Taxation And Inequality: Unspoken Truths Behind India's Economic Success

Sumit Saini & Kartik Kanodia

8 July 2025 4:52 PM IST

  • Taxation And Inequality: Unspoken Truths Behind Indias Economic Success

    “Without economic and social justice, political freedom is hollow.” – Dr. B.R. Ambedkar. India's economy is often praised as a success story, but might it bury rather than reveal? The wealth gap is growing and our tax system is quietly making it worse. This is the underlying truth the impressive GDP figures conceal. Ambedkar's warning was not just philosophical—it was prophetic. It's...

    “Without economic and social justice, political freedom is hollow.” – Dr. B.R. Ambedkar. India's economy is often praised as a success story, but might it bury rather than reveal? The wealth gap is growing and our tax system is quietly making it worse. This is the underlying truth the impressive GDP figures conceal. Ambedkar's warning was not just philosophical—it was prophetic. It's time we ask: who is really paying the price for India's growth—and who is walking away with the gains?

    The Paradox of Growth: Inequality in the Shadow of Economic Success

    India becoming the world's fourth-largest economy is a remarkable achievement. And with our GDP now nudging $4.19 trillion (IMF, 2024), people the world over are starting to see India gradually becoming a world power. But if we move past the headlines and glittering economic statistics, there's a more brutal reality lurking beneath. This rapid growth hasn't made life better for everyone. However, metro cities are looking new with shiny buildings, tech parks, and luxurious lifestyles, millions across rural and semi-urban India are still struggling with basic needs. The divide between the rich and the poor is growing, and it's becoming more visible with each passing day.

    The richest 1% of Indians now own more than 40% of the country's entire wealth, while the poorest half of the population has to make do with mere 6% — according to a 2023 Oxfam India's report. This sort of economic contrast is more than mere numbers; it raises fundamental issues of fairness and justice in a country that so arrogantly everything but every day declares itself a constitutional democracy based on the principles of equality, social justice, and fraternity; a country that boasts about its people but insists that their character is of no concern to the Republic. And if we look at the 2025 Human Development Index that was released by the UNDP, India ranks 130 out of 193 countries. That's a clear reminder that even though the economy is expanding, a huge section of the population still struggles to access basic services like proper healthcare, good education, and a dignified standard of living. Progress, it seems, is not reaching everyone equally.

    It really makes you pause and wonder who is actually gaining out of India's rapid economic growth? Today, India boasts 170-plus billionaires, and interestingly enough, many of them have seen their wealth grow even faster during the pandemic, when millions of families were on the brink of penury. But their share of tax contributions is still surprisingly small given their rapidly growing fortunes.

    A 2024 study by the World Inequality Lab points out something deeply concerning India's tax structure depends heavily on indirect taxes like GST. These taxes hit the poor much harder than the wealthy person. While the richest 1% reportedly end up paying less than 5% of their income in effective taxes, the common man pays a larger amount of his earnings on daily-use items. This creates a situation where the system seems tilted in favor of the already privileged people's.

    India's Tax Structure: A Tilted Burden

    Arthashastra, a manual for kings by the ancient Indian political philosopher Chanakya, urged rulers to “collect taxes like a bee collects honey—without harming the flower.” India's current tax regime, though, does not reflect this wisdom.

    Even though the top 1% possess 40% of wealth and earn 22.6% of national income, tax contributions from this segment remain low. Meanwhile, 64% of GST revenues are contributed by the bottom 50% of the population, which just goes to show how ineffective and regressive indirect taxes are. GST was meant to be one tax, one nation, but it is now nine taxes and very complicated. Smaller companies without dedicated compliance departments are feeling the pain, but larger businesses are managing just fine. The alleged denial of ITC (Input Tax Credit), especially in the real estate segment, has led to increase in consumer prices. However, in a landmark 2024 decisionChief Commissioner of Central Goods and Services Tax & Ors. vs Safari Retreats SC held that ITC now can be claimed on construction of commercial property meant for renting/ leasing.

    The recent move in the Union Budget to increase income tax threshold to ₹12 lakh is meant to stimulate consumption but at the same time it narrows the tax base. With only 6.75 crore individuals (or an estimated 5% of the population) filing income tax returns in 2023-24, the tax is increasingly being borne by a smaller set. Even though those earning over ₹1 crore have increased fivefold, they still represent a negligible portion of India's 960 million working-age citizens.

    A major structural weakness in the current tax framework is the blanket exemption granted to agricultural income. Though originally designed to shield marginal farmers, this provision has increasingly been misused by large landowners who earn significant incomes without paying any tax. In contrast, urban wage earners, small business owners, and salaried professionals who enjoy no such exemptions—continue to bear the tax burden.

