The Burden of Taxes on India’s Middle Class and Corporates

The Burden of Taxes on India’s Middle Class and Corporates

The middle class in India has often been regarded as the backbone of the economy. However, recent years have seen this segment of society grappling with mounting financial pressures, much of which stems from the country's complex tax structure. On the other hand, corporations, particularly large ones, seem to operate in a different realm when it comes to tax policies. The disparity between the tax burden on individuals and corporates raises important questions about equity, sustainability and the direction of India's economic policies.

Understanding the Tax Structure in India

India operates under a progressive tax system where individuals with higher incomes are expected to pay a higher percentage of their earnings in taxes. The middle class, which includes salaried professionals, small business owners and self-employed individuals, falls squarely within the ambit of this system. Income tax, Goods and Services Tax (GST) and various cesses and surcharges together constitute a significant chunk of their expenses.

Corporates, especially large ones, are taxed under a different regime. Over the years, the corporate tax rate in India has seen multiple reductions to encourage investment and economic growth. Currently, domestic companies pay a corporate tax of 22% (without exemptions) and 15% for new manufacturing companies. While this may appear steep on paper, the reality is more nuanced, as many corporations benefit from tax breaks and incentives.

The Middle Class: A Shrinking Wallet

For the middle class, the situation is starkly different. With the introduction of GST, many daily necessities, from food to fuel, are subject to indirect taxes. Although GST was introduced to simplify the tax structure, the cascading effect of taxes on goods and services disproportionately impacts middle-income households. Additionally, rising inflation has compounded the problem, leaving the middle class with less disposable income despite working harder than ever.

Consider the case of fuel taxes, which are a significant source of revenue for the government. Taxes on petrol and diesel contribute to higher transportation costs, which in turn raise prices across sectors. The middle class, already paying income tax, indirectly bears the burden of these taxes as well.

Indian Middle Class and Corporate Contribution to the Economy

The middle class contributes significantly to India's economy, both as taxpayers and consumers. Their income taxes form a substantial portion of the government’s direct tax revenue, while their spending drives demand across industries. This dual role underscores their importance in sustaining economic growth.

On the other hand, corporations, particularly large ones, contribute heavily to the exchequer through corporate taxes, GST and other levies. The corporate sector’s tax contributions help fund infrastructure projects, social welfare schemes and other developmental initiatives. However, the tax contribution of corporations is often offset by the numerous incentives and deductions they receive, leading to debates about whether they are paying their fair share.

The Burden on Salaried People

Salaried individuals in India bear the brunt of multiple taxes. Beyond income tax, they pay professional tax (in some states), GST on goods and services, fuel taxes and cesses for education, health and other purposes. This cumulative burden leaves little room for savings or investments, forcing many to compromise on their long-term financial goals. Additionally, the lack of avenues for tax planning and deductions, compared to those available to businesses, further exacerbates the disparity.

Corporates: A Tale of Tax Relief

Large corporations have often been the beneficiaries of government policies aimed at spurring growth and investment. Tax cuts, incentives for setting up operations in special economic zones and subsidies for certain industries have led to a significant reduction in their effective tax rates. While these measures are designed to stimulate economic activity and create jobs, they also lead to an imbalance in the overall tax ecosystem.

For instance, multinational companies operating in India often engage in tax planning strategies to minimize their liabilities. These practices, though legal, highlight a stark contrast to the lack of such avenues for the average middle-class taxpayer.

The Need for Reform

The disparity between the tax burdens borne by the middle class and corporates points to a critical need for reform. Simplifying the tax structure, lowering indirect taxes on essential goods and providing more robust exemptions or deductions for middle-income earners could alleviate some of the pressure on this segment. On the corporate front, ensuring that tax incentives translate into tangible benefits for the broader economy such as job creation and infrastructure development is essential.