Introduction
The debate around income tax versus corporate tax has intensified in India amid rising economic inequality. With the top 1% of the population owning more than 40% of the national wealth, the issue of who pays how much tax has become contentious.
On one hand, the country has seen a steady rise in the number of billionaires and their cumulative wealth crossing $1 trillion in 2023. On the other hand, inflation and the burden of indirect taxes like the Goods and Services Tax (GST) have hit the middle class hard. The recent corporate tax cuts that reduced government revenue have further fuelled the sentiment that the rich get away lightly while the middle class shoulders most of the tax burden.
The Wealth Disparity in India
Statistics from the latest Oxfam report paint a picture of extreme income and wealth concentration in India. The country added a new billionaire every month between 2021-2022. Meanwhile, the wealth of the bottom 50% of the population is still lower than what it was in 2019.
Wealth Disparity in India:
| Indicator | Value |
| Top 1% ownership of national wealth | > 40% |
| Number of billionaires in India | 166 |
| Collective wealth of Indian billionaires | $720 billion |
| Bottom 50% ownership of national wealth | 3% |
Key Findings from the Oxfam Report
- The top 1% of India own more than 40% of the national wealth
- India has 166 billionaires with a collective wealth of $720 billion
- The bottom 50% of Indians own just 3% of the national wealth
| Key Findings | Statistics |
| Top 1% ownership of national wealth | > 40% |
| Number of billionaires in India | 166 |
| Collective wealth of Indian billionaires | $720 billion |
| Bottom 50% ownership of national wealth | 3% |
The report also states that if the top 10% of Indians pay a 1% wealth tax every year for the next 10 years, it would fund the universal healthcare for 135 million poor families for one year.
Such wealth disparity limits economic mobility and growth. According to the World Economic Forum, India ranks low at 68th place globally in terms of social mobility. High income inequality also puts a break on poverty reduction efforts.
Taxation and Inequality
Experts argue that taxation policy has a major role to play in reducing the inequality gap. However, India’s tax structure seems to favour the ultra-rich more than the middle class.
| Tax Aspect | Description |
| GST as a percentage of government revenue | > 50% |
| Corporate tax rate (2019) | Reduced from 30% to 22% for existing companies |
| Revenue loss due to corporate tax cuts | ₹1.45 lakh crore |
GST Burden on Middle Class
Goods and Services Tax (GST), an indirect tax, accounts for more than 50% of the government’s tax revenue. But by design, GST is regressive in nature – it taxes individuals irrespective of their incomes. Critics argue that the 28% GST slab on items like clothes, footwear, and mobile phones takes a higher toll on middle and lower-income groups.
Corporate Tax Cuts
In 2019, the corporate tax rate was reduced from 30% to 22% for existing companies. The effective tax rate for new manufacturing companies was cut down to just 17%. However, these tax cuts resulted in a revenue loss of ₹1.45 lakh crore, reducing the tax-GDP ratio. With lower tax money, the government struggles to fund welfare schemes and public infrastructure.
The Middle Class Perspective
The middle class bears the responsibility of paying the highest income tax, while benefiting the least from tax cuts and social security measures.
Contribution to Tax Revenue
- Income tax collection heavily relies on TDS, advance tax which are mostly paid by the salaried middle class
- Just 5-6% of Indians pay income tax; of them, nearly 60% are salaried employees
| Contributor | Contribution (%) |
| Salaried middle class | > 60% of income tax collection |
| Percentage of Indians paying income tax | 5-6% |
Financial Struggles
Rising costs of housing, education, healthcare and daily essentials are straining the budgets of middle income families. Their income growth has not kept pace with inflation in the past decade. Additional tax burdens like GST further limit their purchasing power.
Comparison with The Rich
- Top marginal income tax rate applicable for the middle class is 30% plus surcharges; effective tax rate for ultra-rich is around 25%
- Wealthy businessmen often show expenses as business costs to reduce taxable income
- Large corporates frequently avoid taxes by exploiting loopholes, shifting profits abroad
| Income Group | Tax Rate & Information |
| Middle class | Top marginal income tax rate: 30% plus surcharges |
| Ultra-rich | Effective tax rate: around 25% |
So while the middle class pays taxes on their hard-earned salaries diligently, the rich find legal ways to pay far less taxes as a percentage of their actual incomes and wealth.
Case Studies and Personal Stories
To understand the real impact of taxation policy, let us look at some examples of how different Indian income groups experience it.
Pratima’s Story
Pratima Mehta is a 35-year-old urban middle class working woman earning ₹8 lakhs annually. After deductions and exemptions, she pays around ₹50,000 as income tax – nearly 25% of her yearly income.
With education loans and elderly parents to support, Pratima struggles to make ends meet. She dreams of owning a house, but rising property prices in cities make it an impossible goal. While she pays taxes honestly, Pratima feels the system is rigged in favour of the rich.
India’s Richest Billionaire
Gautam Adani has amassed a staggering net worth of $120 billion to become India’s richest man. He owns multiple businesses across ports, energy, real estate and more.
In 2021, Adani spent $13.8 million on a luxury home in Mumbai’s Malabar Hill. But his effective tax outgo is estimated to be less than 5% of his massive wealth gains annually.
Expert Opinions and Economic Analysis
Economists argue that highly progressive taxation is essential for India to reduce its historically high wealth gap. Let us examine what the experts say:
Oxfam CEO Amitabh Behar
Amitabh Behar, CEO of Oxfam India said, “Taxing the super-rich is possible, but we need governments committed to reducing inequality.” He emphasized that taxing wealth and inherited properties can raise significant revenues for social spending.
