Is the Indian Tax System Fair?

Taxes are the largest source of revenue for the government. Tax, by definition, is a compulsory or obligatory fee levied by the government of a country on a citizen for the funding of public works and for the running of the government. This means that taxes are paid by the citizens to the government so that the government can improve the infrastructure and living conditions of the country. More often than not, however, governments levy taxes in the name of public welfare while not developing their countries using said taxes. India is one such country that charges high taxes in the name of social good.

India’s tax system can be divided into two parts:

· Direct Tax – These taxes are imposed on corporate entities and individuals. This tax cannot be transferred to others, it must be directly paid by the individual to the government. The most important type of direct tax is income tax which is levied on, as the name suggests, an individual’s income.

· Indirect Tax – These are the taxes imposed on citizens for goods and services. These include sales tax, excise tax, value-added tax and customs duty. This type of tax is transferrable and can either be paid by the consumer or producer.

When we talk about the taxation system in India, we are mainly referring to income tax. Tax revenue in India accounts for around 80-90% of India’s total revenue, and out of this income tax and corporate tax account for around 51% of the total revenue. India’s income tax rate follows a progressive tax regime. This means that people who earn more have to pay higher rates of tax. Taxes start from 5% for those who earn between Rs. 2.5 lakh and Rs. 5 lakh annually to 30% for those who earn above Rs. 15 lakh annually.

Source: Economic Times

In the last Union Budget for the years 2019-2020, the surcharge rate for persons with an income between Rs. 2 crores to Rs. 5 crores was raised to 25% from the existing 15%. For individuals with an income more than Rs. 5 crores, the surcharge has now gone upto 37%. Since surcharge is the additional levy imposed on individuals drawing high incomes, the effective tax rate on an individual earning more than Rs. 5 crores is now 42.74%.

Compared to countries like the U.S., China and Canada, India has a lower income tax rate. India’s highest tax rate is 42.74%, whereas Canada’s highest rate is 54.0%. While the U.K. and China both levy their highest taxes at 45%, the highest tax rate in the U.S.A. is 50.3%. However, the infrastructure in India and these countries are very different as well. Minimum wage in India is $2.8 per day as compared to $7.25 per hour in the U.S. Whereas, the cost of quality goods and services is cheaper in the U.S. as compared to India. Thus, a lower income tax rate is still a higher burden on Indians than on citizens of other developed countries. Moreover, the basic infrastructural facilities, like health and education, are more developed and accessible in countries like the UK and Canada. India has inadequate healthcare and education financing. This means that Indians have to pay more out of their pockets for basic needs and need that portion of their income that the government is levying on them. They cannot afford to pay such high income tax.

Although, the revenue of the government is supposed to go back into public works, that cannot be seen in India. Most of the budget is spent on administration, defence and the salaries of the government officials. Only 3-3.5% and 1.2-2.5% of the GDP is spent on education and healthcare respectively. The taxes being paid by the citizens are not being used to develop the country, and India has ways to go before achieving universal healthcare or education. It is a known fact that the best method to alleviate poverty is to provide affordable healthcare and education, which is not available in India. Thus, the high rate of taxation in India is unfair as it is not benefitting the citizens who are paying the taxes.

Moreover, the burden of income tax mainly falls on the middle class. Since the tax slab only starts from citizens earning above 5 lakh, a large part of the population isn’t even eligible to pay taxes. In the pre--Covid times, around 35% of the rural population was said to be poor but now that number has risen up to 51-56% (381-481 million people approximately). According to the income tax department, there were 8.04 crore individual taxpayers in 2018-2019. That means that only around 6% of Indians pay taxes. Additionally, many members of the upper class commit tax evasion or hide their incomes. Thus, the middle class has to deal with the high income tax as well as the cost of private health and education facilities.

A taxpayer has the right to ask what their taxes are being used for. The roads still have potholes, there is still large-scale poverty, quality healthcare and education are not available, there is still starvation, etc. Where are the signs that the taxes are being used correctly? The government is supposed to be “of the people, by the people and for the people”. This raises the question: are taxes really fair in India? If the taxes were being used for public good and economic and social development, then yes, levying of taxes would be completely fair. But in a country like India where we see less signs of infrastructural development and lots of corruption, making citizens pay such high taxes is unjust.