The middle class in India has been facing a growing burden due to rising taxes over the years. With the increasing cost of living and stagnant incomes, the additional financial strain has made it difficult for many to make ends meet. In recent years, the government has increased the tax rates for various goods and services, including essential commodities such as petrol and diesel, which has led to inflation and affected the middle class the most. The pandemic has only exacerbated this issue, with many middle-class families struggling to pay for healthcare and other necessities. The government must find ways to ease the burden on the middle class, such as by increasing tax exemptions and reducing tax rates for essential goods and services, to ensure that they can maintain a decent standard of living.

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Mounting Tax burden on the
middle class
Author: Saugata Dastider
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The Middle Class in India: A Crucial Segment for
Economic Growth
India's middle class is a significant and growing demographic,
which has a massive impact on the country's economy. Based on
data from Asian Studies, the middle class is a significant segment
of India's population, accounting for approximately 30% of the total
population. This segment has shown remarkable growth in recent
years and has made a significant contribution of around 45% to the
country's total GDP. The spending power of the middle class is
expected to increase significantly in the coming years, which is a
positive sign for the country's economic growth.

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According to data agency PRICE, the middle class in India is defined as those with an
annual household income between INR 5 lakh and INR 30 lakh. This classification
underlines the significance of the middle class in India's economy, as it represents a
sizable portion of the population with a considerable amount of disposable income.
The growth of the middle class is a crucial factor for India's economic development, as it
leads to increased consumption, which can drive demand for goods and services. The
middle class also plays a vital role in boosting investment and entrepreneurship, which
can drive job creation and economic growth.
The Indian government has taken several steps to improve the economic conditions of
the middle class, such as increasing tax exemptions and reducing tax rates for essential
goods and services. Furthermore, the government has also launched various schemes,
such as the Pradhan Mantri Jan Dhan Yojana, to improve financial inclusion and provide
access to affordable financial services to the middle class.
As the middle class continues to grow, it will remain a crucial segment for the Indian
economy, contributing to its development and progress. The Indian government must
continue to support the middle class by implementing policies that promote their growth
and development. This support will enable the middle class to continue to contribute to
the country's economic growth and development.
The Middle Class in India: Struggling with Rising Taxes
The middle class in India has been facing a growing burden due to rising taxes over the
years. With the increasing cost of living and stagnant incomes, the additional financial
strain has made it difficult for many to make ends meet. In recent years, the government
has increased the tax rates for various goods and services, including essential
commodities such as petrol and diesel, which has led to inflation and affected the
middle class the most. The pandemic has only exacerbated this issue, with many
middle-class families struggling to pay for healthcare and other necessities. The
government must find ways to ease the burden on the middle class, such as by
increasing tax exemptions and reducing tax rates for essential goods and services, to
ensure that they can maintain a decent standard of living.
Present Tax Structure in India: A Look Around

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The Central Government of India imposes taxes such as customs duty, central excise
duty, income tax, and service tax. State governments impose income tax on agricultural
income, state excise duty, professional tax, land revenue, and stamp duty.
Taxation in India is mainly divided into Central and State Govt taxes, with two types of
taxes:
💡 Direct Taxes & Indirect Taxes
Direct Taxes
Direct taxes are imposed on corporate entities and individuals and cannot be
transferred to others. The types of direct taxes applicable in India are: Income Tax,
Capital Gains Tax, and Corporate Tax.

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Capital Gains Tax applies to profits from the sale of a capital asset only. There are
two types of capital gains tax: Short-Term Capital Gains Tax and Long-Term Capital
Gains Tax. Short-term capital gains include equity stocks sold within 12 months of
purchase, debt mutual fund units sold within 36 months of purchase, and real
estate property or gold sold within 36 months of purchase.
🚨 The recent change in tax regulations has removed the long-term tax benefit
for debt mutual funds that invest less than 35% of their assets in equities.
These mutual funds will now attract short-term capital gains tax, and the new
regulations have eliminated the indexing benefits that were previously
available. The change is expected to make bank fixed deposits and debt
mutual funds more comparable. The move may impact fixed-income-oriented
mutual fund houses, as inflows may moderate due to reduced attractiveness.
However, liquid and institutional flows may not be as affected.
Corporate Tax applies to businesses and entities filing their returns as a company.
Indirect Taxes
Indirect taxes in India have been the most consistent and largest revenue source for
the government. The different types of indirect taxes in India include Service Tax,
Indian Excise Duty, Value Added Tax (VAT), Customs Duty, Securities Transaction
Tax (STT), Stamp Duty, and Entertainment Tax.
Indirect taxes in India, such as service tax, value-added tax, and excise duty, have
been removed for a large number of goods and services. These taxes have been
replaced by a single Goods and Services Tax (GST).
Customs duty tax applies to goods being imported into India from other countries.
Securities Transaction Tax or STT applies to transactions involving an exchange of
financial securities, such as equity stocks, mutual fund units, future and options
contracts.
Stamp duty is a State Government levy on the transfer of assets within their
territory.

