The Taxation System in India - A Survey

Abstract

India collects taxes even though, in principle, a government can create its own money. This paper asks a simple question: is that fair? The honest answer is not the one the "why not just print money instead?" objection suggests. Printing money is not a free alternative to taxation, because in a developing economy like India it feeds inflation and cannot fund a modern state. The real fairness problem lies elsewhere: the direct-tax burden rests on a strikingly narrow base, indirect taxes fall on everyone regardless of income, and public trust in how revenue is spent is low. Drawing on India's current income-tax and GST structure, direct-tax-to-GDP data, and figures from the Reserve Bank of India (RBI), I argue that India's tax system is progressive by design and justified in principle, but unfair in practice, and that fairness is won through concrete reforms (widening the base, simplifying the law, and enforcing transparent, faceless administration), not through money creation. A small perception survey of 35 respondents supports the intuition that Indians value fairness and transparency but distrust how their taxes are used.

1. The Fairness Question

Chief Justice John Marshall of the United States famously observed, in McCulloch v. Maryland (1819), that "the power to tax involves the power to destroy." Tax touches every citizen, so the question of whether it is fair is one every democracy has to answer. In India, that question has a peculiar twist. The government, through the RBI, ultimately controls the money supply. So a natural challenge arises: if the state can create money, why does it need to take money from us at all? Isn't taxation, in that light, an avoidable imposition?

This paper takes that challenge seriously and shows why it is the wrong place to look for unfairness. It helps first to separate two things that the "just print money" argument blurs together. Monetary policy, managing the money supply and interest rates, is the RBI's job, and its legal mandate is price stability. Fiscal policy, deciding what to tax and how to spend, is the government's job. Confusing the two makes money-printing look like a painless substitute for taxation. It is not. My thesis is this: the government cannot fairly or safely replace taxes with the printing press; India's progressive tax design is broadly fair in principle; where it falls short is a narrow base, regressive-leaning indirect taxes, and a trust deficit, all of which are fixable. That claim is falsifiable: if money creation could fund the state without cost, taxation really would be optional. The evidence below shows it cannot.

2. Can the Government Just Print Money? Seigniorage, Inflation, and MMT

It is true that a government earns some revenue simply from issuing currency, economists call this seigniorage. India is a vivid example: the RBI transferred a record surplus of about ₹2.69 lakh crore to the central government as its dividend for 2024-25, roughly 27% more than the ₹2.1 lakh crore of the year before (Vajiram & Ravi, 2025). So money and central-bank operations are not a zero source of public funds.

But that sum is small next to a Union Budget running into the tens of lakh crore, and, more importantly, creating money to cover spending has a cost: inflation. This is where the author's original metaphor still holds. Printing money without matching real goods and services is like adding water to milk: there is more liquid, but each glass is worth less. The RBI's legal mandate is to keep consumer price inflation at 4%, within a tolerance band of 2% to 6% (Drishti IAS, 2024). Financing government spending by simply issuing new money would push inflation past that ceiling and quietly tax everyone through higher prices, a burden that falls hardest on the poor, whose savings and wages erode first.

A modern school of thought, Modern Monetary Theory (MMT), argues that a country issuing its own currency can never "run out" of money and so should worry about inflation, not deficits. Whatever its merits for the United States, economists caution that emerging markets like India lack full "monetary sovereignty": while India prints its own legal tender, it cannot easily borrow abroad in rupees, so aggressively creating money risks currency depreciation and imported inflation (ThePrint, 2020; Invest India). In short, for India the printing press is not a free lunch. Taxation, not money creation, has to fund the state, which brings the fairness question back to the tax system itself.

3. What India's Tax System Actually Looks Like

India raises revenue through two broad channels. Direct taxes are paid on income and profits, personal income tax and corporate tax. Indirect taxes are paid on consumption, chiefly the Goods and Services Tax (GST).

On paper, personal income tax is clearly progressive. Under the new regime for 2025-26, income up to ₹4 lakh is taxed at nil, and thanks to a rebate, income up to ₹12 lakh is effectively tax-free; rates then rise in steps to a top rate of 30% on income above ₹24 lakh (ClearTax, 2025). Higher earners are meant to pay a larger share, exactly what most people consider fair.

Yet the base of direct taxpayers is astonishingly narrow. In 2022-23 about 7.4 crore Indians filed an income-tax return, but roughly 70% of them reported zero tax liability, so only about 2.24 crore people, close to 1-2% of the population, actually paid income tax (ThePrint). Even so, direct taxes reached about 6.64% of GDP in 2023-24, a two-decade high, yet still modest for a country of India's size (Vajiram & Ravi, 2024). By contrast, GST is paid by almost everyone the moment they buy something. It was overhauled in September 2025 into a simpler structure of mainly two slabs, 5% on essentials and 18% on most goods and services, with a 40% rate on luxury and "sin" goods such as tobacco (ClearTax, 2025). The catch is that consumption taxes are regressive-leaning: a low-income family spends a larger share of its income on taxed goods than a rich family does. So the real picture is this, a tiny minority carries the visible, progressive income-tax load, while an invisible, flatter GST touches all of us.

4. Is It Fair? What the Survey and the Data Show

To gauge public perception, I surveyed 35 people, students, teachers, professionals, and seniors, through a short questionnaire. This is a small, non-representative snapshot, not proof, but the pattern is telling. 85% agreed that wealthier people should pay higher rates; 40% felt the system is unfair (with another 30% unsure); and 50% doubted that tax money is used properly. Support for progressive taxation is strong; trust in spending is weak.

