Salary-earners pay highest per cent of income in taxes, get little in return and see their tax rupee get used for votes. Salaried employees, bear the brunt of paying taxes on their income even before they receive it. Social equity in India means that a strawberry farmer in Punjab who earns Rs 3 lakhs a month should enjoy tax-free status, but a salaried corporate employee earning Rs 50,000 a month in Mumbai must pay income tax. And we all know that it is not just farmers who earn ‘agricultural income’ in India. Here is one example.
In a country as vast and complex as India, the nuances of taxation often reflect broader socioeconomic dynamics. Among the most telling of these is the disproportionate burden borne by the salaried middle class when it comes to income tax. Despite being a backbone of the economy, this segment remains an overshadowed minority in the electorate, raising questions about equity and representation in the Indian taxation system. India’s economy has been consumption-driven unlike China, but it looks to be heading for despondent times.
India's tax structure is a multifaceted system with various nuances. The salaried middle class, often hailed as the bedrock of stability in the economy, finds itself disproportionately affected by direct taxation. The crux of the matter lies in the direct tax - primarily income tax - which this group is obliged to pay rigorously due to the transparent nature of their earnings.
India's tax base, particularly regarding personal income tax, presents a fascinating study of the country's economic and social structures. Despite being poised to become the world's most populous nation, a relatively small fraction of its population contributes to personal income tax revenues. This scenario has profound implications for public finance, economic equity, and policymaking. Let's delve into the factors contributing to this phenomenon and its implications.
Agricultural Income Exemption: A significant portion of India's workforce is employed in agriculture, which is exempt from income tax. This exemption, while supporting farmers, reduces the number of potential taxpayers.
Informal Economy: A large segment of the Indian economy operates informally, with transactions and earnings not always recorded or reported. Workers in this sector often fall below the tax threshold or evade taxation.
Income Inequality: The concentration of wealth in the hands of a small percentage of the population means that a vast majority earn below the taxable income threshold, further narrowing the tax base.
Tax Evasion and Avoidance: Despite efforts to widen the tax net, tax evasion and avoidance remain significant challenges, with many high earners finding loopholes to minimize tax liabilities.
The Central Board of Direct Taxes (CBDT) reports indicate a skewed distribution of tax payments, with the salaried class contributing significantly more to the income tax pool than their counterparts in business or agriculture, who benefit from more significant deductions and incentives. This discrepancy highlights not just fiscal inequality but also raises questions about the recognition of the salaried middle class's contributions to the national exchequer.
What compounds the issue further is the minuscule representation of this demographic in the electoral arena. Despite their considerable number and contribution to the economy, the salaried middle class's interests often find minimal reflection in the political and electoral promises of competing parties. Their limited electoral influence can be attributed to the fragmentary nature of their demands, which get overshadowed by the broader, more immediate concerns that resonate with the larger voter base. As a result, policies directly benefitting this segment, particularly regarding tax relief, seldom become a priority.
Implications
Fiscal Implications
Revenue Generation: The reliance on a small segment of the population for the bulk of personal income tax revenue limits the government's fiscal capacity, affecting its ability to fund public goods and services.
Public Debt: A narrow tax base may necessitate increased borrowing to meet expenditure needs, contributing to higher public debt levels.
Economic Implications
Investment in Public Services: Limited tax revenues can restrict investment in essential public services like healthcare, education, and infrastructure, impacting overall economic growth and development.
Inequality: The tax structure, combined with income inequality, can exacerbate economic disparities, with the wealthy benefiting disproportionately from tax loopholes.
Policy Implications
Tax Reforms: There is a pressing need for tax reforms that not only widen the tax base but also make the tax system more progressive, ensuring that those with higher incomes contribute a fairer share.
Formalization of the Economy: Policies aimed at formalizing more of the economy could bring more earners into the tax net, increasing revenues without raising tax rates.
Enhanced Compliance and Enforcement: Strengthening tax compliance and enforcement mechanisms is crucial to reducing evasion and avoidance, thereby broadening the tax base.
The ramifications of this disparity extend beyond mere fiscal considerations. It hints at a larger systemic issue where a significant, yet crucial segment of the population feels inadequately represented or heard in the democratic fabric of the nation. The high compliance costs and the psychological burden of being consistently subjected to high taxation rates further exacerbate the feeling of disenchantment among the salaried middle class.
Moreover, India's approach to social security significantly differs from the systems in place in countries like Australia, Germany, and the United States. I shall cover this in a subsequent article on this blog.
Considering these challenges, there's a growing clamour for more equitable tax policies that recognize the contribution of the salaried middle class and ensure that their burdens are commensurate with their benefits. Academics and economists argue for a more progressive tax system that alleviates the weight on this demographic, ensuring a fairer distribution of fiscal responsibilities across all sectors.
For a more inclusive and equitable future, it's imperative that India rethinks its approach to taxation and representation, acknowledging and addressing the unique challenges faced by its salaried middle class. Only through a concerted effort to reform fiscal policies, ensuring they resonate with the needs and realities of this critical segment, can the country stride towards the larger goal of financial justice and equitable growth.
India's challenge of having a small tax-paying population relative to its size is multifaceted, rooted in structural economic issues, policy choices, and social factors. Addressing this challenge requires a comprehensive approach that includes tax reform, measures to formalize the economy, and efforts to reduce income inequality. Such steps are essential not just for increasing government revenue but for fostering a more equitable and sustainable economic growth model. As India continues to evolve, its ability to adapt its tax system to the changing economic landscape will be crucial for its long-term social and economic health.