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The tax trap: Why India’s middle class feels overburdened and undervalued

With 'double taxation', high GST rates, and ballooning living costs, India’s middle class is bearing the brunt of policies that don’t often translate to returns in bettering their lives, making them feel like they are caught in a tax trap.

South First Desk

Published Jan 07, 2025 | 9:00 AM ⚊ Updated Jan 08, 2025 | 12:48 PM

Tax burden.

Tax burden. (South First)

Finance Minister Nirmala Sitharaman is all set to present the Union Budget 2025 on 1 February. Ahead of the budget, South First is bringing together a series of articles highlighting the tax burden on the middle class and the reforms needed to ease the burden on taxpayers. This is the first article in the series, that explains why the salaried class feels burdened with taxes and rising cost of living.

The simmering frustration over the BJP-led NDA’s policies and management of the economy has reached a new intensity in recent months, especially around taxation.

The tipping point came in December 2024 after the 55th GST Council meeting chaired by Finance Minister Nirmala Sitharaman. The council’s decision to impose different GST rates on various types of popcorn and to levy taxes on the resale of vehicles sparked a wave of backlash on social media.

Posts mocking and satirising the policies flooded platforms, with Sitharaman’s attempts to justify the decisions becoming a particular target of criticism.

Some critics went further, coining the term “Tax Terrorism” to describe the government’s approach — an indication of the middle class feeling caught in a tax trap.

 

So what’s fuelling this anger? And why is the government making such seemingly arbitrary policy decisions? Let’s break it down.

A mirage of mobility

In recent months, social media has become a platform for frustrated Indians to express grievances about a taxation system many describe as not only complex but bordering on extortion.

This discontent stems from policies seen as prioritising revenue over public welfare.

The biggest example of this ‘tax trap’ is the imposition of the full 18 percent GST on health insurance. In FY24, the Union Government collected ₹16,398 crore in GST from health and life insurance.

For context, Singapore and Australia, which also have GST, apply rates of roughly 7 percent and 10 percent, respectively, but both provide exceptions for health coverage.

At the same time, India’s GDP growth has slowed significantly, falling to 5.4  percent in the September 2024 quarter – the lowest in two years. This decline is attributed to reduced government spending, climate change, and high inflation, all of which have eroded household incomes. High youth unemployment is compounding economic pressures on middle-class families.

Persistently high inflation, particularly in food prices, has further strained middle-class budgets. Retail inflation reached a 14-month high of 6.2  percent in October 2024, with food prices surging by 10.9  percent. Rising living costs amidst stagnant real wages have curtailed discretionary spending, while forcing households to prioritise essentials.

Reports of middle-class gold loans becoming non-performing underscore the extent of financial distress.

All of this leaves the average household with less disposable income.

When combined with seemingly arbitrary taxation policies, many feel their hard-earned money is being siphoned off – sometimes multiple times through double taxation.

“After paying 30  percent income tax, 28  percent GST on your car, 18  percent GST on car insurance, up to 18  percent road tax, and then 50  percent tax on petrol, the government still collects toll tax on expressways. Why is income tax even collected?” wrote one frustrated user on X.

For some, the reason behind such heavy taxation is clear: Populist welfare schemes announced by governments – both central and state – as part of election promises. These schemes, often extravagant and occasionally unrealistic, have strained government budgets.

However, blaming welfare schemes, which largely benefit sections of the population historically excluded from India’s economic growth, seems selective.

Burden of the system

Since assuming power over a decade ago, the BJP-led NDA government has centralised India’s taxation regime, consolidating control over tax collection and redistribution to states.

Meanwhile, the controversial mandate to link bank accounts with PAN and Aadhaar cards has created a system for scrutinising financial transactions, potentially violating individual privacy, ostensibly in the name of curbing tax evasion.

Routinely, social media is amused by tax notices sent to the average pani puri wala for earning in lacs of rupees.

 

However, critics argue the system disproportionately burdens ordinary taxpayers while allowing the wealthiest to benefit. The wealth tax was abolished in 2016-17, with the government citing high compliance costs. Corporate tax rates have also been significantly reduced in recent years, ostensibly to attract investment.

The bottom half of the population bears a majority of the total tax burden in India.

To offset revenue shortfalls, the government has turned to increased consumption taxes and stricter enforcement on middle- and lower-income citizens.

Meanwhile, the wealth of India’s richest industrialists, such as Gautam Adani and Mukesh Ambani, has surged, particularly since the pandemic. Transfers of wealth within billionaire families often go untaxed.

The GST, introduced in 2017 to simplify taxation, is often criticised as a labyrinthine system in itself. Many argue that the benefits of the taxes collected have not adequately reached those contributing to the revenue, especially in terms of infrastructure.

 

Allegations that savings from cheap Russian oil have been channelled into central coffers and oil company profits rather than being passed on to consumers, tax notices sent to research institutions and educational organisations further illustrate this trend.

