Tax Reforms

Why India’s pro-rich, anti-poor taxation policies must change


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Issues with India's taxation policies


To develop their renewable energy capacities poor countries may well have to help themselves to make the transition that society urgently needs. One source of funding could well be the well-off citizens of India, who are getting richer and richer.

Growing inequality in India

  • A 2018 Oxfam report revealed that 10 per cent of the richest Indians garnered 77.4 per cent of the nation’s wealth.
  •  In fact, according to the report, 58 per cent of India’s wealth was in the hands of one per cent of the country’s population.
  • The combined income of this handful of people in 2017 was almost as much as India’s budget that year.
  • In 2017, the fortune of India’s 100 richest tycoons leaped by 26 per cent.
  •  According to Crédit Suisse, the number of dollar millionaires in India has jumped from 34,000 in 2000 to 7,59,000 in 2019 — in other words, the country has one of “the world’s fastest-growing population of millionaires”.
  • The average wealth of these millionaires has increased by 74 per cent over this period.

Issues with taxation policies

  • The taxation policy of the government, instead of making the exchequer benefit from this trend, has actively strengthened the trend of growing millionaires.
  • Replacing wealth tax by increasing income tax: The government replaced the wealth tax by an income tax increase of two per cent for households that earned more than 10 million rupees annually.
  • Corporate tax was reduced: The corporate tax was lowered, for existing companies from 30 per cent to 22 per cent, and for manufacturing firms incorporated after October 1, 2019 that started operations before March 31, 2023, from 25 to 15 per cent — the biggest reduction in 28 years.
  • Increase in income tax exemptions: In the 2019-20 budget, the income tax exemption limit jumped from Rs 2,00,000 to 2,50,000 and the tax rate for incomes up to Rs 5 lakh was reduced from 10 to 5 per cent.

Impact of pro-rich taxation policy

  • Deprives the state of resources: This taxation policy deprived the state of important resources.
  • Increase in indirect taxes: To (partly) compensate for the decline of direct taxes, the government has increased indirect taxes, unfairly so, because they affect all Indians irrespective of their income.
  • The share of indirect taxes in the state’s fiscal resources has increased to reach 50 per cent of total taxes in 2018.
  • Taxes on petroleum products are a case in point.

High taxes on petroleum products

  • About two-thirds of the cost of a litre of petrol now goes towards taxes.
  • The tax collected on petrol and diesel has increased by 459 per cent in the past seven years — from Rs 52,537 crore in 2013 to Rs 2.13 lakh crore in 2019-2020.
  • Given that petrol is a less elastic good, people are bound to consume it even at higher prices.
  • This also explains why the government sees fuel sale in India as a safe “revenue collection” medium.
  • In 2018-19, excise duty on petroleum products alone accounted for roughly 24 per cent of the indirect tax revenue.

Consider the question “India’s taxation policies are criticised for being pro-rich. In the context of this, discuss the issues with the taxation system and suggest the measure to deal with these issues.”


The government’s taxation policy will probably continue to prevail depriving the exchequer of some of the resources it needs for dealing with issues as important as climate change.

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