NEW DELHI, Jan 10 (Reuters) - India's main opposition party is considering a measure to scrap, or reduce, income tax as a plank in an election manifesto designed to win over crucial middle-class and urban voters before a national election due by May.
The step would mostly benefit wealthy urban voters who have increasingly switched support to the anti-graft Common Man's Party led by Arvind Kejriwal, who last month shocked mainstream parties by becoming chief minister of Delhi.
Proposals like abolishing income tax - levied on just 3 percent of the population but accounting for around 14 percent of federal revenue - will almost certainly be watered down by the opposition Bharatiya Janata Party (BJP) before the election.
But such moves signal how the BJP could embrace headline-grabbing proposals to woo voters, stoking concern over the populist tendencies of BJP leader Narendra Modi's policies just as the economy is mired in a slowdown.
"It seems to be an exciting idea," said Gopal Agarwal, a member of the party's national executive. "The party is seriously discussing it. The party will take a decision only after considering all the pros and cons."
The World Bank ranks India 158 out of 189 countries in terms of ease of paying taxes, a situation that has led to scores of taxation-related disputes.
The BJP is preparing its manifesto as the ruling Congress party coalition flounders in polls while battling a slowing economy, high inflation and corruption scandals.
But concerns have grown that Modi has shown little interest in economic policy, relying instead on his track record as chief minister of the western state of Gujarat, which many businessmen see as an Indian success story.
The income tax proposals, made by an independent think-tank, Arthakranti, initially received a warm reception from several senior party members involved in hammering out economic policy.
"There doesn't seem to be any opposition, provided we can give them a blue-print on how it is to be done," said Subramanian Swamy, a BJP leader charged with drafting the party's policy on taxation.
A bank transaction tax and custom duties could succeed the income tax once it is abolished, the think-tank says.
Modi has urged an overhaul of the tax system, calling it a "burden on the common man", but has given no specifics.
But other senior BJP figures, including Yashwant Sinha, a former finance minister, have opposed abolishing the tax and the proposals drew rapid criticism. The Business Standard newspaper called the idea of abolishing most taxes "a strange brainwave".
"If government could work without charging income tax, why would so many countries around the world have income tax?" said Neeru Ahuja, a partner at Deloitte Haskins & Sells.
The BJP pushed economic reform during its term in office from 1998 to 2004, which is credited with having laid the ground for a subsequent economic boom.
But the party has opposed steps to open India's retail sector to foreign investment, which it has also opposed in the pharmaceutical industry.
To rationalise tax rates and widen the tax net, the ruling coalition introduced a bill in parliament in 2010, but the Direct Tax Code bill, as it is known, has yet to be passed. (Reporting by Rajesh Kumar Singh; Writing by Alistair Scrutton Editing by Clarence Fernandez)
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