“Annual school fees for kindergarten have gone from ₹78,900 in 2014 to ₹1.76 lakh in 2024,” one social media user pointed out. “Yet the tuition fee exemption under Section 80C remains at ₹1.5 lakh – and there’s no change in the revised regime!”

Another user highlighted how a car service costing ₹16,473 swelled to ₹27,999 after accounting for GST and income tax deductions.

“To pay ₹38 lakh in tuition fees, I’ve to earn ₹70 lakh so that, after tax deduction, I could save ₹40 lakh. And now, when I go with ₹40 lakh for higher studies, they charge ₹8 lakh as GST on money I’ve already paid tax on. Why is nobody talking about this? And what am I getting from the tax paid? Potholes? Traffic?” wrote another.

Furthermore, the north-south divide, where comparatively better-off southern states receive less than the original share of the tax pie they paid to the central coffers in GST, has further incensed the middle class.

The growing divide

India’s 140 crore population forms an economic pyramid that’s as steep as it is crowded. It’s often portrayed as a ladder to prosperity, but based on various economic metrics and the lived realities of citizens, this characterisation falls far from the truth.

In 2021, the wealthiest 1  percent of India’s population, approximately 1.4 crore individuals, owned over 40.5  percent of the nation’s total wealth and earned 22  percent of the national income. By contrast, the bottom 50  percent of the population held a marginal share of wealth and earned only 13  percent of the total income.

The middle class, while growing, continues to face hurdles in accumulating wealth. In 2022, a majority of Indian adults reported wealth levels of ₹857,740 or less. Across states, economic inequality remains stark; Uttar Pradesh, the most populous state is also among the poorest.

India also hosts one of the largest informal labour markets globally, but scant data about the sector makes it difficult to quantify the true scope of inequality.

Data highlights the extreme concentration of wealth and income among a small minority.

Workers in the informal sector, reliant on daily wages, often depend on government subsidies for survival. Inflation disproportionately affects this group, reducing food security and forcing migration or hunger when jobs vanish. Welfare programmes offer some relief to segments of the middle class, but rising costs frequently drag them back towards poverty.

Economic disparities have reached unprecedented levels, with a recent report suggesting that inequality today may surpass the extremes seen under colonial exploitation.

In a 2023 report titled ‘Survival of the Richest: The India Story’, Oxfam, a British non-governmental organisation, made some stunning observations:

“The bottom 50 percent of the population at an all-India level pays six times more in indirect taxation as a percentage of income compared to the top 10 percent.

“Estimates suggest that the bottom 50 percent spends 6.7 percent of their income on taxes for select food and non-food items. The middle 40 percent spends half of that, at 3.3 percent of their income on food and non-food items. However, the top 10 percent wealth group spends a mere 0.4 percent of their income on these items.

“The bottom 50 percent income group spends a higher percentage of their income on indirect taxes than the middle 40 percent and the top 10 percent combined.”

A path to a fairer tax system

As criticism mounts against the current tax regime for overburdening the working class while seemingly offering little in return, calls for a fairer and more equitable taxation system are growing louder.

One such proposal that’s popular on social media is abolishing direct income tax for individuals earning less than ₹20 lakh per year. This would ostensibly address the issue of double taxation, where consumers pay taxes both on their earnings and on goods and services purchased with that already-taxed income.

“India should be active in taxing the rich,” French economist and author Thomas Piketty said earlier this month. To address the widening inequality gap, Piketty suggested a 2 percent wealth tax on individuals with assets exceeding ₹10 crore and a 33 percent inheritance tax on properties of similar value. He estimated that these measures could generate annual revenue equivalent to 2.73 percent of India’s GDP.

Nordic countries provide a compelling example, imposing taxes that often exceed 50  percent of the income of their wealthiest citizens while delivering universal benefits, including healthcare, education, and childcare. In India, reintroducing a modest wealth tax or increasing levies on luxury goods could generate significant revenue without overburdening the middle class. This would ensure continued funding for vital welfare programmes on which millions of Indians depend.

Another suggestion includes capping toll taxes on major national highways and expressways. Last month, Bengaluru’s airport expressway sparked outrage when it was revealed that the company contracted under a Build-Operate-Transfer (BOT) model had earned more than double its original costs years ago but continued to levy high tolls on commuters. Many argue such practices unfairly penalise ordinary citizens and call for stricter regulation of toll charges.

Meanwhile, simplifying GST and reducing taxes on essentials such as health insurance are also seen as measures that could provide immediate relief. Additionally, adopting a progressive approach to direct taxation could help restore balance in the system.

Equally important is the need to rebuild public trust. Transparent reporting on how tax revenues are spent – whether on infrastructure, welfare, or subsidies – could reassure citizens that their contributions are making a meaningful impact.

Establishing clear guidelines for tax categories and their specific uses would further strengthen accountability. Additionally, creating public forums for feedback and discussions on taxation policies could ensure citizens feel heard and valued in the decision-making process.

(Edited by Dese Gowda)

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