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Entertainment tax in India is also a state subject and applies to transactions
involving the entertainment business.
Goods and Services Tax or GST has consolidated a complex web of indirect taxes
in India. It has three layers of levies: Centre, State, and Local Authority or
Municipalities.
Before the implementation of GST, indirect taxes could apply. Some exemptions on
tax deduction include House Rent Allowance, Medical Insurance Deduction, Food
Coupons, and Section 80C, 80CC, and 80CCD(1).
Introduction of the New Tax Regime: A Boom or Curse
Difference between the Old Regime and the New Regime

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The new income tax regime includes a basic exemption limit of INR 3 lakh,
increased from the previous INR 2.5 lakh. Additionally, tax rebate on income earned
up to INR 7 lakh is now available under section 87A, as opposed to the earlier limit
of INR 5 lakh.
The old tax regime allows for deductions towards various components like salary
(e.g. HRA, LTA), PPF, NPS, repayment of housing loan, and payment of tuition fees.
The new tax regime offers deductions and full rebate for individuals earning up to
INR 7 lakh annually.
The features of the new tax regime include lower tax rates with tax slab rates
ranging from 0% to 30%, with the highest tax rate applicable on income above INR
15 lakh. The new tax regime starts with INR 3 lakh, as opposed to the earlier
system where income up to INR 2.5 lakh was exempt and the maximum tax rate
was applicable on income above INR 10 lakh, which was 30%.
However, the new tax rate regime requires specified tax deductions and exemptions
to be forgone, such as leave travel allowance (LTA), house rent allowance (HRA),
children education allowance, deduction for professional tax, interest on housing
loan, and deduction for specified investments or expenses under Chapter VI-A.
🚨 An individual who is eligible to claim for deductions/exemptions under the old
tax regime towards HRA, LTA, PPF, etc, may find the same more beneficial.
On the other hand, the new tax regime permits a standard deduction of INR
50,000 for salaried persons and deduction for family pension being lower of
INR 15,000 or 1/3rd of the pension.
Implications of Higher Taxation on India's Middle Class
According to a recent survey conducted by data agency PRICE, only 3% of Indian
households have an annual income above INR 30 lakh and are classified as "rich".
While the survey also identified 30% of Indian households as middle class, defined as
those with an annual income between INR 5 lakh and INR 30 lakh, it is worth noting that
the tax burden on the middle class has been a source of concern.

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Under the regular tax regime, individuals with an income above INR 10 lakh (or INR 15
lakh under India's new no-deduction option) are charged a top-slab marginal rate of
30%. Wealthy individuals who earn in crores must pay a surcharge on their bill, raising
the effective rate above 40%. However, middle-class taxpayers experience ascending
tax rates too soon as they progress, which further exacerbates the issue of income
inequality.
The survey's findings highlight the need for addressing the issue of income inequality
and the tax burden on the middle class. As such, it is imperative for policymakers to
take into account the concerns of the middle class and explore ways to ease their tax
burden.
Despite the government's efforts to alleviate the tax burden on the middle class,
ascending rates can squeeze middle-class taxpayers too soon as they prosper.
In conclusion, while the recent tax regime with new tax rates and deductions may be
beneficial to certain individuals, the removal of long-term tax benefits for debt mutual
funds may impact investors in the short term. The tax burden on the middle class
remains a concern, and the government's efforts to alleviate this issue are yet to
achieve the desired results.
The Heavy Burden of High Inflation, Rising Interest
Rates, and a Slowing Economy on the Middle Class

