As the deadline for filing income tax returns approaches, middle-class salaried individuals in India are struggling with significant tax burdens. Despite the Indian government's efforts to improve public infrastructure and services, the middle class often feels they are not receiving adequate benefits. In FY 22, India's direct tax collections have been growing rapidly, with provisional figures indicating that the Income Tax Department has collected over INR 12.45 lakh crore from taxpayers, reflecting a 40% increase from the previous year. However, this growth in tax collections does not necessarily address the concerns of the middle class regarding their tax burden and the benefits they receive in return.
This article discusses the challenges middle-class taxpayers face in India concerning income tax policies and benefits. The article highlights the concerns of the middle class, which include the perception that their tax payments are being used to support non-taxpaying communities, the burden of indirect taxes such as toll taxes and restaurant bills, and the lack of transparency in the utilization of tax revenue. Additionally, the article compares India's taxation system with those of other countries, such as Switzerland, Singapore, Germany, the United States and China.
The middle class in India has a significant stake in the country's economy and is considered the nation's backbone. Despite their contributions, they feel their tax payments should be utilized more effectively. Their primary concern is that their tax contributions are being used to appease and support non-taxpaying communities, which in their view, is not a fair use of their hard-earned money. They argue that the government should focus more on providing public services and infrastructure development that would directly benefit them.
Moreover, indirect taxes such as tolls and restaurant bills further increase the burden on the middle class. These taxes are not based on an individual's income level but are instead applied uniformly to everyone, regardless of their financial situation. This means that the middle class, who already pay a significant income tax, are further burdened by these indirect taxes.
The middle class is also concerned about the need for more transparency in the utilization of tax revenue. They argue that the government should provide more information about how their tax payments are being used to ensure that they are being allocated effectively. Without this information, the middle class is left in the dark and feels their hard-earned money is being wasted.
India's taxation system has long been a point of contention among the middle class. According to the OECD, India's income tax rate ranks 6th highest among 91 countries. This high tax rate, coupled with indirect taxes such as tolls and restaurant bills, also burdens the middle class, and adds to the discontent. To better understand the situation, it's worth comparing India's tax system with those of other countries.
Comparing India with countries such as Switzerland and Singapore, which have the lowest tax rates, starting at 0% and 2%, respectively, highlights the stark difference in tax policies. For instance, in Switzerland, income tax rates vary by canton, with the average income tax rate ranging from 10% to 12% and no indirect taxes imposed on individuals. Similarly, in Singapore, the personal income tax rate ranges from 0% to 22%, with no indirect taxes levied on individuals.
India's social security benefits are limited compared to other countries worldwide. While India offers tax deductions for certain expenses and tax exemptions on provident fund contributions, other countries have more extensive social security systems in place.
For instance, in Australia, the government provides several social security benefits to its citizens. The Age Pension is a guaranteed income for retirees, funded by taxpayers, and is available to those who meet specific eligibility criteria. Additionally, the government offers a range of other benefits, such as the Disability Support Pension, Carer Payment, and Jobseeker Payment, to support those unable to work or require assistance.
Similarly, in Germany, healthcare and unemployment insurance are covered by social security contributions, and employees only have to contribute to private health insurance. In addition to these benefits, the government also provides retirement benefits, disability benefits, and survivor benefits to eligible citizens.
In the United States, social security benefits include retirement, disability, and survivor benefits, which are funded by payroll taxes. In addition to these benefits, the government provides Medicare, a national health insurance program for individuals aged 65 and older, and Medicaid, a joint federal and state program that helps with healthcare costs for low-income individuals and families.
Overall, countries worldwide have different social security systems to support their citizens. While some countries, like India, have more limited benefits, others offer extensive support to their citizens through guaranteed income, healthcare, and unemployment benefits.
India and China are two major economies with different tax systems. When comparing the benefits offered to salaried individuals in terms of individual income tax, we can assess which country's tax regime is more favourable.
In India, personal income tax rates range from 0% to 30%, depending on income levels. The highest tax slab starts at 30% for individuals earning over INR 15 lakhs per annum. Additionally, the government offers tax deductions for certain expenses such as medical insurance, education expenses, and home loan interest payments. Salaried individuals can also claim tax exemptions on their provident fund contributions, which are a part of their retirement savings.
In contrast, China's income tax rates range from 3% to 45%, depending on income level. While the tax rates are higher compared to India, the Chinese government provides additional benefits to salaried individuals. For example, employers in China are required to contribute to their employees' social security accounts, which include a pension fund, unemployment insurance, and medical insurance. These benefits are in addition to the state-funded basic old-age insurance that covers all citizens.
Regarding the tax filing process, India has a complex and time-consuming system that requires individuals to file their taxes annually. On the other hand, China has a more straightforward system with monthly tax deductions from employee salaries.
Overall, both India and China offer different benefits to salaried individuals regarding individual income tax. India's tax system provides tax deductions for certain expenses. It offers tax exemptions on provident fund contributions, while China provides mandatory employer contributions to social security accounts and a state-funded basic old-age insurance scheme.
Determining which tax regime is better for salaried individuals is challenging as it largely depends on individual preferences and circumstances. However, it's worth noting that China's social security benefits offer greater security for retirement and unemployment, while India's tax exemptions can help reduce tax liability. Additionally, India's tax system is known to be complex and cumbersome, with a relatively low compliance rate. At the same time, China has a strict and efficient tax collection system with a higher compliance rate. Both countries have their challenges when it comes to tax collection effectiveness. India has a high level of tax evasion and underreporting, while China faces issues with corruption and uneven enforcement of tax laws
The government can consider increasing the tax exemption limit for middle-class taxpayers. This will relieve individuals with lower incomes and help ease their tax burden.
Another possible solution is to simplify the tax system and make it more transparent. The current tax system in India is complex and confusing, which makes it difficult for middle-class taxpayers to understand their tax obligations. By simplifying the tax system, taxpayers will have a better understanding of their tax liabilities and be able to comply with the law more easily.
The government could also consider implementing additional taxes on the existing tax slab if required, with the understanding that the additional revenue generated will be directed towards providing social security benefits such as lifelong pensions, free healthcare, and unemployment insurance. However, the government must guarantee that these benefits will be available to those paying the additional tax. By doing so, taxpayers will have a greater sense of security. They can allocate their money to other essential expenses with the assurance that they will receive the promised benefits in return. This approach addresses the middle class's concerns about the tax burden and the benefits they receive from the government.
Moreover, the government can also improve the quality of public services and infrastructure, which will help reduce the burden on the middle class. By providing better benefits such as healthcare, education, and transportation, the government can improve the quality of life for the middle class and help them save money on essential expenses.
In conclusion, India's middle-class taxpayers face significant challenges regarding income tax policies and benefits. These challenges include the perception that their tax payments are being used to support non-taxpaying communities, the burden of indirect taxes such as toll taxes and restaurant bills, and the need for more transparency in the utilization of tax revenue. The high personal income tax rates and limited social security benefits also add to the discontent.
Comparing India's taxation system with those of other countries, such as Switzerland, Singapore, Germany, the United States, and China, highlights the stark differences in tax policies and social security benefits. While some countries offer extensive support to their citizens through guaranteed income, healthcare, and unemployment benefits, others have more limited benefits.
India has been implementing various measures to encourage tax compliance among its citizens, but there is still much work to be done to address the concerns of the middle class. The government should focus on improving public services and infrastructure development to directly benefit the middle class while also ensuring transparency in the utilization of tax revenue. Additionally, the government should consider lowering personal income tax rates and expanding social security benefits to reduce the burden on the middle class and improve their overall well-being.
