The NDA government is expected to announce a hike in the income tax limit to Rs5 lakh in the upcoming budget. The Modi government is also likely to rework the existing income slabs for tax purpose.
With the income tax exemption limit going up to Rs5 lakh from the current Rs2 lakh, people earning up to Rs5 lakh will not have to pay income tax.
The previous UPA government had rejected the suggestion of the then standing committee on finance that the I-T exemption ceiling be raised to Rs3 lakh.
The panel led by senior BJP leader Yashwant Sinha had recommended nil tax for income up to Rs3 lakh, 10 per cent for income of Rs3-10 lakh, 20 per cent for Rs10-20 lakh and 30 per cent for income beyond Rs20 lakh
Currently, tax is levied at the rate of 10 per cent on income of Rs2-5 lakh, 20 per cent on income of Rs5-10 lakh and 30 per cent on income above Rs10 lakh.
Besides, there is an education cess and an additional surcharge at the rate of 10 per cent on income exceeding Rs1 crore.
The finance ministry had rejected the recommendations of the Sinha panel saying the changes in slabs and the removal of the cess would result in annual revenue losses to the tune of Rs60,000 crore.
The increase in tax exemption limit and reduction in tax rates would put more money in the hands of people, which in turn would raise demand for various goods and services, boosting the manufacturing and services sectors.
An increase in consumption would also result in higher collection of indirect taxes, which would compensate the fall in income-tax collection.
However, there is also another argument against putting more money in the hands of people, which could make the job of combating inflation more difficult, as economists believe that more money in circulation may stoke up inflation.