Tax overload: India’s middle class is hurting because of inequitable taxation

Personal income taxes now account for a larger share of government revenue than corporate taxes, marking only the third time this has happened in over three decades. From 35% during the United Progressive Alliance (UPA) years, corporate taxes today are only 26% of total tax revenue. 

This shift, along with high Goods and Services Tax (GST) rates and collections, is making the country’s tax system more regressive. This raises concerns about increased income inequality, reduced consumer spending power and a higher burden on low- and middle-income households.

Without reforms, the tax system will continue to burden the middle class and, in the process, hurt India’s economic development.

Also read: Budget 2024 expectations: ‘Need balanced tax structure for economic resilience’

This inversion of the tax burden is not accidental. It can be traced back to the corporate tax cuts implemented in 2019, designed ostensibly to stimulate private investment and economic growth. 

Over the last five years, the revenue foregone stood close to ₹9 trillion. It is reasonable to ask what we received in return for this staggering amount, which could have instead been deployed for essential public services like healthcare, education and infrastructure.

Unfortunately, the much touted benefits of the corporate tax relief did not materialize. Gross fixed capital formation (GFCF), a key indicator of investment, grew at an average rate of only 1.4% from 2019 to 2023. 

Meanwhile, corporate profits have climbed to record highs, with the corporate profit-to-GDP ratio reaching 3.8% in 2022, the highest in 15 years. Worse, at 4.4%, private consumption growth in 2023-24 was the slowest rate in two decades, excluding the pandemic year of 2020-21. 

This stark contrast between booming corporate profits and sluggish investment alongside weak consumption growth highlights a critical disconnect. 

The benefits of tax cuts have disproportionately accrued to corporations, while the broader economy, particularly the middle class, has been left to bear the brunt of the government’s financing needs.

This trend is compounded by rising unemployment and persistent inflation, which have further strained middle-class households. Rising labour force participation, which the government highlights, comes at a time when agricultural employment has gone up—a classic sign of distress employment. 

Also read: Our middle class bears too heavy a tax burden

Simultaneously, inflation has consistently exceeded the Reserve Bank of India’s target range, hovering around 6-7% annually since 2020. Persistent inflation has eroded the rupee’s purchasing power and made it increasingly difficult for middle-class families to maintain their standard of living.

The opposition has been warning against the harm caused by the government’s tax policies. Leader of the Opposition Rahul Gandhi recently accused the government of indulging in “tax terrorism," burdening the middle class and favouring its “corporate friends." 

The opposition’s view is that with little income tax relief, a heavy GST burden and stagnant salaries, the middle class is hurting badly, and that this is not only an injustice, but will adversely impact India’s prospects.

The opposition’s criticism finds support in economic research. In a 2015 research paper, economists at the International Monetary Fund (IMF) found that increasing the wealth of the rich by 1% reduces GDP growth by 0.08 percentage points over five years, while increasing the wealth of the poor and middle class by 1% can boost GDP growth by up to 0.38 percentage points. This was a follow-up study to an earlier IMF paper that showed income inequality is bad for growth and its sustainability.

Internationally, there is growing recognition that corporate tax cuts do not necessarily lead to increased investment or broader economic benefits. 

Countries like the United States and those in the European Union are increasingly closing tax loopholes and ensuring that corporations pay their fair share, recognizing that equitable tax policies are essential for reducing inequality and promoting sustainable development.

In contrast, India’s current approach seems increasingly out of step with these global trends, prioritizing the interests of a wealthy elite at the expense of the broader citizenry.

Reforming India’s tax policy and administration is a critical need. We should be aiming for a more transparent, stable and progressive tax system that helps unlock the potential of businesses and individuals to drive innovation, create jobs and contribute to economic growth. 

An overarching principle underlying our tax system should be that those with the greatest means contribute their fair share to the nation’s development. This is not about targeting the rich, but to ensure India’s low and middle income families play their part in powering India’s future.

India’s current tax policy is unsustainable. It is hurting India’s growth engine and concentrating wealth and power in the hands of some of the wealthiest people in the country. There are reforms that offer a clear and viable alternative, one that prioritizes fairness, equity and sustainable development.

Also read: Why inflation fell without a recession

The choices made today will shape the nation’s trajectory for decades to come, and the path of fairness and equity is the one most likely to ensure lasting prosperity for all.

(Salman Soz is a national spokesperson of the Indian National Congress and a former World Banker.)

For an opposing view you can read the following piece: India’s economy needs moderate corporate taxes to prosper