Direct Taxes Bring 57% to Total Revenue: Middle Class Pays Higher Tax than Corporate

Direct Taxes Bring 57% to Total Revenue: Middle Class Pays Higher Tax than Corporate

The contribution of direct taxes to India’s total tax revenue surged to an impressive 56.72% in the financial year 2023-24 (FY24), marking the highest level in 14 years. This significant milestone reflects the robust growth in direct tax collections, underlining its increasing importance in the nation’s fiscal framework. According to time-series data released by the Central Board of Direct Taxes (CBDT) under the Ministry of Finance, this surge coincided with a direct tax-to-GDP ratio of 6.64% — the highest in over two decades.

Highlights of Revenue Composition

  • Direct Tax Contribution: In FY24, direct taxes accounted for 56.72% of total tax revenue, up from 54.63% in the previous year.
  • Decline in Indirect Taxes: The share of indirect taxes dropped to 43.28%, reflecting a shift towards progressive taxation.
  • Historical Context: The last time direct taxes exceeded this level was in FY10, at 60.78%.

This shift underscores efforts to enhance tax compliance, expand the tax base, and ensure equity in revenue collection.

Rising Dominance of Personal Income Tax

Personal income tax (PIT) has emerged as a key driver of direct tax collections:

  • Higher Than Corporate Tax: In FY24, PIT collections amounted to ₹10.45 lakh crore, surpassing corporate tax collections at ₹9.11 lakh crore.
  • Steady Growth: PIT’s share in net direct tax revenues rose to 53.3%, up from 50.06% in FY23.
  • Trend Over Time: Except for FY22, PIT collections have outpaced corporate tax collections in four of the last five years.

This trend reflects increased contributions from the middle class, driven by rising income levels and improved tax compliance.

Growth in Net Direct Tax Revenues

Net direct tax revenues grew by 17.7% in FY24, reaching ₹19.58 lakh crore. Key drivers of this growth include:

  • Robust Economic Activity: Strong GDP growth supported higher tax collections.
  • Improved Compliance: Digitalization and automation initiatives enhanced efficiency and reduced evasion.
  • Broader Tax Base: Efforts to widen the tax net brought more individuals and entities into the system.

Middle Class: The Backbone of Tax Revenue

The middle class, comprising the primary tax-paying population of India, shoulders a disproportionate share of the nation’s tax burden. This segment not only pays income tax on their earnings but also bears the brunt of Goods and Services Tax (GST) on their spending. Despite constituting just 2% of India’s population, they make a massive contribution to the country’s infrastructure development and welfare policies.

Every Budget day, the middle class looks to the government with hope, often feeling neglected in terms of tangible relief. Their dual contribution—through direct and indirect taxes—has played a pivotal role in driving India’s growth, yet they often face limited fiscal incentives or relief measures.

Policy Implications and Challenges

The increasing reliance on direct taxes has significant policy implications:

  • Equity in Taxation: Direct taxes ensure a fair distribution of the tax burden, reducing reliance on regressive indirect taxes.
  • Revenue Stability: A strong direct tax base provides predictable and sustainable government revenues.
  • Middle-Class Burden: With PIT contributions consistently outpacing corporate tax collections, there is a growing need to address the disproportionate burden on middle-class taxpayers.

Conclusion and Recommendations

The resurgence of direct taxes as the dominant contributor to India’s tax revenue reflects a progressive and equitable taxation approach. However, the middle class, which has shouldered a significant portion of the tax burden, deserves greater relief. To reduce their financial strain, the government should consider:

  • Increased Tax Exemptions: Revisiting tax slabs and exemptions to provide relief to salaried taxpayers.
  • Simplified Tax Regime: Streamlining tax processes to reduce compliance costs.
  • Targeted Support: Offering deductions and benefits that address key middle-class concerns, such as housing, education, and healthcare.

By acknowledging the pivotal role played by the middle class in nation-building and implementing these measures, the government can create a fairer tax system. Ensuring relief for this segment will not only enhance their quality of life but also foster sustained economic growth and social equity.

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