Indian Tax System: Continuous Taxation with Minimal Relief for Ordinary Citizens and Working Class

India’s tax system has long been a subject of debate, with ongoing scrutiny about its fairness and effectiveness. While the government collects substantial revenue each year, a growing sentiment among the public is that the ordinary citizens and the working class, who form the backbone of the country’s economy, are bearing the brunt of this taxation without receiving adequate benefits in return. Despite modernization efforts, the tax system continues to put immense pressure on these communities, pushing many further into financial distress rather than offering relief. This article provides a deep analysis of the Indian tax system over the last four years, exploring how it has impacted ordinary citizens and the working class, particularly through rising costs, inadequate reforms, and growing debt.

1. The Tax Burden: Direct vs. Indirect Taxes

India’s tax system consists of both direct and indirect taxes, with income tax being the primary direct tax and Goods and Services Tax (GST) as the most significant indirect tax. Direct taxes, such as income tax, are levied based on individual earnings, whereas indirect taxes like GST are imposed on goods and services, impacting consumption.

The tax system’s most significant issue lies in the disproportionate burden of indirect taxes, particularly GST. Introduced in 2017, GST was intended to simplify the complex indirect tax structure by creating a unified tax system. However, in practice, GST has often led to price increases for essential goods, disproportionately affecting the working class and lower-income households.

A report by the National Institute of Public Finance and Policy (NIPFP) found that while GST simplified the tax structure, it also increased the prices of essential items like food, healthcare, and transportation, primarily affecting lower-income households. For example, packaged food items attract a 5% GST, branded apparel is taxed at 18%, and luxury goods at 28%, putting extra pressure on ordinary citizens who spend a significant portion of their income on these necessities. The tax system’s inability to reduce the cost of living has led to increased financial strain on the working class.

2. Income Tax: Stagnation Amid Rising Costs

India’s income tax system, designed to tax individuals based on their earnings, has also failed to provide substantial relief to the working class. While the government has made efforts to modernize tax collection, the income tax slabs have remained largely unchanged for years. The income tax exemption limit for individuals has stayed at Rs. 2.5 lakh since 2014, despite inflation and the rising cost of living.

The stagnation of income tax slabs means that ordinary citizens and working-class families, particularly those earning between Rs. 5 lakh and Rs. 10 lakh annually, find themselves pushed into higher tax brackets. This situation is exacerbated by inflation, which reduces the real value of their income. In addition, while tax rebates like Section 87A offer relief of Rs. 12,500 for income below Rs. 5 lakh, only a small section of the population benefits from this. A Ministry of Finance report from 2021 pointed out that the income tax system has failed to offer sufficient relief, especially for middle-income groups, as wages have not grown in line with inflation, and rising taxes have reduced disposable income.

3. The Rising Cost of Essentials

The rising cost of daily essentials remains one of the most visible and distressing impacts of the current tax system. GST, despite its simplification of the tax process, has led to higher prices for many basic goods. Food items like vegetables, pulses, and edible oils have seen sharp price hikes in recent years, in part due to GST, which imposes an additional layer of tax on goods in the supply chain.

According to a report by the Reserve Bank of India (RBI) in 2021, inflation in food prices has remained a significant concern for low-income households. In particular, the price of vegetables, pulses, and edible oils has increased substantially, with the RBI noting a considerable spike in the cost of these items over the past few years. Similarly, rising fuel prices, partly due to high excise duties and VAT, have led to an increase in transportation costs. Since fuel is a critical input for production and distribution, these rising costs are ultimately passed on to consumers, increasing the prices of goods and services.

Moreover, as fuel prices surge, transportation costs rise for daily commuters, further increasing the financial pressure on ordinary citizens and the working class. A 2022 report from the Ministry of Statistics and Programme Implementation highlighted that food inflation in urban areas had risen by over 7% in the past year alone. This puts additional strain on lower-income families who already allocate a significant portion of their budget to essential goods, leaving them with less disposable income and pushing them further into debt.

4. Debt and Financial Distress

The increased tax burden, combined with stagnating wages and rising costs, has led many ordinary citizens and working-class families to rely on loans, credit cards, and consumer debt to maintain their standard of living. A 2018 report from India’s Ministry of Finance indicated a rising trend in consumer debt, particularly among middle-class households, as they struggle to cope with the rising cost of living.

With limited income relief, many working-class individuals are forced to borrow money to cover everyday expenses. The lack of sufficient financial assistance or tax relief, especially for those earning between Rs. 5 lakh and Rs. 10 lakh, means that these households often resort to high-interest debt. This situation creates a cycle of financial distress, where individuals borrow to meet immediate needs but face long-term consequences in the form of debt traps.

5. The Impact on the Informal Sector and Employment

A significant portion of India’s working class is employed in the informal sector, which accounts for about 90% of the workforce, according to the International Labour Organization (ILO). Informal workers, who often lack social security or formal contracts, have been disproportionately affected by the tax system, particularly during the pandemic. Despite government relief programs such as the Pradhan Mantri Garib Kalyan Yojana (PMGKY), informal workers have often faced difficulties accessing these benefits.

The informal sector, which is highly vulnerable to economic shocks, has been further strained by rising taxes and the lack of a robust social safety net. Reforms like the Jan Dhan Yojana and Pradhan Mantri Shram Yogi Maan-Dhan Yojana have attempted to provide financial inclusion for informal workers, but the absence of comprehensive social welfare programs continues to exacerbate economic insecurity for the working class.

6. The Need for Comprehensive Tax Reforms

Despite various reforms and attempts at modernization, India’s tax system continues to disproportionately burden ordinary citizens and the working class. Rising indirect taxes, stagnant income tax slabs, and inflationary pressures have placed considerable strain on households, particularly in the lower and middle-income brackets. The growing reliance on consumer loans and credit cards to manage daily expenses further highlights the depth of financial distress faced by these groups.

To address these challenges, the Indian government must prioritize tax reforms that focus on reducing the tax burden on working-class households. Key measures could include raising the income tax exemption limit, reducing GST on essential goods, and implementing targeted subsidies for low-income families. Additionally, revisiting the tax exemptions for large corporations and wealthier individuals is essential to ensure a fairer distribution of the tax burden.

Without comprehensive reforms that directly address the economic realities of ordinary citizens, India’s tax system will continue to exacerbate inequality and financial distress, pushing more families into debt and widening the gap between the rich and the poor.

References:

1. National Institute of Public Finance and Policy (NIPFP), “Impact of GST on Consumer Prices,” NIPFP Research Report, 2018.
2. Reserve Bank of India (RBI), “Inflation and its Impact on Household Budgets in India,” RBI Research Paper, 2021.
3. Ministry of Finance, “Consumer Debt and Household Borrowing Trends in India,” Ministry of Finance, 2018.
4. International Labour Organization (ILO), “Informal Economy in India,” ILO Report, 2020.
5. Ministry of Statistics and Programme Implementation, “Consumer Price Index and Inflation Data,” 2022.