As Budget Day approaches, the debate over how the middle class, particularly the salaried class, bears the country's tax burden has gained momentum. With only a small number of individual taxpayers shouldering most of the weight, calls for much-needed relief have grown louder.
The number of tax returns filed by individuals has more than doubled, from 3.35 crore in 2013-14 to 7.54 crore in 2023-24. However, many individuals file zero-tax returns merely for compliance purposes. The number of individuals filing zero-income tax returns has also more than doubled, from 1.69 crore to 4.73 crore during the same period. On the other hand, the number of individuals actually paying income taxes has increased from 1.66 crore in 2013-14 to 2.81 crore in 2023-24.
In September 2019, the government announced a reduction in the base corporate tax rate for existing companies to 22% (from 30%) and for new manufacturing firms incorporated after October 1, 2019, to 15% (from 25%). Following this announcement, corporate income tax (CIT) collections have fallen relative to personal income tax (PIT) collections. The PIT-to-CIT ratio, which was 0.7x from 2000-10 to 2019-20, has increased to 1.1x from 2020-21 to 2024-25 (budgeted).
Corporate income tax collections have grown from Rs. 5.56 lakh crore in 2019-20 to Rs. 10.2 lakh crore in 2024-25, an increase of 83%. During the same period, personal income tax collection grew from Rs. 4.92 lakh crore to Rs. 11.87 lakh crore, an increase of 141%.
Individuals Contribute Generously To GST
Annual GST collections in India range from Rs. 18 lakh crore to Rs. 20 lakh crore. The government does not provide a breakdown showing the respective shares of individuals and corporations in this pie. But, since corporations can claim input tax credits for goods or services purchased for business purposes, the majority of GST collections are accounted for by individuals.
Five states account for more than half of the total GST collections. Maharashtra holds the largest share at 21.2%, followed by Karnataka at 9.3%, Gujarat at 8.4%, and Tamil Nadu at 8.2%. Uttar Pradesh ranks fifth, with a share of 6.8% in 2023. All of these states except Uttar Pradesh have urbanisation levels higher than the national average of 31.1%, according to the 2011 census. This effectively means that GST collections are higher in urban areas, where India's middle class predominantly resides.
The Extent Of The Actual Tax Burden
Three examples illustrate the heavy burden the middle class shoulders.
- For an individual who earns Rs. 10 lakh and saves 30% (the national savings rate), the tax outgo, assuming an average GST rate of 15% on consumption, could be close to Rs. 1.6 lakh. That is 16% of the total income. If the same person saves 15% of their income, the outgo would be 18%, and 20% if there is no saving at all.
- If an individual earns Rs. 20 lakh in income and saves 30%, assuming an average GST rate on their expenditure of 18%, he will pay Rs. 3.1 lakh in income tax under the new tax regime and Rs. 2 lakh in GST on consumption expenditure. The total tax paid would be Rs. 5.1 lakh, or 25% of the income. If this person saves 15%, the total tax burden would come to around 28%, and, in case of no savings, it will be closer to 31%.
- Assuming an individual earns Rs. 1 crore and saves 30%, then, with an average GST rate of 23% on consumption expenditure, the tax burden, both direct and indirect, will be nearly Rs 40 lakh, or 40% of the income. If the same person saves 15%, the tax incidence will go up to 43%, and, in case of no savings, the burden will shoot up to 47%.
The middle class has long been treated as a cash cow by successive governments, and there is a growing demand for fair treatment, including tax breaks, incentives for vehicle and home purchases, and parity with corporations in terms of deductions. At a time when household savings are at their lowest and wage increases by corporations are insufficient to cover inflation, some relief is warranted for the middle class.
(Amitabh Tiwari is a political strategist and commentator. In his earlier avatar, he was a corporate and investment banker.)
Disclaimer: These are the personal opinions of the author
