The Union Budget 2025-26 brought widespread relief to the middle class with Finance Minister Nirmala Sitharaman’s announcement of significant income tax cuts. Individuals earning up to ₹12 lakh annually are now exempt from paying income tax, a move that is expected to benefit over 6.3 crore taxpayers, or more than 80% of the tax base. However, while many celebrated the tax relief, prominent economist Ajit Ranade raised critical questions about the broader implications of this policy.
“Much jubilation about income tax cut, but millions will fall out of the income tax net,” Ranade wrote, pointing out a potential contradiction between the government’s goal of widening the tax base and the new tax exemptions. According to him, out of 80 million income tax filers, barely 25 million pay taxes beyond zero. With the revised exemption limit raised to ₹12 lakh, which is 500% of India’s per capita income, Ranade argues that no other country offers such generous tax exemptions. “This also contradicts the objective to widen the tax net,” he added.
Ranade highlighted a startling statistic: “India has only 7 income taxpayers for every 100 voters,” calling it an extreme outlier compared to other democracies. He explained that while GST (Goods and Services Tax) captures a wider section of the population, including the poor, it leads to a regressive tax burden. “GST, being an indirect tax, is inherently regressive. GST as a percentage of family income is higher for the poor than for rich folks, hence its burden is regressive,” he wrote. In contrast, direct income tax can be more progressive, ensuring that wealthier individuals pay a higher share of taxes.
Addressing the suggestion that India could abolish income tax altogether given robust GST collections, Ranade dismissed the idea: “GST is regressive. It hurts the pocket of a poor or lower-middle-class household much more than the rich. So the rate must come down, ideally to 10% only.” Currently, GST rates are much higher, with a median rate of 18% and some items taxed at 28%. “That’s not the way to go,” he asserted.
Ranade also challenged the perception of “bumper” GST growth, stating, “GST growth is not bumper at all. In the past eight years, it has not even grown at the rate of nominal GDP growth.” This, he believes, raises concerns about India’s increasing reliance on indirect taxes while shrinking the base of direct taxpayers.
“Just because GST is easier to collect does not mean we depend only on it. We have to make our tax system more progressive and introduce vertical equity—richer folks pay more tax and also a higher percentage,” Ranade concluded. Drawing comparisons to international practices, he mentioned that countries like Canada provide GST rebates for low-income households to offset the regressive nature of consumption taxes. However, he also acknowledged that implementing such measures in India could be impractical and would complicate an already complex tax system.