French Economist Thomas Piketty
Thomas Piketty, in his bestselling book ‘Capital in the Twenty-First Century’ states that marginal tax rates of 80-90% are justified for those earning over $1 million per year in advanced economies. He prescribes higher inheritance taxes to prevent perpetuation of wealth inequality over generations.
Importance of Public Revenue
Government revenue is crucial for funding public infrastructure like affordable housing, healthcare, education and social security that benefit vulnerable sections of society.
Experts argue that the tax potential of the rich is under-utilized in India. Closing tax loopholes and imposing a wealth tax on the ultra-rich can raise substantial capital for welfare schemes.
The Argument for Taxing the Rich
There is a strong case to make for increasing tax rates and government oversight on the incomes and assets of Indian billionaires and large corporations.
Wealth Tax
Imposing even a 1-2% wealth tax on the collective net worth of Indian billionaires can potentially raise $15-30 billion annually as per Oxfam estimates. This can fund the entire budget for the National Health Mission scheme.
Higher Income Tax
- 50% tax for incomes above ₹10 crores per annum
- Remove exemptions, deductions frequently misused to evade taxes
- Tax dividends, share buybacks, capital gains at par with salaries
Increased Tax Compliance
Plugging tax loopholes around corporate profit shifting, offshore assets and shell companies can improve tax compliance substantially. The government must also invest more in audits and widening the tax net.
Global Comparisons
India has one of the lowest tax-to-GDP ratios in the world at 17.7% compared to 25.9% in China and 34.3% in Brazil. The lack of wealth taxation and lower property taxes also makes India an outlier.
Advanced economies like the USA, UK, France and Canada apply much higher tax rates for millionaires, combined with estate duties of 40% or more.
Scandinavian countries are well-known for their social welfare schemes funded by taxpayers. They rank among the most equal societies globally with Gini coefficients below 30.
The Way Forward
For sustainable economic growth with social justice, India needs to undertake structural tax reforms. Here are some recommendations:
Policy Actions
- Introduce wealth tax and inheritance tax
- Remove corporate tax exemptions
- Invest in tax department’s IT infrastructure
- Widen tax net; discourage evasion
Utilization of Revenue
Additional tax revenue should fund social sector schemes-
- Healthcare – Improve public hospitals, primary health centers
- Education – More public schools, subsidized higher education
- Social security – Pensions, income support for poor
Such progressive tax policies that redistribute wealth will reduce inequality. They will also stimulate demand, boost economic growth, supporting both capitalists and working classes alike.
Conclusion
The Indian middle class resents income taxes as the ultra-rich seem to find legal loopholes to evade taxes, despite exponential wealth gains in recent years. With rising costs of living, the salaried middle class also struggles financially.
Economists prescribe higher tax rates and a wealth tax to reduce inequality. The additional revenue can expand India’s abysmally low spending on healthcare and education. Progressive taxes and their fair enforcement are vital for India to achieve inclusive growth.
FAQs
Q: What percentage of Indians actually pay income tax?
A: Only about 5-6% of Indians pay any income tax. Of them, nearly 60% are salaried employees in the middle class who have taxes deducted at source.
Q: How much taxes do Indian billionaires pay?
A: The effective tax rate paid by ultra-rich Indians is estimated to be 15-25% of their actual income, far lower than the top marginal tax rate of 30%+ applicable for the middle class.
Q: Why does the Indian government rely heavily on indirect taxes?
A: Indirect taxes like GST are easier to collect than direct taxes. But over-dependence on indirect taxes makes the system more regressive, hurting the poor more.
Q: How do corporates avoid paying higher taxes?
A: Big businesses exploit legal loopholes around deductions, exemptions and tax havens to reduce tax outgo. They also indulge in practices like profit shifting to shell companies abroad.
Q: What are the benefits of taxing the rich more?
A: Additional revenue generated can fund social welfare schemes in healthcare, education, housing and financial support for the poorest sections. This reduces inequality.
Q: Which group pays the maximum income tax in India?
A: Salaried individuals and working professionals in the middle class contribute more than 85% of personal income tax revenue for the government due to TDS and limited exemption benefits.
Q: Why has the tax-GDP ratio remained low in India?
A: Despite high economic growth, India’s tax-GDP ratio is just 17% due to narrow tax base, poor compliance and generous tax incentives for corporates.
Q: How do tax cuts impact government revenue?
A: Tax cuts directly reduce the money available to the government for funding infrastructure projects and social schemes, hurting the poor most.
Q: What are the payoffs of increasing tax compliance?
A: Plugging loopholes to improve tax compliance can generate over $30 billion extra revenue annually for the government to fund development.
Q: Which group benefits the most from India’s tax structure?
A: The ultra-rich with assets worth millions and large corporates tend to gain the most by exploiting legal tax loopholes to reduce their outgo.
Q: How does GST affect the middle class specifically?
A: GST imposition on essential consumer items like clothes, mobile bills takes a higher toll on middle class families compared to the rich.
Q: Why does India not have inheritance or estate taxes?
A: India abolished estate duties in 1985. Economists argue that taxing inter-generational wealth transfers can raise substantial revenue and promote equality.
Q: What are the global best practices in taxing the rich?
A: Advanced economies impose 50% or higher top income tax rates for millionaires. Inheritance taxes range from 40-55% to prevent perpetuation of wealth inequality.
Q: How do Scandinavian countries manage to tax high yet provide the best social welfare?
A: Scandinavian countries like Sweden, Norway and Denmark collect over 40% of GDP in taxes to fund generous schemes. This has made them the most equal societies.
