Don't go overboard

It is now more or less certain that Mr Chidambaram will raise the income limit below which no income tax has to be paid. Several recommendations and exhortations point to a doubling of the tax exemption floor from Rs 50,000 to Rs 1 lakh.

While there is certainly a case for some action on this score, since the Rs 50,000 limit has remained unchanged for six years, doubling the level would be overshooting the mark since it cannot be anyone's case that prices have doubled since 1998. Settling around the Rs 75,000 mark would seem a fair compromise.

The matter is important from two points of view. First, more than a third of the total number of income tax assessees would go out of the tax net if the exemption level is raised to a lakh "" and many who are above that level would then be tempted to try and evade taxes by trying to hide their marginal income.

There is virtue in keeping people within the tax net, even if the tax revenue this yields is not very large, because it helps maintain a more complete database of assessees which the taxman can use to cross-check the reported income with expenditure patterns.

Second, the tax level at the first slab is a modest 10 per cent; so someone earning Rs 10,000 a month (or Rs 1.2 lakh a year) would probably pay, after taking credit for the standard tax shelters, no more than three or four hundred rupees a month (that is, 3 to 4 per cent of gross income), if not less. Since anyone at that level of income is probably in the upper third of the income strata, this is not an unreasonable burden to bear.

The logical corollary to raising the tax exemption floor would be to raise qualifying limits for the higher tax slabs as well. As Vijay Kelkar has argued, the maximum tax slab of 30 per cent kicks in at a fairly low multiple of per capita income, when compared to the practice in other countries.

Once again, there have been suggestions that the highest tax slab should kick in at Rs 4 lakh, instead of the current Rs 1.5 lakh. This too would seem to be overdoing the correction, unless the finance minister proposes simultaneously to close some doors leading to tax shelters (and these would have greater impact at the higher income slabs), and also introduces what has been proposed in the Common Minimum Programme "" a cess on all central taxes in order to fund higher education outlays.

In any case, if this is going to be one of the more important tax announcements in the Budget, Mr Chidambaram would be well advised to moderate expectations so as not to generate disappointment on B-day.