India's middle class is vital to the nation's economy. Many express concerns over their substantial income tax burden. Beyond inefficient government services and pervasive corruption, frustration arises from widespread tax evasion within their ranks. While many dutifully pay taxes through transparent channels like cards or UPI, a significant segment remains outside the tax net. This leads to substantial revenue losses for the country.
Defining the Middle Class
A study by the People Research on India's Consumer Economy (PRICE) defines the middle class. It includes households with annual incomes between ₹25 lakh and ₹230 lakh. This bracket encompasses approximately 432 million individuals. Considering an average household size of 4.4 members, this translates to about 98 million potential taxpayers. However, data from the Income Tax Department for the financial year 2020-21 reveals a discrepancy. Only 15 million individuals in the ₹25 lakh to ₹30 lakh income bracket filed tax returns. This suggests that around 83 million middle-class individuals are evading taxes.
The Financial Implications
The fiscal impact of this tax evasion is profound. In the 2020-21 fiscal year, individual taxpayers within the ₹25 lakh to ₹230 lakh income range contributed ₹1.41 lakh crore in taxes. If the non-compliant individuals had fulfilled their tax obligations, it could have added approximately ₹27.8 lakh crore to the national exchequer. This accounts for nearly 30% of the 2020-21 budget. A significant portion of this shortfall is attributed to exemptions, notably agricultural income. This remains a substantial area of concern.
Government Initiatives and Challenges
Over the past decade, the Indian government has implemented measures to widen the tax net and reduce the burden on the middle class. According to tax authorities, there has been a 120% increase in income tax returns filed between 2014 and 2024. The number rose from approximately 3.6 crore in 2014 to 7.9 crore in 2024. Notably, individuals reporting annual incomes above ₹50 lakh saw a nearly five-fold increase. The figure went from 1.85 lakh in 2014 to 9.39 lakh in 2024. This surge is attributed to stringent anti-tax evasion and black money laws implemented during this period.
Despite these efforts, a substantial segment of the middle class continues to evade taxes. This exacerbates income inequality and undermines the nation's fiscal health. The government's advanced data analytics capabilities have yet to be fully leveraged to enforce tax compliance effectively. Instead, measures such as tax collected at source for overseas expenditures have been introduced. Many view these as burdensome to already compliant taxpayers.
Future Directions
Addressing middle-class tax evasion requires a multifaceted approach. Firstly, the government must utilize its data analytics capabilities to identify and bring non-compliant individuals into the tax net. This involves cross-referencing data from various sources to detect discrepancies between reported incomes and actual expenditures.
Secondly, there is a need to simplify the tax filing process to encourage voluntary compliance. Complex procedures and lack of awareness often deter individuals from filing returns. Educational campaigns and user-friendly platforms can play a crucial role in this regard.
Thirdly, revisiting exemption policies, particularly those related to agricultural income, is essential. While these exemptions aim to support the agrarian sector, they are often misused by individuals to evade taxes. Implementing stricter verification processes can help ensure that only genuine beneficiaries avail of these exemptions.
Lastly, fostering a culture of tax compliance is vital. This can be achieved through public awareness campaigns that highlight the importance of taxes in nation-building and the consequences of evasion. Recognizing and rewarding honest taxpayers can also serve as an incentive for others to comply.
Conclusion
India's middle class bears a significant tax burden. However, a considerable segment manages to evade it. This leads to substantial revenue losses and fosters resentment among compliant taxpayers. Addressing this issue requires the government to utilize its data capabilities to broaden the tax base and ensure equitable tax enforcement. By implementing comprehensive strategies that combine technological advancements with policy reforms and public engagement, India can bridge the tax gap and foster a more inclusive and robust economic future.