The Great Indian Middle Class’s anger is justified

Something very rare happened on Friday in Mumbai. The industry body FICCI had organised a seminar on capital markets which was attended by the chairperson of the Securities and Exchange Board of India (SEBI) and a Secretary from the Finance Ministry. It was a typically staid and dull business event with no important ministers or political leaders in attendance. Suddenly, a few professionals, including some women, dished out placards demanding a rollback of the capital gains tax increase and the removal of indexation for taxation purposes that was announced in Budget2024. It was a spontaneously organised venting of anger by private-sector salaried professionals, something unusual in India.

India’s middle class is upset. Very upset, at what they perceive as a betrayal and injustice by Prime Minster Narendra Modi and Finance Minister Nirmala Sitharaman. Without delving into the jargon and technicalities such as capital gains, indexation, etc., suffice to say that the FM raised taxes on gains made by investing one’s savings in stocks and property. Social media has erupted in anger. As funny and creative are the memes in social media mocking the FM and the PM, they are equally biting and vicious in their attacks. Erstwhile cheerleaders of the ruling BJP have suddenly turned against them, triggered by this issue. There is all-round surprise at the high-decibel, vehement reaction by the professional class that was generally deemed to be BJP supporters.

The Leader of the Opposition Rahul Gandhi seized on the opportunity in his speech in Parliament saying that despite the middle class’ irrational faith in Modi, evidenced by their mindless banging of utensils during Covid-19, they have been betrayed and attacked on their backs and chests in Budget2024. Gandhi promised to fight for them and encouraged them to switch their support to the opposition INDIA alliance.

Politics apart, are salaried professionals justified in their extreme anger and disappointment about the budget? Yes, but not because of the specific changes in taxation announced by Sitharaman but by the larger regressive taxation philosophy of the Modi government over the last decade.

Broadly, there are two types of taxes -- direct and indirect. Direct taxes are progressive taxes such as income tax, property tax and investment gains taxes where the higher the income or wealth, the higher are the taxes. Indirect taxes are regressive because everyone from the richest industrialist to the poor NREGS worker pays the exact same tax, such as GST or tax on petrol or movie tickets. Remember, every Indian pays indirect taxes, unlike income taxes paid only by 70 million Indians that earn income above a certain threshold. Every fair society should collect more of its share of taxes through progressive direct taxes versus regressive indirect taxes.

On average, America, European nations and China collect 60 per cent through direct and 40 per cent through indirect taxes. Some Scandinavian nations collect 70 per cent through direct and 30 per cent through indirect taxes. India is an outlier, with the exact opposite ratio -- 65 per cent coming from regressive taxes and 35 per cent from direct taxes (Centre and states combined). Manmohan Singh inherited a 30-70 ratio of direct to indirect taxes in 2004 when he became Prime Minister. He made India’s taxation more progressive by bringing that ratio down to 40-60 by the time he left office. Under Modi, it became regressive again and increased to a 35-65 ratio. Simply put, over the last decade, the average Indian has had to bear a greater burden of supporting the nation through indirect taxes than wealthier elites through direct taxes.

Not just has taxation got more regressive in its direct to indirect taxes ratio, but even within direct taxes, the salaried professional is shouldering a higher tax burden for the nation than richer corporates. It is well understood that richer corporates can afford to pay higher taxes than individual employees. Extrapolating this for the nation as a whole, it is reasonable to expect that corporates should contribute a greater share of taxes than individual citizens collectively. Which was the case all these years -- until it turned under Modi.

Some 55% of the country’s income taxes are paid by citizens now while corporates contribute only 45 per cent. Again, when Manmohan Singh left office in 2014, it was the exact opposite -- 65 per cent of income taxes were collected from companies and only 35 per cent from the middle class. In the decade under Manmohan Singh, overall income taxes for the government went up five times, with 62 per cent coming from corporates and 38 per cent from individuals. In Modi’s decade, overall income taxes grew by three times, with 60 per cent coming from individuals and only 40 per cent from corporates. Clearly, even in the more progressive direct taxes, the Modi government placed a greater tax burden on the poorer middle class than on the richer corporates.

So, when one takes a big picture view of India’s taxation philosophy in the last decade, it has changed dramatically for the worse for the middle class. The average citizen pays income tax, GST and other taxes such as duties on petrol and diesel. When each of these have increased as a share of overall tax burden, it is little wonder that the middle class feels aggrieved and cheated.

It is in this larger context that the outburst by the middle class must be seen. When they are already shouldering an unfair share of the country’s tax burden, slapping more taxes on them through capital gains and removal of indexation rubs salt on their wounds. The issue is not one of whether a specific proposal to increase short-term capital gains or removing indexation is justified or not. The middle class is asking -- why are we the sitting ducks always for the Modi government? On that, their anger is well-justified.