Set against the data, this makes sense. The progressive rate structure is fair in principle, that is not where the problem lies. The unfairness is twofold. First, the narrow base means honest salaried and formal-sector taxpayers feel they are carrying people who under-report income in a large cash economy. Second, there is a trust deficit: when citizens cannot see what their taxes buy, the "social contract", the sense that paying tax is a fair exchange for public services, frays. Fairness in Indian taxation, in other words, is not really threatened by the option to print money. It is threatened by who pays and by whether people believe the money is well spent.

5. What Would Make It Fairer: Concrete Reforms

If the diagnosis is a narrow base and low trust, the cure is not higher rates on the same small group. It is a set of specific, already-emerging mechanisms:

• Widen the base with data, not just rate hikes. The tax department already receives an Annual Information Statement (AIS) and Form 26AS showing a person's high-value transactions. Matching this data, and GST records, against filings can bring habitual non-filers with clear spending power into the net, easing pressure on the salaried minority instead of squeezing it further.
• Make honest filing effortless with pre-filled returns. The e-filing portal already offers returns pre-populated from a taxpayer's AIS and employer (TDS) records; defaulting to and expanding these pre-filled forms reduces both errors and the effort of compliance. The easier it is to file correctly, the fewer people drop out of the system.
• Simplify the law itself. The Income-tax Act, 2025 replaces the six-decade-old 1961 Act from 1 April 2026, and swaps the confusing "previous year / assessment year" split for a single "tax year" (ClearTax, 2025). A law ordinary people can understand reduces both evasion and honest mistakes.
• Enforce transparently through faceless assessment. Since August 2020, the Faceless Assessment Scheme (under Section 144B) has routed cases through a National Faceless Assessment Centre with no face-to-face contact between taxpayer and officer, precisely to cut discretion, harassment, and corruption (TaxGuru, 2024). Expanding and strengthening it directly attacks the trust deficit at the enforcement end.
• Keep GST progressive-by-design. Zero or low rates on essentials and higher rates on luxuries, as the 2025 reform does, soften the regressive edge of consumption taxes and are worth protecting (ClearTax, 2025).
• Close the trust loop with visible spending. Publishing clear, accessible dashboards of where tax money goes would let citizens see the return on what they pay, rebuilding the very social contract the survey shows is under strain.

6. Conclusion

The government could, technically, print money, and it does earn seigniorage, the record RBI surplus transfer is real revenue. But it cannot print its way to a modern state without triggering inflation, and as an emerging economy India can afford that even less than a rich one can. Taxation is therefore necessary, and India's progressive design is fair in principle. It falls short in practice for reasons that have nothing to do with the printing press: too few people pay direct tax, indirect taxes weigh on the poor, and trust in spending is low. The path to a fairer system is not to abandon tax for money creation, but to widen the base, simplify and digitise the law, enforce it transparently, and show citizens what their money buys. Fairness, in the end, is less about how the money is made than about who pays it and whether they can trust where it goes.

Sources

1. https://cleartax.in/s/income-tax-slabs, India's income-tax slabs for FY 2025-26 (new regime): the ₹4 lakh basic exemption, the ₹12 lakh effective tax-free threshold, and the 30% top rate above ₹24 lakh.
2. https://vajiramandravi.com/current-affairs/direct-tax-collection-reaches-14-year-high-in-2023-24/, India's direct-tax-to-GDP ratio of 6.64% in FY24 (a two-decade high) and direct taxes at 56.7% of total tax revenue, from CBDT data.
3. https://theprint.in/economy/more-indians-filing-tax-returns-but-only-1-2-of-population-actually-pays-income-tax-shows-govt-data/1686818/, only about 1-2% of Indians actually pay income tax (~2.24 crore in 2022-23); 7.4 crore filed returns, ~70% with zero liability.
4. https://cleartax.in/s/next-generation-gst-reforms, the September 2025 GST reform (effective 22 Sep 2025): removal of the 12% and 28% slabs, the 5% and 18% main slabs, and the 40% luxury/sin-goods rate.
5. https://vajiramandravi.com/current-affairs/rbi-dividend/, the RBI's record surplus transfer of about ₹2.69 lakh crore to the government for FY25, roughly 27% above the previous year's ₹2.1 lakh crore.
6. https://www.drishtiias.com/daily-updates/daily-news-analysis/india-retains-4-inflation-target-for-rbi, the RBI's inflation mandate of 4% with a 2%-6% tolerance band.
7. https://taxguru.in/income-tax/faceless-assessment-income-tax-digital-shift-thats-changing-game.html, the Faceless Assessment Scheme (Section 144B, since August 2020), the National Faceless Assessment Centre, and its aim of cutting discretion and corruption.
8. https://cleartax.in/s/income-tax-act-2025, the Income-tax Act, 2025 replacing the 1961 Act from 1 April 2026 and introducing a single "tax year".
9. https://theprint.in/economy/why-emerging-markets-like-india-are-wary-of-using-modern-monetary-theory-to-fix-the-economy/532893/, why emerging markets like India, lacking full monetary sovereignty, are wary of MMT.
10. https://www.investindia.gov.in/team-india-blogs/economic-policy-through-lens-modern-monetary-theory, Modern Monetary Theory and its inflation limits for an economy like India's.