The Union 2025-26 budget caused a general repair to the middle class with the announcement by the Minister of Finance Nirmala Sitharaman of income tax reductions. People winning up to 12 Lakh per year are now exempt from paying income tax, a decision that should benefit from more than 6.3 taxpayers, more than 80% of the tax base. However, while many have celebrated tax relief, the eminent economist Ajit Ranada raised critical questions about the broader implications of this policy.
“A lot of jubilation on the drop in income tax, but millions of people will fall from the income tax net,” wrote Ranade, highlighting a potential contradiction between the government’s objective to widen the Tax base and new tax exemptions. According to him, out of 80 million income tax reports, 25 million payment taxes beyond zero. With the revised exemption limit noted at 12 lakh, or 500% of India’s per capita income, Raden argues that no other country offers such generous tax exemptions. “This also contradicts the objective of expanding the tax net,” he added.
Ranada underlined a surprising statistic: “India has only 7 income taxpayers per 100 voters”, calling it as extreme aberrant value compared to other democracies. He explained that if the TPS (tax on goods and services) captures a broader section of the population, including the poor, it leads to a regressive tax burden. “TPS, being an indirect tax, is intrinsically regressive. The TPS as a percentage of family income is higher for the poor than for the rich, so its burden is regressive, “he wrote. On the other hand, direct income tax may be more progressive, ensuring that the richest individuals pay a higher share of taxes.
Addressing the suggestion that India could abolish all income tax given the robust TPS collections, Raden rejected the idea: “TPS is regressive. It hurts the pocket of a poor or lower household with the middle class than the rich. The rate must therefore be lower, ideally to only 10%. Currently, TPS rates are much higher, with a median rate of 18% and certain elements imposed at 28%. “This is not the way to follow,” he said.
Raden also challenged the perception of the growth of TPS “bumper”, declaring: “TPS growth is not at all exceptional. Over the past eight years, it has not even increased to the rhythm of the nominal growth of GDP. This, he believes, raises concerns about the growing dependence of India with regard to indirect taxes while shrinking the basis of direct taxpayers.
“It is not because TPS is easier to collect. We have to make our tax system more progressive and introduce vertical equity – people from Richer pay more taxes and also a higher percentage, ”concluded Ranade. Comparisons with international practices, he said that countries like Canada offer low -income households to compensate for the regressive nature of consumption taxes. However, he also recognized that the implementation of such measures in India could be impractical and would complicate an already complex tax system.
