New Delhi: Finance Ministry will have to resort to a tight ropewalk to blend economics and politics in the Budget, which is likely to keep tax rates "stable" but lay the roadmap for phasing out tax exemptions that drains over Rs 25,000 crore from the exchequer annually.

The Finance Minister P Chidambaram, known for his dream Budget of 1997-98, would attempt a big push to tax reforms on the lines of Kelkar panel recommendations by widening the service tax net and reducing exemptions besides measures to hasten introduction of a nationwide Value-added Tax.

Official sources said direct tax rates might not be tinkered with but income tax exemption limit may be raised with the trade unions demanding that it should be doubled to Rs one lakh.

Indirect tax rates especially peak customs duties may be lowered for raw materials in line with the Kelkar panel's recommendations. The NDA (National Democratic Alliance) Government brought down the peak rates to 20 from 25 per cent in January, which might not be altered by the United Progressive Alliance (UPA).

But some indirect tax exemptions may be phased out as it was bleeding the exchequer without actually boosting the growth in customs and excise collections.

While keeping tax rates stable, the Finance Minister may not fully adhere to rationalisation of small savings rates as suggested by the RBI committee headed by Rakesh Mohan considering the fact that there was increasing pressure from UPA allies especially Left parties.

The Left parties have already pitched for maintaining higher rates on employees provident fund and small savings, especially for senior citizens.

Even as Chidambaram attempts to provide some sops to the common man in a bid to fulfil some of the promises outlined in the Common Minimum Programme, he would find it difficult to ignore the need to keep fiscal deficit under check and carry forward the roadmap laid down in the Fiscal Responsibility and Budget Management Act to bring down revenue and fiscal deficit by at least 0.5 per cent of GDP annually.

Finance Minister has already made a commitment to wipe out revenue deficit ahead of 2009, as envisaged in CMP. His advisor Vijay Kelkar has been already entrusted with the task of laying down the roadmap for wiping out revenue deficit.

Once, revenue deficit is wiped out, fiscal deficit would be "manageable", Chidambaram had said a few days back.

To bring down deficits, the Finance Minister has to push up revenue growth substantially as 90 per cent of expenditures are rigid downwards.

In a bid to improve Tax:GDP ratio, Chidambaram is likely to come up with some innovative ideas like 1X6 formula to widen the tax base, particularly direct tax, bringing more services especially transporters under tax net and special schemes to tap black money.

The Finance Minister may also initiate measures to tighten the noose on tax dodgers but at the same time take steps to simplify tax laws with the ultimate aim of reducing archaic Income Tax Act.