Union Budget 2011 - What to expect on Income Tax on Salary

The countdown has begun for Central Government to unveil Union Budget for 2011-12 on 28th February 2011 Monday. Finance Minister Mr Pranab Mukherjee is busy from few months meeting almost all critical stakeholders on their expectations and ideas on budget.

Its such a critical event for Central Government that only figures and facts are not considered while drafting budget but political implications plays a critical role in it.

The facts and figures which would play a major role in deciding Income Tax on Salaries :-

Telecom 3G spectrum auction 

Unlike 2010 budget situation, this year situation for our country from Fiscal deficit point of view is way better, thanks to the execution of Telecom 3G spectrum auction and unexpected revenue of Rs 67,719 Crores  government received. This was much more than what government anticipated in the beginning of the auction. Clearly it has helped government to cut down on Fiscal deficit in big way.

Forex Reserves

Foreign Exchange Reserves has increased by ~5% in Calendar year 2010 (source http://www.rbi.org.in) which add up towards reduction in Fiscal Deficit.

Foreign Direct Investment

India received USD 19,002 million as Foreign Direct Investment (FDI) from April 10 to Nov 10 (source http://www.rbi.org.in). Although this is less than last fiscal year FDI but fairly decent figure to bank upon.

Foreign Institutional Investment (FII)

FII's were the one taking out all money from stock market in 2008-09 recession. They withdrew USD 15,000 million (net of Inflow and outflow) from Indian economy during 2008-09. I personally believe that this was one of the key reason that our stock markets crashed badly.

Now FIIs are back in India and have invested USD 29,048 million in 2009-10 and USD 31,007 million in fiscal year 2010-11 which is still going on. It surely eases up the pressure on Forex reserves and help improve   fiscal deficits significantly.

National Rural Employment Guarantee Act (NREGA)

This scheme has earned lot of points for UPA and they have seen its result in many elections. This scheme was started in year 2006.

Seeing its magnificent success and results, government increased the budget to Rs 27,000 Crores in 2009 and Rs 39,000 Crores in year 2010 (144% increase) and there is high probability that this number will increase further. 

A major change this year in this scheme was that minimum wages have been linked to inflation, hence indexing of minimum wages with inflation will result in more outflow of funds which means increase in budget.

This can be one of the reason that Income Tax on salaries can be secondary over NREGA budget allocation.

Other Factors

Factors like Inflation, GDP growth, PSU Disinvestment, Unique Identity Card (UID), Export/Imports, GST, Indirect Tax collection, Infrastructure development etc will play a key role in deciding which source of Income (for government ) to increase/decrease and which portion of expenditure need leverage.

The Strategic/political situation which would play a major role in deciding Income Tax on Salaries :-

Its Vote Bank Game

No matter what the facts and figures are, upcoming elections always influence the decision to some extent. 2011 will have 5 state assembly election i.e.West Bengal, Kerala, Assam, Tamilnadu and Puducherry. Now the government which is in power in centre would never love to loose in these elections hence will try to spread the benefits in such a manner that every voter is benefited.

So expect some concession in Income Tax on Salaries because of this.

Moreover, UPA will start its preparation for next term in centre right now hence again some benefit to tax payers on this account as well.

I am not going to speculate on how much tax benefits will flow into the pocket of tax payer but clearly some concessions on Income Tax on salaries seems logical.

However we should not forget that few days before Union Budget we will witness Railway Budget. A loss making department will surely eat up big chunk of our Union Budget and Railway Minister Mamta Banerjee will try to introduce as much trains to West Bengal as possible keeping in mind upcoming Assembly elections  in West Bengal.

It would be unfair with Union Budget to say that these are the only factors which enables Finance Minister to make a proposal.

Let's wait and watch what is there inside dark brown Brief Case of Mr Pranab Mukherjee for Income Tax payers.