The Federation of Indian Chambers of Commerce and Industry (Ficci) has suggested that maximum marginal rates of personal income tax should be brought down to 30 per cent and stabilised at 25 per cent over the next two to three years.
In its pre-budget memorandum, Ficci said the 40 per cent maximum marginal rate of income-tax is on the higher side compared to the rates prevailing in other countries.
Mentioning that a moderate level of tax incidence would result in better tax compliance and larger revenue realisation, Ficci said that the empirical evidence has it that when the personal income tax rates were reduced, the income-tax collection went up.
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According to Ficci analysis, when the maximum marginal rate of 61.77 per cent inclusive of surcharge in financial year 1984-85 was brought down to 50 per cent in 1985-86, revenue collections went up considerably from Rs 1,928 crore to Rs 2,509 crore.
Similarly, when the rates was reduced from 56 per cent in 1991-92 to 44.8 per cent in 1992-93, tax collections went up from Rs 6,731 crore to Rs 7,888 crore.
The collections went up during 1994-95 in spire of the abolition of surcharge and increase in basic exemption limit.
Even during 1995-96, the trend of collection was upward in spite of an increase in the basic exemption limit, the release said.
Ficci said the maximum rate should apply on income of over Rs 3 lakh rather than Rs 1.2 at lakh at present. In fact as far back as 1973-74, the maximum rate was applicable over Rs 2 lakh.
The increase of Rs 20,000 from Rs 1 lakh to 1.2 lakh in 1995 for the application of maximum marginal rate was not enough especially when viewed in the context that the limit of Rs 1 lakh had continued since 1976-77, it said.
To encourage voluntary tax compliance and checking the menace of tax evasion and tax avoidance, the chamber suggested that the existing tax slabs be rationalised and maximum rate be applied over an income of Rs 3 lakh and the basic exemption limit increased to Rs 60,000.
Similarly, in the case of leave travel concession, Ficci suggested that restrictions on allowing travel concession only to the extent of AC second class by rail be done away with and the entire amount received by the employee for leave travel and actually spent by him for the purpose should not be includable in his taxed income.
At present, the value of any travel concession deductible from the income tax is having only a limited scope. The restriction tantamounts to taxing almost 75 per cent of the amount which he has actually spent on journey by rail which is time consuming, Ficci said.
Increasing the monetary limit for savings under section 80-l of the Income Tax Act provides for deduction in respect of income from dividend and interest from certain specified savings instruments up to Rs 12,000 plus Rs 3,000 separately from dividend income in a year. This monetary limit should be raised to Rs 20,000 and Rs 5,000 respectively and motivate savings and encourage investment in shares which can give a critical push to the capital market, the release added.