The possibility of domestic consumption being given a stimulus in the Budget exists so that spending improves and acts as a catalyst for higher demand, which in turn will set the economic wheels into motion again.
In sync with this, the Modi government may well ease the tax burden on the middle class and impose a higher tax on the super-rich in its first Budget, which will be presented by Union finance minister Arun Jaitley.
According to reliable sources, the current thinking in the government is that the discretionary income of the middle class or more money in the wallet has been eroded due to persistent inflation and there is a strong case for providing some tax relief. However, this may come up short if service tax is increased to 14 per cent across the board except the exempted list.
Then it will be Catch-22.
Sources said that the government is considering a proposal to raise the tax exemption limit to Rs 3 lakh from Rs 2 lakh. This would provide some relief to the lowest income bracket, who were in the tax net and saw their household budgets being stretched due to the relentless increase in prices.
According to the proposal under consideration of the new government, there would also be a tax on the super-rich bracket comprising those earning Rs 10 crore or more of 35 per cent. This category would be above the Rs 1-crore class, which pays an effective tax of 33 per cent inclusive of a surcharge that the United Progressive Alliance government had introduced.
According to the proposal, the income tax on the lowest rung of Rs 3-Rs 5 lakh income would be 10 per cent while those earning between Rs 5 and Rs 10 lakh would pay 20 per cent and for those earning above Rs 10 lakh, the tax rate would be 35 per cent.
The Budget is also expected to raise the limit of exemption for savings under Section 80 C of the Income Tax Act to Rs 1.5 lakh from Rs 1 lakh. Besides, the exemption from tax on interest paid on home loans is likely to be raised to Rs 2 lakh from Rs 1.5 lakh. Some further relief is also likely to be provided in the form of tax exemption on expenditure on health care being raised from Rs 15,000 to Rs 20,0000.
Tax expert Subhash Lakhotia said: "The government should provide substantial relief to tax payers as disposable incomes have gone down every month due to rising prices."