Raise income tax limit for peak rate to Rs 12 lakh: Ficci

As the Indian economic growth slowed to a nine-quarter low of 6.9 per cent in the second quarter of this financial year, Ficci has urged the finance ministry to provide more disposable income at the hands of the people by raising the personal income tax slab for the peak rate of 30 per cent in the next budget.

In a pre-budget memorandum to the ministry, the chamber suggested the 30 per cent tax rate be imposed on annual income of over Rs 12 lakh (Rs 1.2 million) from the next financial year from the current Rs 8 lakh (Rs 800,000).

"This should be further raised to Rs 15 lakh (Rs 1.5 million) in the Budget, thereafter. Of course, we will need to steadily go upwards, stabilising the same at Rs 25 lakh (Rs 2.5 million)," it said in the memorandum.

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Even though the Indian economy is slowing, there is hardly any chance of the government raising income tax slab to impose 30 per cent tax on the income of over Rs 12 lakh in a year, since the government is talking of rolling out Direct Taxes Code from next year, which does not include such an ambitious proposal, at least not the DTC Bill.

The DTC Bill, proposed to tax annual income of over Rs 2 lakh (Rs 200,000) and up to Rs 5 lakh (Rs 500,000) in a year at 10 per cent, more than Rs 5 lakh and up to Rs 10 lakh (Rs 1 million) at 20 per cent and beyond Rs 10 lakh at 30 per cent.

Currently, income over Rs 1.80 lakh (Rs 180,000) up to Rs 5 lakh attracts 10 per cent income tax, over Rs 5 lakh and up to Rs 8 lakh 20 per cent and beyond Rs 8 lakh 30 per cent income tax.

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However, Ficci's proposal to ultimately impose the peak rate on over Rs 25 lakh (Rs 2.5 million) of income in a year is in line with the first draft of the DTC suggestions.

The first draft had suggested 10 per cent tax rate for over Rs 1.6 lakh (Rs 160,000) and up to Rs 10 lakh, 20 per cent for over Rs 10 lakh and up to 25 lakh and 30 per cent for income above Rs 30 lakh (Rs 3 million).

The memorandum said the government should encourage consumption spending by leaving more money in the hands of the people.

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"While over the recent years, personal income taxation has been streamlined resulting in reduction of tax liability at all levels, but the measure has not gone far enough," the federation said.

Tax rate of 30 per cent, in fact, really means 30.9 per cent, if it includes education cess.

"The tax rate of 30.9 per cent on income of over Rs 8 lakh casts a sizeable burden on the middle class, reducing the surplus in their hands for consumption spending," the chamber said.

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As Indian economy slows down and the government has ruled out direct stimulus to the economy, Ficci's recommendations may be worth reckoning, but the government has to keep its financial year consolidation story also moving on, analysts said.

Fiscal deficit has already crossed 74 per cent of the budget estimates till October of 2011-12. The government has targeted to rein in fiscal deficit at 4.6 per cent of the gross domestic product.

However, Ficci said if individuals are allowed to face lower tax rates at higher income level, it will give incentives to people to come into the tax net, ensure higher collection from greater compliance and encourage consumption and savings.