The existing 10 per cent surcharge on personal and corporation income tax may be halved or scrapped entirely in the coming Budget.

If undertaken, the move will reduce the tax burden of a certain category of individuals, firms and companies by between 1.54 and 3.09 percentage points from fiscal 2008-09 onwards.

The finance ministry is considering this move on account of better levels of tax compliance and the ongoing buoyancy in direct tax collections, a senior government official told Business Standard. The surcharge, a sort of "tax on tax" is paid by 2-3 million, of the total 31.9 million assessees who are liable to pay tax.

A demand to scrap the 10 per cent surcharge has been made by industry associations.

Currently, the total peak tax incidence on individuals, firms and corporations works out to 33.99 per cent, which is inclusive of the 10 per cent surcharge and education cess of 3 per cent on the peak rate of 30 per cent. If the surcharge is halved, the tax incidence will come down to 31.54 per cent. If it is scrapped, the incidence will be reduced to 30.9 per cent.

About 2-3 million assessees, such as individuals in the higher income bracket, Hindu Undivided Family, firms and domestic companies will be the beneficiaries of this move. Surcharge is levied at the rate of 10 per cent on individuals with annual income over Rs 10 lakh (Rs 1 million) and on domestic companies and firms, having an annual income of over Rs 1 crore.

International companies, liable to pay tax in India, pay a lower surcharge at the rate of 2.5 per cent on a higher corporation tax rate of 40 per cent.

Surcharges, originally envisaged as temporary imposts, were first levied by the central government in 1991-92 (taken off in some years also) to meet unplanned government expenditure or to fund budgetary deficit as tax revenue collections were low in India.

Over the past 17 years, the surcharge has varied between less than 1 and 15 per cent. The surcharge was increased from 2.5 per cent to 10 per cent in 2005 for individuals and domestic companies.

If the proposal is implemented, the government may have to forgo over Rs 4,000 crore (Rs 40 billion) to Rs 8,000 crore (Rs 80 billion) annually.

However, it will be a reward to tax payers, whose voluntary compliance is one of the factors for the over 40 per cent growth in direct tax collections in the last two years.

The surcharge fetched around Rs 6,100 crore (Rs 61 billion) in 2006-07, Rs 4,600 crore (Rs 46 billion) in 2005-06 and Rs 3,300 crore (Rs 33 billion) in 2004-05 to the government. Surcharge collections are expected to exceed Rs 8,000 crore in 2007-08.

"Surcharge was meant for specific purposes, these purposes appear to have been taken care of. So, removal of surcharge will be a welcome move," said senior tax consultant.

Who pays sucharge

• Individuals, HUF, association of persons and body of individuals, who have an annual income over Rs 10 lakhs (Rs 1 million).  
• Partnership firms and domestic companies, whose income exceeds Rs 1 cr (Rs 10 million)