Budget may hike tax exemption to Rs 1.75 lakh

Tax incentives to software companies under Sections 10A and 10B are set to continue next year, with a change in the basis of benefits from profit-linked to investment-linked.

A senior finance ministry official told Business Standard that the Budget 2011-2012 is likely to make provision for continuing the scheme into the next financial year.

. . . 

"The basis for the incentives is likely to be made investment-linked, to bring it in synchronisation with the Direct Taxes Code," he said.

Under Sections 10A, 10B, companies located within software parks are granted a 10-year tax holiday on their profits. The scheme was to end this year.

. . . 

There were indications that Sections 10A and 10B would continue, but there was no clarity on whether it would remain profit-linked in 2011-2012 or would change to being investment-linked.

The official said making the whole scheme investment-linked would ensure continuity once DTC came into force.

. . . 

Experts said that under the profit-linked system, the scheme has been prone to misuse.

But changing the basis to investment-linked would curb the possibility of undue gains to software companies.

. . . 

This would also fulfil the objective of bringing investments into infrastructure.

Finance Minister Pranab Mukherjee is also set to increase the income-tax exemption limit on the personal income side. The official said that the increase would be inflation-linked.

. . . 

He added that currently, the exemption limit is Rs 1.6 lakh (Rs 160,000) and considering the fact that inflation is running at around 10 per cent, an increase of 10 per cent in the exemption limit could be expected in the upcoming Budget.

This would mean that the exemption limit would probably be enhanced by Rs 15,000 to 1.75 lakh (Rs 175,000).

. . . 

This step would result in a revenue loss of around Rs 4,000 crore (Rs 40 billion), said the official, adding that this would mean a Rs 1,500 tax benefit a year to the taxpayer.

He said that the increase in the exemption limit would also be a step towards aligning the tax structure with DTC, as the exemption limit under the proposed regime is Rs 2 lakh (Rs 200,000) a year. DTC is expected to come into effect from 2012-2013.