Surprise! It is in Government's interest to raise income tax exemption limit from Rs.2 Lakhs to Rs.5 lakhs

Lot of people are rightly disappointed that income-tax exemption limit for individuals has not been raised at all from Rs.2 Lakhs at all by the Budget 2013 presented by the Finance Minister in Lok Sabha today. Only a tax credit upto Rs.2,000 has been given for individual resident taxpayers with total incomes of Rs.2 Lakhs to Rs.5 lakhs. This measly amount is simply nothing in the wake of inflation.  
Increasing income-tax exemption  limit from Rs.2,00,000 to Rs.5,00,000  makes sense for the Government too. Here is why. The Parliamentary Standing Committee  on Finance  in its report on DTC Bill (49^th report, March 2012)  pointed out that: 

• Almost 90% of taxpayers comprise of individual taxpayers in the 0-5 lakh income slab without commensurate tax yield; which translates into nearly 3 crore assesees.

• The Committee finds it absurd that the Department should diffuse their energies and spread their resources thin over handling such a large number of individuals with low income potential.
• The argument that more taxpayers have to be brought within the tax net for widening the tax base can hold water only to the extent that this approach brings in more taxpayers and tax revenue from the higher income brackets, rather than simply adding to the numbers in the lower segments.
• Keeping in view the inflationary trends in the economy and the imperative to leave more disposable incomes in the hands of individual tax payers, particularly those in the lower income bracket, the Committee would recommend that the tax slab attracting „nil rate, that is, full exemption from tax on income should be raised to three lakhs from the proposed two lakhs.
• As reasoned earlier, higher exemption limit would go a long way in minimising the compliance and transaction costs of the Income Tax Department, which can now focus their attention and re-orient their resources on the higher income groups, untaxed or concealed incomes, and categories and sectors that are avoidance or evasion prone.
• The revenue gap, if any, could be easily bridged by way of stringent measures to curb and bring to book unaccounted money and through realisation of huge tax arrears and by way of savings from the proposed transition to the investment-linked incentive / exemption regime. [Paras 87 and 88 of the Report]

At the time of passing of Finance Bill, the Finance Minister may consider the following suggestions:

(i)Either increase the exemption limit from Rs.2,00,000 to Rs.3,00,000 for general individual resident taxpayers and Rs.2,50,000 to Rs.3,50,000 for senior citizes. The 10% tax slab will be from Rs.3,00,000/Rs.3,50,000 to Rs.5,00,000

(ii)Or eliminate the 10% tax slab altogether and increase exemption limit from to Rs.5,00,000 across the board and have only 20% and 30% tax slabs

Increasing exemption limit will be win-win for Government, taxpayers, businesses and economy in general as under:

·   incentivise hardwork and enterprise as more disposable incomes and savings will result

·   relief to taxpayers from inflation

·   incentivise more investments since purchasing power of consumers increase and businessmen will want to profit from that; this will generate higher employment

·   due to highr consumer spends more sales tax and VAT collections will result

·   stock market sentiments will revive resulting in higher STT collections

·   increase voluntary compliance 

·   reduce evasion and avoidance

·   reduce cost of collection and administrative work for Government