Tax Here, Tax There, Everywhere Tax, Tax. Why Is Everything About Taxes In India? Why Nirmala Sitharaman’s Tenure Has Failed To Leave A Mark?

India’s taxation system has long been a contentious topic, but the cracks in its foundation are now too glaring to ignore. While salaried employees find themselves perpetually squeezed under the relentless grip of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS), the Interim Budget for 2024-25 also offers no respite.

It is a continuation of a trend—over the past six to seven years, there have been no significant reforms to individual income tax laws. But is the problem merely about tax rates? Or is it that the very structure of income tax in India is inherently flawed and unjust?

The Reality of India’s Tax Base

Let’s start with the numbers. Out of India’s 88 crore adults, only 2.2% pay income tax. Compare this to countries like France (78.3%), the USA (50.1%), Germany (61.3%), and the UK (59.7%). Out of the 6.22 crore income tax returns filed in India, 4.29 crore resulted in zero tax liability, leaving just 1.93 crore individuals to bear the entire burden of income tax.

Even if we assume that 70% of India’s adult population is legitimately not eligible to pay taxes, that still leaves 26.32 crore individuals who should be contributing to the tax pool. Yet, only a minuscule fraction of them do. This glaring inequity propels us to question—why is the tax net so narrow, and why are salaried employees and pensioners disproportionately targeted?

The Disproportionate Burden

The injustice becomes even sharper when we consider the composition of India’s tax revenue.

In the 2024-25 Budget Estimates, individual income tax accounted for 30.18% of the gross tax revenue, while corporate tax contributed slightly less at 27.22%. This means that a tiny fraction of income taxpayers—mainly salaried employees—are contributing disproportionately to the nation’s coffers. Meanwhile, vast sections of the population, including agricultural income earners and informal sector workers, remain outside the tax net.

This imbalance is not just unfair; it is inefficient. India’s tax regime has become a system where those trapped within its formal structure are overburdened, while the informal economy largely escapes scrutiny. It is a classic case of inequity, where the few carry the weight of the many.

Why Income Tax Is a Failure

The current income tax system is not just unjust—it is a failure. It has failed to broaden the tax base, plug revenue leaks, and capture the true economic activity of a mixed but predominantly informal economy like India’s. Despite widespread knowledge of tax evasion, income underreporting, and tax leakage, successive governments have done little to address these issues.

India’s taxation model, rooted in the frameworks of formalized economies, is ill-suited to its unique characteristics. A significant portion of India’s economic activity occurs in the informal sector, which remains largely untaxed. This raises a critical question: Is India ready for an income tax regime designed for a formalized economy when it is still predominantly informal?

An Alternative to Income Tax

It is time to acknowledge that income tax as a revenue mechanism for individual taxpayers has failed. Instead of persisting with a corroded pillar of the tax regime, India must explore alternatives such as expenditure tax, which taxes consumption rather than income.

An expenditure tax has its critics—economists will argue that it disrupts the buoyancy of tax revenues and presents implementation challenges. But the current arrangement, where less than 3% of adults sustain the tax base, is neither sustainable nor just. Widening the tax net to include more contributors, irrespective of income source, is the need of the hour.

Nirmala Sitharaman. The Middle-Class Reality Check

Nirmala Sitharaman has held the reins as India’s Finance Minister since 2019, a tenure spanning over five years and counting. While she has been at the helm during some of the most turbulent times in modern history—COVID-19, global inflation, and economic disruptions—the verdict from India’s middle class and salaried workforce is far from glowing.

India’s middle class and salaried employees form the backbone of the economy. Yet, under Sitharaman’s tenure, they have faced relentless financial pressures with little to no relief in sight.

Let’s break it down –

Stagnant Tax Slabs – For years, income tax slabs have remained largely untouched. The much-touted “new tax regime” introduced during her tenure was widely criticized for being unappealing, offering minimal benefits while eliminating critical exemptions. The salaried class, already burdened by rising inflation, received no meaningful respite from an outdated tax structure.

No Relief Amid Inflation – The cost of living has skyrocketed during Sitharaman’s tenure. Prices of essential commodities like food, fuel, and housing have surged, eroding disposable incomes. Yet, there has been no corresponding increase in standard deductions or tax benefits to help salaried individuals cope with these rising expenses.

Burden of Indirect Taxes – The Goods and Services Tax (GST), while implemented before her tenure, has been managed in a way that disproportionately impacts the middle class. Essentials like packaged food items, healthcare products, and even basic services attract high GST rates, adding to the financial strain.

Fuel Price Mismanagement – Despite fluctuations in global crude oil prices, Sitharaman’s government has consistently kept fuel taxes high. This not only inflates transportation costs but also has a cascading effect on the prices of all goods and services.

Achievements That Barely Scratch the Surface

Supporters of Sitharaman might point to a few measures as evidence of her contribution to the middle class, but a closer look reveals how limited these have been –

New Tax Regime – Promoted as a simplification of the tax system, the new regime was widely rejected for being unattractive. It removed key exemptions like housing loan interest and 80C deductions, which are crucial for middle-class financial planning. While it offers reduced tax rates, the loss of these exemptions has made it less appealing.

COVID-19 Economic Package – The much-publicized “Atmanirbhar Bharat” package was largely skewed towards businesses and infrastructure, with little direct financial relief for salaried individuals. While loan moratoriums and credit schemes were introduced, these did little to alleviate the immediate financial burdens of the middle class.

Focus on Startups and MSMEs – While commendable, the emphasis on promoting startups and small businesses has done little for the average salaried worker. The middle class continues to bear the brunt of high taxes and rising costs without seeing tangible benefits from these initiatives.

What Could Have Been Done?

The Finance Minister had ample opportunities to address the middle class’s concerns but consistently failed to deliver.

Here are a few measures thar could have been implemented –

• Revising tax slabs to reflect inflation and rising living costs could have provided immediate relief.
• Essentials should have been moved to lower GST slabs, reducing the financial burden on the middle class.
• A more rational approach to fuel taxation could have prevented the cascading inflationary effects that have crippled household budgets.
• Introducing targeted social security measures, such as subsidized healthcare or housing benefits for the middle class, could have gone a long way in easing financial stress.

A Legacy of Missed Opportunities

Nirmala Sitharaman’s tenure as Finance Minister has been marked by missed opportunities and misplaced priorities. The middle class, a vital segment of India’s population, feels abandoned. The lack of meaningful tax reforms, rising indirect taxes, and no significant policy measures to ease their financial burden paint a grim picture of her legacy.

While the government has focused on macroeconomic stability, infrastructure, and business growth, it has failed to address the everyday struggles of its citizens. For the middle class and salaried individuals, Sitharaman’s tenure has been a period of stagnation, rising costs, and unfulfilled promises.

For a nation with vast development needs—defense, infrastructure, social welfare, and research—a fair and efficient tax system is non-negotiable. But fairness cannot mean overburdening a small segment of the population. India needs a taxation model that reflects its economic realities and distributes the tax burden more equitably across all sections of society.

It is time to dump individual income tax as we know it and design a new system that is just, efficient, and inclusive. The earlier this happens, the better—for the taxpayers and the nation.