Actually, Taxation In India Is Becoming More Progressive

There were a lot of heated debates when the GST council imposed or raised GST duties on a series of goods and services. Critics of the government accused it of being brazenly anti-poor and lower middle class since GST was imposed on packaged items of daily use such as curd, wheat flour, Lassi, Tetra pack drinks and even Paneer, among many others. In addition, GST was imposed on hotel room tariffs of up to Rs 1,000 per day. Critics further accused the government of favouring the rich and the upper middle class by continuing with lower income tax rates and a slew of exemptions as analysed in a related India Tracker story published today. On the face of it, imposing taxes on items of daily use mostly consumed by the poor and the lower middle class when inflation is so high does appear to be cruel. But the mandate of India Tracker is not to engage in political or policy debates, but just find credible data and analyse it to arrive at a conclusion. Even a student of elementary economics knows that direct taxes like income and corporate taxes are “progressive” while indirect taxes like GST, Excise and custom duties are “regressive”. The reason is simple: the burden of indirect taxes is borne by all consumers and low income consumers suffer more because of it. A Rs 5 hike in the price of wheat flour may not matter much to someone earning more than Rs 50,000 a month. But it does matter to someone earning Rs 10,000 a month.

So what does the data say? In a related story today in India Tracker, we have pointed out and analysed how income tax collections have ballooned and gone up by 20 times in the last 20 odd years despite lower rates and exemptions. The accompanying chart shows how direct tax collections as a ratio of GDP has changed in this century. Do remember, till economic reforms were launched in 1991, indirect taxes constituted an overwhelming proportion of total tax collections. That was a text book case of regressive taxation. But India is becoming more progressive at least in matters of taxation as clearly suggested by the data. For instance, the direct tax to GDP ratio in India was 3.25% in the financial year 2000-01. By 2007-08, when the Indian and the global economy were enjoying an unprecedented boom, the ratio almost doubled to 6.3%. Then came the global financial crisis and the ratio went down to 5.8% by 2010-11; and further to 5.43% by 201-16. Barring the pandemic years since then, the ratio has been steadily improving; a clear sign that taxation is becoming more progressive.

Two more facts will confirm what the data shown in the chart says. For the first time in 2021-22, the ratio of direct tax to GDP at 6.1%  was higher than the ratio of indirect taxes to GDP. Even more important, the direct tax to GDP ratio was 3.25% in 2000-01 when the GDP of India was less than $ 500 billion. Now the ratio is ore than 6% even as the GDP has gone up six times to almost $ 3 trillion. Daily news is important; but looking at long term data is even more important