Link income tax slabs to inflation: Shome

This will ensure individuals do not get into higher I-T brackets due to inflation.

Income-tax brackets should be adjusted for inflation so as to relieve the burden on individuals, according to Parthasarathy Shome, adviser to Finance Minister P Chidambaram. This will ensure tax slabs moved up each year to account for the impact of inflation, he said.

Speaking to Business Standard yesterday, Shome said with the same tax slabs year after year, the real value of the income that was taxed went down because of inflation. The adjustment will ensure individuals do not get into higher tax brackets just because of inflation.

Though he termed this as his personal view, Shome's comments, just three weeks before the Budget, are significant.

The levels of income taxes at the basic slabs of 10, 20 and 30 per cent were quite comparable to international standards, Shome said. The real challenge was to create a level playing field by reducing exemptions and incentives, he said.

Shome said the government's attempts were directed at reducing Customs duties to Asean levels and at removing tax exemptions. This was necessary in view of the sharp drop in the tax to gross domestic product ratio, particularly in indirect taxes.

Shome said the tax rate on foreign companies had already been brought down substantially over the years, indicating the government's intention to attract more foreign investment. Taxes on foreign companies have come down from 65 per cent in 1990-91 to 40 per cent in 2004-05.

He said the implementation of the value-added tax would see a gradual withdrawal of various other state-level taxes such as sales tax. However, the losses of state governments on this account would be compensated by the Centre for a period of three years.