What Middle Class' Tax Burden Tells Us About the State of Indian Taxation System

The middle class' tax burden is a reminder of the structural and procedural flaws in our tax system.

As the Union Budget 2025 approaches, debates over tax reforms have reignited frustrations among the middle class about the disproportionate tax burden they bear – and the lack of adequate public services they receive in return.

(Photo: Aroop Mishra/The Quint)

As the Union Budget 2025 approaches, debates over tax reforms have reignited frustrations among the middle class about the disproportionate tax burden they bear – and the lack of adequate public services they receive in return.

This dissatisfaction, though seemingly smaller in scale compared to indirect tax contributors, is not misplaced. It reflects deeper structural and procedural issues in India’s tax system that remain unresolved despite repeated reform attempts.

In 2010, during the recovery from the global financial crisis, the government had a chance to simplify tax slabs and rationalise exemptions. Instead, it chose short-term fiscal fixes over structural reform. A similar scenario unfolded in 2019 after demonetisation and the rushed rollout of the Goods and Services Tax (GST). Both events were billed as transformative but failed to address inherent inequities in the system.

These examples reveal how political caution and immediate economic pressures often derail long-term reform.

Joint Taxation for Couples

One proposal generating interest this year is the introduction of joint taxation for married couples, as suggested by the Institute of Chartered Accountants of India (ICAI).

Under this model, a married couple would file taxes as a single unit, potentially reducing their overall tax burden.

Advocates point to systems in countries like the US and the UK, where such mechanisms have eased financial pressures on families. For instance, while an individual earning Rs 7 lakh is currently tax-exempt, a family filing jointly could enjoy an exemption of Rs 14 lakh under the proposed model. Progressive tax slabs for combined incomes aim to ease the load on middle-income families and boost household savings.

However, joint taxation is not without its flaws. While dual-income households would benefit the most, single-income families might see less tangible relief.

Additionally, the broader tax system disproportionately burdens middle-income earners while offering generous exemptions to corporations and high-net-worth individuals (HNIs). Without addressing these inequalities, new reforms risk perpetuating the very problems they aim to solve.

Deeper Rots in Tax Framework

These issues are symptomatic of deeper structural problems within India’s tax framework. In the fiscal year 2023-24, around 8.09 crore individuals in India filed income tax returns, accounting for approximately 6.68 percent of the population.

Notably, out of these, 4.9 crore taxpayers reported zero taxable income, a sharp rise compared to 4.64 lakh in the previous fiscal year. This significant increase highlights critical aspects of India’s tax landscape and the growing divergence between filings and actual taxable income.

One of the major structural challenges in India’s direct tax system is the high volume of tax litigation.

The IT authorities informed the court that nearly 5.8 lakh appeals are pending:

• 3.9 lakh under the Faceless Commission of Income Tax (CIT)

• 80,170 before Non-Faceless CIT

• 1.09 lakh before Joint CIT

Such delays in dispute resolution, which often take years to conclude, hinder timely revenue collection and burden taxpayers with prolonged uncertainty. These inefficiencies highlight the pressing need for a streamlined tax litigation and resolution framework.

Outdated Laws, Procedural Lapses

Additionally, the Income Tax Act of 1961, which governs direct taxation, is outdated and riddled with multiple ambiguities. Attempts at rationalisation have been piecemeal, often ignoring interconnected inefficiencies.

India’s decentralised approach to taxation, split between state and central authorities, further complicates standardisation efforts and alignment with global frameworks like BEPS 2.0. The result is a complex and often confusing system that deters compliance and undermines trust.

Procedural inefficiencies add another layer of challenges. Digital tools like e-invoicing and blockchain have been introduced to simplify compliance, but inconsistent implementation leaves small businesses and individuals struggling. Tax dispute resolution, too, remains painfully slow.

Even with the proposed GST Appellate Tribunal, the backlog of pending cases is significant, creating uncertainty for taxpayers. The government’s tendency to reopen closed assessments only exacerbates these delays.

Indirect Taxes Additional Burden for Middle Class 

Another major concern is the government’s growing reliance on indirect taxes like GST, which now account for nearly a third of total tax revenue.

Unlike direct taxes, which are progressive, and target individuals based on their income, indirect taxes impose a uniform rate on all consumers, regardless of their ability to pay.

This regressive nature disproportionately affects lower-income households, which spend a larger share of their income on essentials.

The middle class, already burdened by direct taxes, also ends up contributing significantly through indirect taxes, while wealthier individuals often escape with substantial savings due to exemptions and deductions in the direct tax system.

Despite the steady growth in indirect tax revenue, it has not translated into better public services. Spending on health, education, and other critical sectors remains stagnant or has even declined in real terms.

This disconnect between tax collection and public investment raises serious questions about fiscal priorities. For many taxpayers, it fuels the perception that the system is fundamentally unfair, benefitting a privileged few while failing to address the needs of the majority.

Charting a Path Toward Equitable Taxation in India

Several successful global examples highlight the nature of reforms the Indian government can consider like Singapore’s 'GST Voucher' scheme and Canada’s GST/HST credit which provides rebates and direct cash payouts to low-income households, helping offset the disproportionate impact of consumption-based taxes.

India's tax-to-GDP (gross domestic product) ratio still stands at a worrying 12 percent when compared to other developing nations with similar per capita income levels. For example, Brazil boasts a tax-to-GDP ratio of 33 percent, while South Africa stands at 26 percent.

Tax revenue vs GDP.

(Sources: OECD Revenue Statistics 2023, World Bank)

These countries, despite comparable income challenges, have managed to expand their tax bases and fund robust social welfare programmes.

However, there are some areas where India has done better over the years as evidenced by the abolition of the 'angel tax' in Budget 2024-25 to promote startups, and the digitisation of land records for improved transparency.

The government, in 2019, took an unexpected step by slashing the corporate tax rate from 30 percent to 22 percent, hoping to stimulate private investment and fuel economic growth. High indirect taxes, confusing and rushed GST rules, and an overreliance on regressive taxation have created barriers that stifle consumption demand which forces thousands of Indian out of the country.

It’s ironic that while private companies were trusted with generous tax breaks in hope of more private investment, the latter didn’t happen.

If tax breaks and blatant avoidance continue in a deeply unequal economy like India, the ripple effects could transform the socio-economic landscape, entrenching further inequality and informality over time.

Increased disposable income would drive consumption, giving a much-needed boost to domestic demand, small businesses. Higher household savings could translate into greater investment, fostering entrepreneurship and expanding economic opportunities.

This author has earlier argued in favour of a consumption tax as explained by economist Kenneth Rogoff. Consumption tax is levied on the rich consumers on luxury and relatively more elastically demanded goods and services.

Such reforms wouldn’t just uplift individuals from a high-debt, low-income trap. They would also create a self-reinforcing cycle of growth, economic opportunity for the nation as a whole, while making those more capable to pay tax contribute towards their fair share, even as those in need for tax breaks are offered to enable more consumption demand at the bottom-of-the-pyramid.

(Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, Office of Inter-Disciplinary Studies, and Director of Centre for New Economics Studies (CNES), OP Jindal Global University. He is a Visiting Professor at the London School of Economics, and a 2024 Fall Academic Visitor to the Faculty of Asian and Middle Eastern Studies, University of Oxford. This is an opinion piece. All views expressed are the author’s own. The Quint neither endorses nor is responsible for them)