Authors: Sneha suresh Rungta, Kamlesh kumar
Abstract: The tax system influences the standards of living of the middle classes in India in three main ways, namely: (i) via direct taxes on income (personal income tax, surcharge, cess and payroll-based compliance), (ii) via indirect taxes (particularly the Goods and Services Tax- GST-, and the excises), and (iii) the interaction between tax design and factors such as inflation, housing costs and consumption baskets. In this paper, the recent policy changes as well as empirical literature are synthesized to determine the impact of Indian tax policies on the disposable income, consumption, savings, and perceived fairness of the middle-class families. We chart mechanisms and document distributional implication using secondary evidence of the Income tax department Budget FAQs, slabs, and PRS Legislative Research and GST council rate rationalisation documentation and household consumption fact-sheets of Ministry of statistics and Programme Implementation (MoSPI). The findings suggest that the recent income-tax relief (an increase in tax-free threshold through the Section 87A rebate and standard deduction under the new regime) hikes post-tax income and can stimulate consumption of the lower and lower-upper middle segments, and decreases the relative merit of deduction-intensive tax planning under the old regime. Indirect tax reforms that cut the taxes on much of mass-consumption, and on some of the aspirational durables, can reduce the cost of living; but consumption taxes are structurally retrogressive when compared to annual income, particularly where essentials are higher than household budgets. Complexity of administration and compliance expenses also have a role to play: there is evidence that compliance burdens need not be trivial, and simplification will lead to welfare beyond the tax rate itself. The paper is rounded off with policy alternatives, such as indexation versus inflation, superior targeting of GST relief, and a reduction in compliance costs, that can promote welfare of the middle classes without compromising on revenue adequacy.
