Tax Terrorism in India and Its Impact on the Middle Class: A Call for Equitable Reform

~ Kishore Boruah KB , Teacher

              Tax is a cornerstone of any functioning society, serving as a vital contribution from citizens toward the development and maintenance of public resources and services. It funds critical infrastructure such as roads, schools, healthcare, and security, ensuring the well-being of individuals and the progress of the nation.

               Paying taxes is not just a legal obligation; it is a shared responsibility that empowers governments to address societal challenges and invest in the future. By fulfilling this duty, we play an active role in building a more equitable and sustainable society. Understanding taxes and their significance enables us to appreciate how they contribute to economic stability and the common good. But ______

Tax terrorism marked by excessive scrutiny, regressive taxation policies, and inefficient implementation—unfairly burdens the middle class, stifles economic growth, and necessitates immediate reforms to ensure equitable wealth distribution and promote financial security.

A Case Study of Middle-Class Struggles

Taxation is essential for a nation’s development, providing revenue for infrastructure, healthcare, and public welfare. However, the term "tax terrorism" has emerged in India to describe the misuse of tax laws, aggressive enforcement, and undue pressure on taxpayers. While wealthy individuals and corporations find ways to minimize tax burdens, the middle class, often referred to as the backbone of the Indian economy, bears a disproportionate share. This essay argues that tax terrorism has a detrimental impact on India’s middle class, leading to financial stress, reduced savings, and economic stagnation. Addressing this issue requires a fair and transparent tax system that balances the needs of revenue generation with taxpayer rights.

Burden on the Middle Class

High Tax Rates:

The middle class in India is taxed at rates ranging from 5% to 30%, with limited deductions compared to business owners and corporations. For example, while the corporate tax rate was reduced to 22% in 2019, income tax brackets for individuals have remained stagnant, failing to adjust to inflation or rising living costs.

Income Tax vs. Corporate Tax: A Comparative Analysis

Income Tax

The Indian income tax system heavily relies on individual taxpayers, with the middle class contributing a significant portion of direct tax revenue.

Contribution: In FY 2022-23, individuals contributed approximately 56% of total direct tax revenue.

Rates: Individual income tax rates range from 5% to 30%, with limited deductions for salaried individuals compared to business owners.

Corporate Tax

Reduction in Rates: The corporate tax rate was reduced from 30% to 22% in 2019 to attract investments. New manufacturing companies enjoy an even lower rate of 15%.

Contribution: Corporate taxes constituted around 44% of direct tax revenue in FY 2022-23.

Aggressive Enforcement

Harassment by Authorities:

Instances of aggressive audits, disproportionate penalties, and retrospective taxation have fostered distrust. For example, the infamous Vodafone case highlighted how arbitrary tax policies can discourage compliance and investment.

Faceless Assessments:

While initiatives like faceless tax assessments aim to reduce corruption, they often result in automated, impersonal decisions, leaving taxpayers with limited recourse to explain their positions.

Economic Impact

Reduced Disposable Income:

Taxation, coupled with rising inflation (averaging 6%-7% in 2023), erodes the purchasing power of the middle class, reducing their ability to spend or save.

Investment Stagnation:

Excessive taxation discourages investments in real estate, mutual funds, and other financial instruments, leading to slower economic growth.

Examples from Other Nations

Progressive Tax Models:

Countries like the US and Canada have progressive taxation systems with extensive exemptions and credits, ensuring the middle class retains sufficient disposable income.

Technology-Driven Transparency:

Estonia's e-taxation system minimizes harassment while ensuring compliance, providing a model for India to emulate.

Jobless Growth: Rising Unemployment

Unemployment Rate: As of 2024, India's unemployment rate hovers around 7%-8%, with youth unemployment exceeding 20%.

Layoffs: The tech sector alone saw over 100,000 layoffs in 2023, reflecting global economic uncertainties.

Lack of Quality Jobs

Gig Economy: The rise of gig jobs and contractual roles has increased employment but at the cost of job security and benefits.

Skill Mismatch: Despite government initiatives like Skill India, a significant proportion of graduates remain unemployable due to skill gaps.

Taxation and Inflation: A Vicious Cycle

The combination of high taxes, stagnant wages, and inflation creates a challenging environment for the middle class.

1. Tax Burden: The lack of regular income tax reforms keeps the middle class perpetually overtaxed.

2. Rising Costs: Inflation erodes purchasing power, making essentials unaffordable.

3. Savings and Investments: Reduced disposable income limits savings and investments, impacting long-term financial security.

Recommendations

1. Income Tax Reforms

✓ Increase the basic exemption limit to align with inflation.

✓ Introduce higher standard deductions for salaried employees.

✓ Provide tax incentives for investments in essential areas like healthcare and education.

2. Inflation Control

✓ Strengthen supply chains to stabilize food and fuel prices.

✓ Encourage domestic production to reduce dependency on imports.

3. Job Creation

✓ Focus on high-employment sectors like manufacturing and agriculture.

✓ Enhance skill development programs to match industry demands.

4. Corporate Accountability

✓ Tie corporate tax benefits to job creation and CSR activities.

✓ Ensure equitable distribution of tax incentives across sectors.

Why Are India’s Millionaires Leaving? 

In 2023, over 12,000 wealthy individuals left India, making it one of the top countries losing its richest citizens. This is not just a statistic; it’s a warning sign. Why are so many millionaires choosing to leave?

One major reason is India’s tax system, which many feel is unfair and burdensome. High taxes, complex rules, and fear of harassment are driving the rich to relocate to countries with lower taxes and friendlier policies. But this isn’t just their personal decision—it’s a national problem.

When the wealthy leave, it doesn’t just hurt our tax revenues. It impacts our economy as a whole. Investments reduce, job opportunities shrink, and industries like real estate and luxury markets suffer. It creates a ripple effect that affects everyone, especially the middle class.

This issue is urgent. If we don’t fix our tax system and make India a more attractive place for the rich to stay, we risk slowing down economic growth and deepening inequality. It’s time to think seriously about what’s driving our wealthiest citizens away and take steps to stop it.

In conclusion , Tax terrorism in India places an undue burden on the middle class, the segment most crucial for driving economic growth and consumption. A fair tax system that prioritizes inclusivity, transparency, and efficiency is essential for alleviating the financial stress faced by this group. Policymakers must shift focus from aggressive enforcement to expanding the tax base and introducing reforms that protect taxpayer rights. Without such changes, the persistent challenges of tax terrorism will continue to erode trust in the system, hinder economic progress, and exacerbate social inequalities. An equitable approach to taxation is not just a fiscal necessity—it is a moral imperative.

Thank you 🙏