New Delhi, Feb. 13: Finance minister P. Chidambaram is under pressure from cabinet colleagues to ease the tax burden on the lower middle class by raising the tax exemption limit.
The ministry is tinkering with various proposals on tax slabs and exemption limits to create a budget that the middle class welcomes.
Congress MPs say urban constituencies have returned to the United Progressive Alliance in large numbers and steps need to be taken to consolidate this base.
Although the Left wants the government to increase taxes, it, too, feels the burden should be on high- income earners.
One of the popular ideas which seems to have emerged is that those who earn up to Rs 1.5 lakh a year can, through tax planning, get away without paying taxes. Currently, those earning up to Rs 1.09 lakh a year are exempt.
Even if this happens, they will have to continue filing returns if they earn more than Rs 50,000.
With this, the lowest tax rate of 10 per cent will lose relevance as those in the income bracket paying at this rate will escape the net altogether.
Such a move will not result in any great loss of revenue. But, with the need to mop up resources for ambitious social sector plans, the government may well decide not to go the whole hog.
Officials cautioned that if the relief is announced, some tax-saving schemes could be rationalised.
Income from investments in tax-saving funds and bonds will become taxable, as is the practice in most developed countries. This has been suggested by several expert committees on taxation.
The officials said income from existing investments in tax-saving schemes should continue to remain tax free as 'the impact of any decision taken now should show in the future and not relate to the past or we will be caught in endless litigation'.
They explained the reason the government will continue to insist on filing returns even by those who do not pay tax because of exemptions. It wants to keep an eye on as large a number of people as possible, keeping in mind the possibility that some of them might graduate to a higher income level where they will have to pay taxes.
The government has already come out with a tax information return system by which high-value transactions have to be reported by brokers or dealers.
The trigger amount for reporting to the tax authorities varies. While stock market transactions worth even Rs 50,000 need to be reported, for sale of property and automobiles the level is higher at Rs 2.5 lakh.