to come by.

Yesterday, finance minister Arun Jaitley said in a blog, “Manufacturing sector has had an abysmal performance last year. There is a need to boost domestic low-cost manufacturing.”

Officials said DTC, which the ministry had planned to bring along with budget, may be delayed as the ministry will now work to fine-tune it in line with the expectations of the new government.

“The GST is being given priority right now… besides measures to reverse the slowdown in growth. You can look at raising exemption limits as a way to encourage people and businesses to spend more to boost growth,” officials said.

 
 
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