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India, like many other countries, is facing a challenging economic situation post COVID-
19. Rising inflation, high unemployment rates, and a depreciating currency are among
the many issues that the economy is struggling with. These challenges threaten to undo
the fragile recovery that many had hoped for. Consumers are forced to spend more on
basic necessities, leaving less disposable income for discretionary spending. As a
result, demand for goods and services has decreased, which has adversely affected
businesses. Unfortunately, the middle class, which makes up 30% of the total
population in India, has been hit the hardest. They are facing the brunt of the rising
prices of goods and services. This has made it difficult for them to maintain their
standard of living, let alone invest in growth opportunities. Unless steps are taken to
address these underlying issues, the Indian economy may face prolonged stagnation
and hardship.
Over the years, India has experienced a consistent rise in the cost of living, as indicated
by the Wholesale Price Index (WPI) and Consumer Price Index (CPI) of India. The WPI
measures the price of goods at the wholesale level, while the CPI measures the price of
goods at the retail level. Both indexes have been steadily increasing, which indicates
that the cost of living in India is going up.

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According to provisional data from the Commerce Ministry, India's wholesale price index
(WPI)-based inflation eased to 3.85% in February on an annual basis from 4.73% in
January. The month-on-month change in WPI index for February saw an increase of
0.20% as against 0.13% in the preceding month. The decline in the rate of inflation in
February 2023 was primarily contributed by a fall in prices of crude petroleum & natural
gas, non-food articles, food products, minerals, computer, electronic & optical products,
chemicals & chemical products, electrical equipment, and motor vehicles, trailers &
semi-trailers. (Source: The Economic Times)
The all India Wholesale Price Index (WPI) number recorded an annual rate of inflation
of 4.73% (Provisional) for the month of January 2023 (over January 2022) against
4.95% recorded in December 2022. The decline in the rate of inflation in January 2023
was primarily contributed by mineral oils, chemicals & chemical products, textiles, crude
petroleum & natural gas, textiles, and food products. (Source: Press Information
Bureau)
According to a recent report by the Reserve Bank of India (RBI), structural reforms are
needed to address the underlying issues affecting the Indian economy. The RBI warns
that without the necessary reforms, slow growth may persist, which would only worsen
the challenges faced by the middle class. The RBI has revised its GDP growth forecast
for 2022-23 to 6.8%, with Q3 at 4.4% and Q4 at 4.2%, and risks evenly balanced. Real
GDP growth is projected at 7.1% for Q1FY24 and 5.9% for Q2, which is lower than the
earlier estimate of 7%. (Source: Times of India)
The rising cost of living and slow economic growth rate are two significant issues that
the Indian government needs to address. Unless the government takes steps to
address these underlying issues, the Indian economy may continue to experience slow
growth, which could exacerbate the challenges faced by the middle class.
The Middle Class's Shrinking Earnings

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Tax structures on capital gains in India and the recent abolition of
indexation benefit on debt funds.
India's tax structure for capital gains varies depending on the type of asset in question:
For stocks or equity shares, short-term capital gains (STCG) are taxed at a rate of
15%, while long-term capital gains (LTCG) exceeding INR 1 lakh are taxed at a rate
of 10% without indexation benefit, or 20% with indexation benefit.
For fixed deposits (FDs), interest income is taxed as per the individual's income tax
slab rate. The interest earned on FDs is added to the individual's taxable income
and taxed accordingly. This means that if an individual's total income exceeds the
basic exemption limit of INR 2.5 lakh, they will be required to pay tax on the interest
earned from their FDs.
For market-linked debentures (MLDs), taxation depends on whether the debentures
are listed or unlisted. If listed, STCG is taxed at the applicable slab rate, while LTCG
exceeding INR 1 lakh is taxed at a rate of 10% without indexation benefit or 20%
with indexation benefit. If unlisted, STCG is taxed at the applicable slab rate, while
LTCG is taxed at a rate of 30% without indexation benefit or 20% with indexation
benefit.

