Stop choking the consuming class
The call for a rational income tax regime in India grows as the tax base remains narrow, with heavy reliance on the already taxed consuming classes.
It is a yearly occurrence in the run-up to the budget, but this year, the chorus for a more rational income tax regime has been louder (including by some of this newspaper’s columnists). This isn’t surprising. The fact is India’s direct tax base is extremely narrow. Sure, 75.4 million people filed tax returns (for 2023-24), but 47.3 million of these involved no payment of tax, and 2.4 million paid more than 50% of the total income tax collected. Similarly, 678 companies in 2021-22 (more recent data is not available, but the trend is likely to have only become stronger), accounted for 55% of the total corporate tax collected (the base is around 1.03 million companies). And the argument that the poor bear a disproportionate share of the indirect tax burden — some NGOs have voiced this — doesn’t stand up to even a cursory scrutiny of the methodology and the actual numbers. It is the so-called consuming classes that carry the load, just like they do in the case of direct taxes. Clearly, efforts to broaden the tax base have not really worked.
Meanwhile, with welfarism being proven to be the strongest weapon in the armoury of a political party, it isn’t surprising that politicians across the spectrum are in agreement on taxing the already taxed more. This is in sharp evidence in the conduct of the GST Council, comprising the states, including those ruled by parties that are part of the national Opposition; the council has been quite happy to increase taxes on products and services that are largely consumed by people perceived as rich. Both the Centre and the states need the tax revenue to fund their welfare schemes which usually involve freebies and cash handouts (monthly payments to women and the unemployed youth are all the craze).
This government’s response to this, over the years, has been to focus on capital investment (and grow the economy by pushing investment) and gamble that the consuming classes will continue to consume even as they continue to grumble about high taxes and the poor quality of civic utilities and government services. But recent economic data indicates that consumption (demand) needs a push. That could explain the growing chorus for some sort of relief for people who actually pay tax, although whether the Union Budget that finance minister Nirmala Sitharaman will present on Saturday will respond to is anybody’s guess.
Recommended Topics