Tax regime under Modi: A tale of middle-class exploitation and corporate leniency

Explore the stark inequities in India's tax system, where the overburdened middle class funds growth while corporations enjoy tax cuts. A critical analysis of fiscal policies and their impact on taxpayers.

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Surajit Dasgupta
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Tax regime under Modi: A tale of middle-class exploitation and corporate leniency

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With the budget day approaching, the concerns of the country's middle class have changed into worries. In the ever-expanding narrative of India’s economic growth, one theme remains constant: the disproportionate tax burden on the middle class.

While the government touts its achievements in infrastructure development and welfare schemes, it is evident that these come at a significant cost to the middle-class taxpayer, who seems to be bearing the brunt of fiscal policy. The stark contrast between the contributions of individuals and corporations in India's tax structure is a glaring testament to an economic policy riddled with inequities.

The middle-class burden

Income tax collections, predominantly paid by individuals, reached a record 3.35% of GDP in 2023-24, surpassing corporate tax collections (3.12%). This milestone, however, paints a troubling picture: a mere 2% of India’s population—its middle class—is shouldering the nation’s financial load. This segment pays both income tax and Goods and Services Tax (GST), contributing massively to the nation’s welfare and infrastructure projects, all while being systematically neglected in policy decisions.

Despite the middle class’s outsized role in funding the economy, their tax reliefs have been negligible. Budget 2024 provided a modest increase in the standard deduction under the new tax regime from ₹50,000 to ₹75,000, leaving an additional ₹17,500 in the hands of taxpayers earning ₹15 lakh or more annually. However, this relief pales in comparison to the benefits extended to corporations.

Corporate tax cuts: A misguided gamble

In 2019, the government slashed corporate tax rates, leading to an annual revenue loss of ₹1.44 lakh crore. The rationale was clear: boost private-sector investments, create jobs, and fuel exports. Yet, this gamble has failed to pay off. Between FY20 and FY23, corporate profits quadrupled, but hiring and wage growth lagged far behind. The Economic Survey 2023-24 bluntly criticised corporations for their failure to translate these profits into economic benefits, calling for them to take job creation seriously.

The situation becomes even more dismal when examining the corporate tax base. Of the 15 lakh private companies in India, only 10.7 lakh filed income tax returns for Assessment Year 2023-24. Shockingly, half of these companies filed zero-tax returns, with just 5.6 lakh actually paying taxes. Moreover, a mere 150 companies accounted for 40% of corporate tax revenue, revealing a troubling concentration of responsibility within a tiny segment of the corporate sector.

Skewed priorities

India’s tax-to-GDP ratio has improved, and the government has widened the tax net, but the disparity between individuals and corporations remains glaring. Out of 7.4 crore Indians who filed tax returns in 2022-23, 70% had zero tax liability, leaving the middle class—just 1.6% of the population—as the primary contributor. This skewed distribution highlights systemic inefficiencies and misplaced priorities in India’s fiscal policy.

The middle class is further disadvantaged by GST, where salaried individuals receive no refunds on the tax paid, unlike corporations, which can claim input tax credits. Additionally, the highest income tax bracket of 30% kicks in at much lower income levels in India than in countries like the US, China, or Russia.

An unfair trade-off

The middle class, contributing disproportionately to the nation’s coffers, gets little in return. Public infrastructure remains unreliable, compelling families to rely on expensive private healthcare and education. Meanwhile, toll roads add another layer of financial strain. Unlike in many other countries, India’s taxpayers lack access to robust social security and pension systems, further exacerbating their vulnerability.

The way forward

India’s economic policies need an urgent overhaul to address these glaring inequities. The government must:

  1. Expand the tax base: With only 1.6% of the population paying taxes, it is imperative to widen the tax net to include a larger share of individuals and businesses.
  2. Rationalise corporate tax benefits: Tax cuts for corporations should be contingent on tangible outcomes such as job creation and wage growth.
  3. Increase relief for individuals: The standard deduction and income exemption limits must be significantly raised to reduce the middle class’s financial burden.
  4. Enhance social security: A robust system of pensions and social security for taxpayers is essential to ensure that they are not left to fend for themselves in times of need.

India’s middle class is the backbone of its economy, funding its growth while receiving little in return. The government’s lopsided fiscal policies, which prioritise corporate profits over the welfare of individuals, are neither sustainable nor justifiable. For a nation aspiring to be a global economic powerhouse, it is high time to adopt a more equitable tax regime—one that acknowledges the contributions of its citizens and ensures that the fruits of development are shared more broadly.

economy Nirmala Sitharaman income tax tax
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