Progressive Tax System

The quantity and quality of tax revenues collected by the government are often true indicators of the robustness of an economy. India’s tax-GDP ratio went from 6% in 1950 to 16% in 1990. Between 1990 and 2014, as India became rapidly wealthy with a five-fold increase in per capita GDP, the tax- GDP ratio actually remained stagnant between 15-17%. Tax revenues since 2014 have grown at an average of 12.5% per annum. This is nothing extraordinary. The average tax revenue growth from 2009 to 2014 was 15%, despite the global financial crisis of 2008-09. Viewed in that context, the 12.5% growth in tax revenues is by no means robust. Taxes are collected in two categories — direct taxes (tax on income and wealth) and indirect taxes (tax on products and services). Majority of direct taxes are levied by the Central government while States depend on indirect taxes such as sales tax for their revenues. A measure of the ratio of direct and indirect taxes of a nation is an indicator of the quality of tax revenues. Direct taxes are considered progressive, typically impacting the wealthy elite and the earning middle class. Indirect taxes are regressive in nature and their marginal impact is much greater on the poor than the rich. India’s direct-indirect tax ratio is 35:65, collecting twice as much in indirect taxes than in direct taxes. This is a sharply skewed structure, placing a greater relative burden on the poor. In the absence of a wealth tax and dividend tax, it is not surprising that India’s direct taxes ratio to GDP at 5-6% is one of the lowest among large economies. India has a peculiar mix of low tax-GDP ratio, with larger collections through indirect taxes. This must change.

AIPC Position

  • AIPC will promote the importance of a new Direct Tax Code Bill to ensure our tax system is fairer, more efficient and generates the resources needed for the country’s development.
  • India’s tax system is particularly unhelpful for taxpaying professionals. On the one hand, they contribute to direct (income) taxes, which most Indians are exempt from. On the other hand, they also pay indirect taxes, which everybody else pays. That leaves the Indian middle class with effective tax rates that are probably higher than any class of Indians.
  • For the entrepreneurs, the tax system can be even worse because of what many call “tax terrorism”. In addition to direct and indirect taxes, entrepreneurs pay hidden taxes in the form of payments that unfair tax administration may impose. We need to advocate for greater transparency in understanding the tax burden on different classes of Indians.
  • As a class, professionals and entrepreneurs should pay for their fair share of taxes that would fall under a progressive income tax system. INC will promote these types of ideas to ensure middle-class families don’t bear the brunt of the tax burden.