Having pushed a majority of central government employees into the highest marginal tax bracket of 30 per cent, by merging 50 per cent of their dearness allowance with basic pay, Finance Minister Jaswant Singh has given the new government full justification to substantially raise the highest personal income tax slab in the full Budget to way beyond Rs 200,000.

Mini-Budget 2004-05

The new finance minister will also have the additional support of state government employees across the country, as the Centre's largesse is set to be replicated by states soon. The revision will have to entail a thorough amendment to all the income tax slabs, which have continued unchanged since 2001-02.

Just consider the facts. At present, the median monthly basic pay of a central government employee is about Rs 10,500. A merger of the dearness allowance of 50 per cent will hike the same to Rs 15,000 per month, which translates into a gross annual salary of Rs 1,80,000.

In spite of the maximum permissible standard deduction of Rs 30,000 for the employee, the total will be Rs 1,50,000. To this one has to add the nine per cent dearness allowance that he will get in addition to the revised pay.

The current level of DA is 59 per cent of basic pay, so the salary is way into the highest taxable slab of 30 per cent rate on his annual income, assuming that he is unable to make any voluntary savings.

As per the current tax laws, he will have to pay back to the government, a flat Rs 19,000, plus 30 per cent of the amount by which his salary exceeds Rs 1,50,000, making his annual tax liability Rs 23,860.

So, even if Jaswant Singh has made a central government employee at the median level richer by Rs 2,100 per month (increase in salary linked HRA plus the remaining 9 per cent dearness allowance), the net benefit to the person post tax will be less than Rs 1,340 in a calendar year. Even if one adds the mandatory contribution to the GPF, the picture does not alter.

In the interim Budget, Singh has said he is in favour of revising the standard deduction, for salaried class and the present annual exemption limit of Rs 50,000, but the new government will have to raise the tax slabs substantially, to make this section of the middle-class happy.

Incidentally, the last census conducted by the Centre regarding its 3.5 million civilian employees and another 2 million in uniform was a decade ago in 1995.

In the interim Budget, the finance ministry could not append the section on staff emoluments and number across the ministries, due to what officials called "absurd numbers" filed by the departments, which did not add up.