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For mutual funds (MFs), taxation also depends on whether the fund is an equity
fund or a debt fund. For equity funds, STCG is taxed at a rate of 15%, while LTCG
exceeding INR 1 lakh is taxed at a rate of 10% without indexation benefit or 20%
with indexation benefit. For debt funds, STCG is taxed at the applicable slab rate,
while LTCG exceeding 3 years is taxed at a rate of 20% with indexation benefit.
Debt funds no longer provide indexation benefits.
💡 Indexation adjusts an asset's value for inflation, preserving its real value and
avoiding the negative effects of inflation. It's especially useful for long-term
investments, where inflation can erode an asset's value.
The Indian government recently proposed an amendment to the Finance Bill 2023 that
could potentially strip debt mutual funds of their long-term tax benefit if they invest less
than 35 percent of their assets in equities. This amendment, could mean that such
mutual funds will now attract short-term capital gains tax.
While this may seem like a negative development for debt mutual funds, personal
finance experts suggest that the proposal actually brings bank fixed deposits (FDs) on-
par with debt mutual funds. This could level the playing field for financial products such
as bank fixed deposits, debt mutual funds, and insurance savings products.
The recent change in tax regulations is expected to impact fixed income-oriented mutual
fund houses as inflows may moderate due to reduced attractiveness. However, it is
possible that liquid and institutional flows may not be as affected.
The new tax regulations will now put taxation for Debt MF, Fixed Deposit, and Market
Linked Debentures (MLD) at par. Overall, this move aims to create a more equitable
financial environment for investors and financial institutions alike.
Income Inequality in India

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Income Inequality in India
Income inequality in India is caused by unequal access to education, employment, and
resources, particularly in rural areas. The government needs to take action at both the
central and state levels to address this issue. This includes increasing access to
education and job training programs, investing in rural infrastructure development, and
implementing progressive taxation policies.
According to the Periodic Labour Force Survey (PLFS) Annual Report (July 2021 - June
2022), the wealthiest 0.1% of individuals in the population receive 5-7% of the national
income, while the top 1% earn almost three times more than the lowest-earning 10% of
individuals. Additionally, the top 1% holds 6.82% of the total income, and the top 10%
earns 32.52%.In contrast, the lower 50% of earners only make up around 22% of the
total income. These numbers suggest a notable disparity in income in India.
According to the 2019-20 Periodic Labour Force Survey (PLFS), individuals who earn at
least Rs 25,000 per month (or Rs 300,000 per year) are among the top 10% of wage

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earners in India. This is a significant finding, as it indicates that earning an annual
income of Rs 300,000 would place someone within the top 10% of wage earners.
Government's Quick Response to Criticism
Nirmala Sitharaman announced a new tax regime that aims to
benefit the middle class by allowing them to keep more money. This
was reported by the Times of India.(source)
India's Finance Minister, Nirmala Sitharaman, recently announced
that the government has increased the outlay on capital
expenditure by 35% to ₹7.5 lakh crore in the current financial year,
building on efforts since 2020. (Source: PIB)

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FM Sitharaman aimed to reinforce the government's commitment to improving the
country's infrastructure and promoting economic growth. The FM said:
Modi government has not levied new taxes on the middle class in any budget so far,
and has ensured that no taxes are levied on people earning salaries up to ₹5 lakh
annually.
The government has brought metro railways to 27 places, in line with the focus on
developing smart cities and catering to the needs of the middle class.
The Modi government is implementing the 4Rs to reduce non-performing assets
(NPA) and stabilize the banking sector.
The government aims to improve the health of public sector banks and ensure
reliable financial services for the public.
Sitharaman addressed political parties promising freebies during election
campaigns. She suggested that parties allocate funds in their budgets and consider
the state's financial condition before making such promises. This prudent approach
will prevent unrealistic promises, frustration, and disappointment.
India was part of the 'Fragile Five' economies in 2013. But since the Modi
government took power in 2014, the country's economy has undergone significant
changes and is now the world's fastest-growing.
The rupee has fluctuated against the dollar, but India is seen as having a stable
government and balanced policies.
The Indian rupee is strong compared to most currencies except the dollar.
Non-governmental foreign organizations create economic indices using secondary
sources. These indices often target the Indian government. It is important to
question their methodology, data, and intentions to ensure accurate and unbiased
survey results.
In conclusion, Nirmala Sitharaman's statements shed light on the various initiatives
taken by the Modi government to improve the country's infrastructure, reduce the
middle-class tax burden, and stabilize the banking sector. The government's focus on
smart cities and the middle class is a positive step towards inclusive growth. With the
right policies and initiatives, India can continue to be a leading economy in the world.

