Why does paying taxes in India feel more like a one-sided burden than a shared responsibility? Despite record tax collections, our cities remain choked with potholes, crumbling infrastructure, and polluted air. The middle class, the backbone of India's tax revenues, is overburdened, while wealthy agriculturists and the rich and the famous just about pay minimal tax.
With the Union Budget on the horizon, one has to ask: Is it time to rebuild India's taxation system from the ground up — with trust, fairness and accountability at its core?
With the Union Budget on the horizon, one has to ask: Is it time to rebuild India's taxation system from the ground up — with trust, fairness and accountability at its core?
The Indian taxation system, touted as progressive on paper, reveals deep structural inequalities. A recent LinkedIn post by a prominent startup founder highlighted a startling statistic: just 2,000 families control 18% of the nation’s wealth yet contribute only 1.8% of its total taxes.
While the source of this data remains unverified, it reflects a perception that is difficult to ignore — the wealthiest in India bear a disproportionately lower tax burden relative to their economic influence. Meanwhile, the middle class, constituting only 2% of the population, shoulders a majority of the tax burden, contributing significantly to both income tax and goods-and-services-tax revenues.
At its core, this disparity raises critical questions about the progressiveness of India's tax structure. The top 10% of income earners account for nearly all income tax collections as the country's taxation base remains abysmally narrow. The majority of Indians fall outside the ambit of personal income tax, with taxpayers comprising just 7.4% of the total population.
Despite claims of expanding the tax net, we are still taxing only the top decile of earners, far below the 30th percentile that should ideally serve as the base. This limited reach of income tax exposes an urgent need for structural reform in how we design and implement direct taxation policies.
India's GST structure, often praised as a hallmark of cooperative federalism, is also riddled with inefficiencies and complexities. The GST Council now has nine different rates, including niche slabs like 0.25%, 1.5% and 7.5%, alongside the more conventional rates. While these slabs aim to cater to specific sectors, they introduce undue complexity and friction for taxpayers. The distracting debate about taxing items like popcorn and second-hand cars reflects a distracting tendency to focus on marginal issues rather than addressing systemic challenges. Simplifying the GST regime into fewer, well-defined slabs and reducing compliance friction is essential to foster a culture of trust and compliance among taxpayers.
However, structural reforms in tax policy are not enough. The government must demonstrate a commitment to transparency and accountability in how it utilises taxpayers' money. India's top 10 cities, the economic hubs driving national growth, grapple with inadequate civic infrastructure, poor public transport and worsening air quality. Despite record tax collections, most municipalities still rely heavily on funding from state or central governments, rather than improving their own property tax collection and efficiency. This over-dependence on external funding stifles local accountability and innovation in revenue generation. These systemic failures erode citizens' trust in governance and diminish their willingness to comply with the tax system. Why should taxpayers believe in a system that consistently fails to deliver basic amenities?
Furthermore, the political reluctance to address long-standing issues, such as taxing wealthy agriculturists, undermines equity in the tax regime. It is no secret that some celebrities exploit loopholes to masquerade as farmers, avoiding taxes. This glaring omission in policy threatens the very democratic ethos of the country by perpetuating privilege for the few.
The middle class, the backbone of India's tax revenue, remains neglected year after year. While corporate tax rates have been slashed in recent years to stimulate private investment, the promised surge in private capital expenditure has yet to materialise.
Personal income tax collections, meanwhile, have surpassed corporate tax collections for the second consecutive year. This is a clear signal that the government has relied disproportionately on individuals, particularly salaried taxpayers, to fund its infrastructure ambitions and welfare schemes. Yet, this same middle class finds itself squeezed between high living costs and stagnant tax relief measures.
As India approaches the Union Budget 2025–26, there is little evidence of bold policy ambition to overhaul the taxation system. Budget discussions and public stakeholder inputs are often marked by speculative "kite-flying", particularly around Sankranti, but meaningful tax reforms await actual flight. The need of the hour is a taxation system that is simpler, broader and built on a foundation of trust — the one where the taxation ideology trusts its citizens.
This means reducing compliance hurdles, simplifying the tax code and ensuring fairness in tax collection. It also means addressing the tax loopholes exploited by the ultra-rich, be they corporate magnates or celebrity farmers. In a nation of 140 crore people, it is hard to believe that we are short of ideas to broaden the tax base and streamline collections.
Taxation is a social contract between the state and its citizens. For this contract to hold, citizens must see tangible benefits from their contributions, and the state must create an equitable framework that inspires confidence. A redesigned tax system that simplifies processes, widens the base, and treats taxpayers with respect can unlock India’s true economic potential. It is time for the government to act, not merely promise. Trust, after all, is the most valuable currency in governance.
Srinath Sridharan is a corporate adviser and independent director on Corporate Boards. Blogs at https://srinath.blog. He tweets as @ssmumbai.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.
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