    Similarly in Corporate taxation, Just 1% of firms contributed 85% of total corporate taxes. Government incentives, offshore vehicles, and loopholes have made it possible for large corporations to pay lower effective rates than individuals, even though their earnings are much higher. In a glaring reversal of expectations, individuals now make larger contributions to the tax pool than corporations.

    Recent Developments:

    In the Union Budget 2025–26, the government introduced a major changes by making the New Income Tax Regime (NITR) the default choice for taxpayers. On the surface, it looks like a sweet deal as there is no tax up to ₹7 lakhs, and a standard deduction of ₹75,000 for salaried individuals. For someone earning around ₹12.75 lakh a year, this could mean zero tax liability but only if they give up the usual exemptions and deductions under the old system, like investments in LIC, PPF etc.

    But here's the real catch: while these seems like it's aimed at easing the burden for the average taxpayer, it mainly favors those in the regular salaried jobs, especially in the formal sector. What about the millions working in the informal economy the small shop owners, freelancers, and gig workers? These people are often depending on deductions like Section 80C to make ends meet and save a little extra. Under the NITR, those benefits are not able to claim anymore.

    The government claims this overhaul will simplify the tax process and improve compliance. Maybe that's true in theory. But in reality, it ends up removing key incentives for people to save in crucial areas like healthcare, education, and housing areas that matter the most to the middle class and lower-income families. So, while it might look like reform on paper, the ground reality tells a different story.

    The limits for deductions under Section 80D, which relate to medical insurance, have remained unchanged for over ten years, despite the steep rise in healthcare expenses. At the same time, Capital gains taxes have been raised LTCG from 10% to 12.5% and STCG from 15% to 20%—reducing net returns from mutual funds and equities. Likewise, eliminating indexation on property sales raises tax liabilities on inflation-adjusted gains, penalizing the very asset class many families depend on for long-term security.

    India now stands at a critical policy crossroads—balancing economic efficiency with social equity. In a society marked by inequality, tax reform must strike a careful balance: it should aim for simplicity while ensuring that the most vulnerable are not left behind.

    The Road Ahead

    India's tax-compliant middle class is feeling more and more boxed in. Stagnant policy, indirect tax hikes, and vanishing exemptions had offered little relief and a growing burden to this group.

    Enhancing transparency such as requiring high-net-worth individuals to publicly declare their assets, a practice common in Scandinavian nations would help in improving compliance and rebuild public trust. A fairer tax system is not only possible but necessary. Introducing a modest 2% wealth tax on billionaires could generate approximately 0.5% of national income enough to support meaningful redistributive initiatives without undermining investment incentives. Both the OECD and IMF have, in the aftermath of the pandemic, advocated for solidarity taxes targeting the ultra-wealthy.

    For instance, corporate tax cuts introduced in 2019, which reduced rates from 30% to 22% for existing firms and to 15% for new companies, led to an estimated revenue loss of ₹1 lakh crore.

    However, these reductions failed to deliver significant gains in employment or capital formation. These outcomes suggest that slightly higher taxes are unlikely to deter genuine investment. Instead, the most reliable engine of growth remains robust demand—especially from the middle class— whose consumption drives expansion across industries.

    Nobel laureate James Mirrlees in his work on optimal taxation theory, highlighted the importance of a tax system that minimizes economic distortions while striking a balance between efficiency, equity, and economic incentives. He maintained that rather than burdening a select few, taxes should involve widespread participation. Mirrlees also emphasized how crucial incentives and public trust are to tax compliance, as people are more inclined to pay taxes when they see visible improvements in infrastructure and public services.

    Additionally, reforming the Goods and Services Tax (GST) is essential. Removing or reducing taxes on basic necessities, while introducing progressive consumption taxes, would help ease the disproportionate burden currently placed on low- and middle-income households.

    Most importantly, the anachronistic view that agricultural income should be untaxed needs to be reconsidered. The rich in any industry need to be taxed fairly. Fairness must replace political expediency as the guiding principle of taxation.

    Article 39(b) and 39(c) of the Directive Principles of State Policy mandate that the ownership and control of material resources be distributed to best serve the common good and that the economic system should not result in the concentration of wealth and means of production to the detriment of society. These are the very principles on which to build a framework toward social and economic justice—the very principles articulated in the Preamble to the Constitution.

    A truly fair tax system must be consistent with the Constitution's vision of a fair and just society. Reforming India's tax regime is not just an economic necessity—it is a democratic obligation.

    Views are personal.


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