How Bad is India’s Taxation System in 2024?

India's taxation system has been a subject of debate for decades, and in 2024, the landscape has evolved with several reforms aimed at promoting growth, equity, and compliance. However, despite these efforts, challenges persist, leading to mixed opinions on its effectiveness. This article dives deep into the current state of India’s taxation system, highlighting its strengths, flaws, and areas of improvement, supported by recent statistics and expert insights.

Income Tax Reforms

One of the most notable changes in 2024 has been the revision of income tax slabs under the new tax regime. These adjustments were introduced to provide relief to middle-class taxpayers and stimulate consumption in the economy. The updated tax structure offers rates ranging from nil for incomes up to ₹3,00,000 to 30% for incomes above ₹15,00,000. For the middle-income group, the introduction of a standard deduction increase from ₹50,000 to ₹75,000 has provided additional savings, especially for salaried individuals.

These reforms aim to simplify the tax system by making the new tax regime more attractive than the old one, which allowed for various exemptions and deductions. The government hopes this will encourage taxpayers to opt for the straightforward new regime, reducing compliance burdens and administrative complexities. Yet, critics argue that the dual tax system creates confusion for taxpayers who must evaluate which regime is more beneficial annually.

Corporate Taxation

India’s corporate tax rates have seen incremental adjustments aimed at attracting foreign investment. The corporate tax rate for domestic companies remains at 30%, while for foreign companies, it has been reduced to 35% from 40%. These changes align with global tax standards and aim to position India as a competitive investment destination.

While the reduced tax rate may attract multinational corporations, domestic businesses argue that the benefits largely favor foreign players. Additionally, the government’s focus on reducing tax rates while maintaining revenue collection targets puts pressure on compliance and increases scrutiny, especially for smaller enterprises.

Capital Gains Tax Adjustments

Capital gains taxation has also undergone significant changes in 2024. The short-term capital gains (STCG) tax on shares, mutual funds, and real estate has been increased from 15% to 20%. Meanwhile, long-term capital gains (LTCG) tax rates have risen from 10% to 12.5%, with the exemption limit slightly increased to ₹1.25 lakh.

These changes aim to curb speculative trading and encourage long-term investments. However, experts argue that higher taxes on capital gains might discourage retail investors from participating in the stock market and mutual funds, potentially stalling growth in these sectors. Moreover, wealthier investors often find ways to navigate around such taxes, making the burden disproportionately higher for middle-income earners.

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Tax Collection Trends

India's tax collection performance in 2024 has been commendable, showcasing the impact of reforms and improved compliance measures. Net direct tax collections increased by over 16% year-on-year, reaching ₹15.8 trillion as of December 2024. Gross direct taxes, including both corporate and personal income taxes, rose by over 20%, totaling ₹19.2 trillion. These figures highlight the government's ability to maintain revenue growth despite providing tax relief to individuals.

Refunds amounting to ₹3.4 trillion were also issued during this period, demonstrating efficiency in processing claims. However, experts warn that over-reliance on a small tax base—comprising only a fraction of the population—remains a concern. Broadening the tax net to include a larger portion of India’s workforce is critical to ensure sustained growth in revenue without overburdening existing taxpayers.

The Debate on Wealth and Inheritance Taxes

India’s taxation system has long faced criticism for failing to address wealth inequality. In 2024, the debate over reintroducing wealth and inheritance taxes has intensified. Economists like Thomas Piketty have argued for a 2% wealth tax on individuals with assets over ₹100 million and a 33% inheritance tax on properties of the same value. According to Piketty, such measures could significantly reduce the growing wealth gap and generate additional government revenue.

However, the Indian government remains hesitant. Wealth tax was abolished in 2015 due to concerns over administrative challenges and the potential for capital flight. Finance Minister Nirmala Sitharaman and Chief Economic Adviser V. Anantha Nageswaran have opposed reintroducing these taxes, citing risks to the middle class and investment sentiment. This cautious approach has left critics questioning the government’s commitment to addressing systemic inequality.

Simplification and Compliance

One of the key objectives of India’s tax reforms in 2024 has been to simplify compliance for taxpayers. Reductions in Tax Deducted at Source (TDS) rates for various transactions have eased the burden on individuals and businesses. For example, the TDS rate for insurance commissions, rent payments, and brokerage payments has been cut from 5% to 2%. Similarly, the TDS rate for e-commerce transactions has been reduced from 1% to 0.1%.

These measures aim to make the system more user-friendly and reduce instances of over-deduction. However, tax professionals argue that frequent changes to TDS rules add to the complexity, especially for small businesses and first-time filers. Furthermore, while digital platforms like the Income Tax portal have streamlined filing processes, technical glitches and bureaucratic hurdles continue to pose challenges for many taxpayers.

Persistent Challenges

Despite the reforms, India’s taxation system faces several challenges that hinder its efficiency and equity.

1. Complexity: The coexistence of two tax regimes—old and new—complicates decision-making for taxpayers. Frequent changes in rules and rates also contribute to confusion, making it difficult for individuals and businesses to stay compliant.

2. Narrow Tax Base: A large portion of India’s workforce remains outside the formal tax net. According to recent data, less than 10% of the population files income tax returns, and an even smaller percentage actually pays taxes. Expanding the tax base by integrating informal sector workers and self-employed individuals is crucial for long-term sustainability.

3. Equity Issues: The absence of wealth and inheritance taxes disproportionately benefits the wealthy, while the middle class bears the brunt of indirect taxes such as GST. This imbalance has led to growing calls for more progressive taxation policies that address inequality without deterring economic activity.

4. Administrative Inefficiency: While digitalization has improved transparency, issues like delayed refunds, excessive scrutiny, and lack of clarity in tax notices persist. These inefficiencies erode taxpayer trust and discourage voluntary compliance.

Conclusion

India’s taxation system in 2024 is a work in progress, reflecting a mix of advancements and persistent flaws. The government’s efforts to simplify the tax structure and provide relief to taxpayers are commendable, but challenges related to equity, complexity, and compliance remain unaddressed. The debate over reintroducing wealth and inheritance taxes underscores the need for a more progressive approach to taxation that balances revenue generation with social justice.

As India continues to modernize its economy, a fair and efficient tax system will play a crucial role in driving growth and reducing inequality. Policymakers must focus on broadening the tax base, addressing administrative inefficiencies, and ensuring that the benefits of reforms reach all segments of society. Only then can India achieve a taxation system that is not only robust but also equitable and inclusive.

By addressing these issues proactively, India can create a tax environment that fosters trust, compliance, and economic progress—a critical step toward realizing its vision of becoming a $10 trillion economy by 2030.