Expecting a tax cut? PM's advisers have other ideas

TAXING TIME: Chidambaram is under pressue to put more money in pockets in order to boost consumer demand.

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Keywords: Tax Cut, Pm

New Delhi: It's not going to be any easier on the personal tax front in this Budget as there are indications that the Centre may not slash the personal tax rates despite the 40 per cent surge in revenue collections this fiscal.

But Union Finance Minister P Chidambaram might just do some tinkering with the tax slabs. There was a broad indication to this effect after the Prime Minister's Economic Advisory Council held pre-Budget discussions with Chidambaram on Wednesday.

The EAC, which is headed by former Reserve Bank of India governor C Rangarajan, told Chidambaram that some adjustment in the income tax slabs is needed in order to boost consumer demand. "The tax rates can be kept as they are," the panel told him.

What this implies is that while the FM may not slash personal tax rates, the exemption limits might go up a tad. This appears a logical move as the Pay Panel report will have a spiraling effect on income levels across the board.

The Finance Minister had last week fuelled expectations of a tax cut after he said that there could be a case for moderation of rates if voluntary tax compliance increased.

He made the remark after reports that direct tax collections witnessed over 40 per cent growth this fiscal and looked all set to cross the Rs 3,00,000-crore mark.

While the economy is expected to grow at 8.5 per cent in the next fiscal (2008-09), there are fears of a slowdown in view of the high interest rates and a slowdown in the manufacturing sector.

Top economists in the country have, however, opposed any reduction in direct taxes at this stage. They say instead of slashing personal tax rates, the government should try and rationalise the excise duty structure and take care of the mounting subsidies.

"The government should use the rise in tax collections to clean up the fiscal deficit and also to repair the country’s creaky road, port and airport network," the economists told Chidambaram during the annual pre-Budget meeting.

Another reason why the government may not do much tinkering with the direct taxes this year is the impending big-ticket spending that it will have to do on the salary hike of 30 lakh government employees after the pay panel submits its report in April.

Top economists of the country have also pointed out that apart from the Pay Commission report, the government would be under a lot of fiscal stress in the next fiscal due to the upcoming oil bonds and market stabilisation scheme bonds.

The Rangarajan panel has also suggested the Finance Minister to increase public expenditure. Expressing concern over the recent slowdown in the growth of the manufacturing sector, the panel has suggested some adjustments in indirect taxes to stimulate growth in consumer durables.

The forthcoming Budget will be Chidambaram's fifth national Budget for the UPA Government since it assumed office in May 2004 and the seventh for him personally.

(With inputs from IANS)