The pay hike proposed by the Sixth Central Pay Commission will boost income tax collections in the coming years despite the Rs 40,000 increase in the basic exemption limit for personal income tax announced in the Budget. The commission has proposed an effective salary hike of 28 per cent.
The recommendations, if implemented in entirety, are likely to generate around Rs 6,000 crore (Rs 60 billion) tax revenue or around 20 per cent of the immediate additional outgo of Rs 30,621 crore (Rs 306.21 billion), including arrears, according to an income tax department official.
This includes an additional annual outgo of Rs 12,561 crore (Rs 125.61 billion) and arrears of Rs 18,060 crore (Rs 180.6 billion) as the award will be effective from January 1, 2006.
However, the largest increase in collections will come from the staff of public sector enterprises, states and the private sector. While the pay hike for the PSU staff is being finalised, states are yet to take a call. It is expected that public sector employees will get a better deal than the central staff.
The total tax payable by the central government staff will rise further in the subsequent years due to annual increments.
Direct tax collections are expected to fetch the government Rs 3,65,000 crore (Rs 3.65 trillion) in 2008-09 as against the revised estimate of Rs 3,04,760 crore (Rs 3.04 trillion) in 2007-08 an increase of 20 per cent. The Pay Commission expects direct tax collections to double to Rs 6,35,053 crore (Rs 6.35 trillion) by 2011-12.
The multiplier effect of the salary hike will take care of the additional pay burden of Rs 12,561 crore (Rs 125.61 billion) per annum that the government will incur.
Buoyant tax collections also mean the government will better the Fiscal Responsibility and Budget Management Act mandate of 3 per cent fiscal deficit in 2008-09. The revenue deficit is likely to be zero by 2009-10, in line with the revised target.
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