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Why are we being taxed?
India's taxation burden has been a source of concern for the middle class, which makes
up around 30% of the population. The government generates revenue through taxation,
which is used to fund public services, national defense, and security initiatives.
However, the rising cost of living, slow economic growth, and high inflation have made it
difficult for the middle class to maintain their standard of living and invest in growth
opportunities.
Below are some of the basic reasons for taxation and its growing trajectory.
Govt makes money from tax
The government generates revenue through taxation, where individuals and
organizations are required to pay a percentage of their income or profits to the
government. This revenue is then used to fund public services, such as education,
healthcare, and infrastructure development, as well as national defense and security
initiatives. Additionally, taxation policies can be used to incentivize certain behaviors or
discourage others, such as offering tax breaks for investing in renewable energy or
imposing higher taxes on tobacco products to discourage smoking. Overall, taxation
plays a crucial role in shaping a country's economy and the distribution of resources
within it.
Tax is growing as govt has taken loads of debts
According to the latest data, the General Government Debt to GDP ratio in India
increased from 75.7% at the end of March 2020 to 89.6% at the end of the pandemic
year FY21. This rise was due to increased spending on healthcare and economic relief
measures during the pandemic. However, the ratio is expected to decline to 84.5% by
the end of March 2022, thanks to various measures taken by the government.
It is crucial for the government to keep the debt-to-GDP ratio under control to ensure
long-term sustainability. A high debt-to-GDP ratio can lead to negative economic
implications such as higher interest rates and inflation. Overall, the expected decline in
the ratio is a positive sign for the Indian economy. The government needs to continue
implementing measures to keep the debt under control. (Source: PIB)
Interest rates have gone up: Govt has to pay higher interest on their debts
Recently, there has been a significant increase in interest rates, which means that the
Indian government now has to pay more in interest on their debts. This situation may

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lead to a 15% increase in India's interest burden in the upcoming fiscal year of 2023.
According to a report published in The Economic Times, this increase in interest rates
could put a significant strain on the government's finances and may require them to re-
evaluate their budgetary priorities. The report also highlights the potential impact that
this increase in interest rates could have on India's economy as a whole, especially in
the current global economic climate. (Source: ET)
Tax to aid the fiscal deficit
The fiscal deficit has been a longstanding problem for the government, and it has been
seeking new ways to alleviate the situation. One of the proposed solutions is the
implementation of higher taxes to aid in achieving the 6.4% fiscal deficit goal for FY23.
According to a recent article by Business Standard, the government is considering this
approach in hopes of increasing revenue and stabilizing the economy.
Conclusion
India's middle class accounts for approximately 30% of the total
population and contributes around 45% to the country's total GDP.
However, the significant difference in income in India, combined with the increasing cost
of living, slow economic growth, and high inflation, has made it challenging for the
middle class to maintain their standard of living and invest in growth opportunities.
Although the government has attempted to alleviate the burden by increasing tax
exemptions and lowering tax rates for essential goods and services, many middle-class
families are still struggling to make ends meet.
The Finance Minister Nirmala Sitharaman's recent announcement of a new tax regime
has received mixed responses. While there is a growing need for structural reforms to
tackle the underlying issues affecting the Indian economy, the slow growth may continue
to worsen the challenges faced by the middle class.
India may experience the "Matthew Effect," a phenomenon where the rich get richer and
the poor get poorer. This trend is already happening in many countries around the
world, including India, where income inequality has been increasing. The wealth gap is

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widening, and those at the top have more resources to invest and grow their wealth,
while those at the bottom are struggling to make ends meet. Without proper
intervention, this trend can continue and worsen the problem of income inequality in
India.
In conclusion, the Indian government must continue to support the middle class by
implementing policies that promote their growth and development while ensuring that
they can maintain a decent standard of living. Achieving a balance between generating
revenue and ensuring citizens' well-being, particularly the middle class, is crucial for the
country's progress. #India #MiddleClass #TaxBurden #Economy