The recent Union budget has raised the annual income threshold above which income tax kicks in to ₹12 lakh under the new tax regime. While this move aims to bolster middle-class spending and stimulate economic growth, it also narrows the tax base as a side-effect, placing an even greater fiscal burden on a small segment of the population.

Also Read: Mint Quick Edit | Sitharaman's income tax bonanza: Time to rejoice

Only about 10-12 million taxpayers are estimated to be in earning brackets that would require their contribution to the tax coffers. They will bear the responsibility of generating over ₹14 trillion in direct taxes—or about a third of the government's gross mop-up (a chunk of which will be transferred to states as their share). As a proportion of the Centre's net tax collections, as projected, income tax would be about half.

The fewer the taxpayers, the greater the resentment. If this trend continues, the overburdened few may soon start asking: What has the country given to me?

While taxation involves no quid pro quo and must be paid even if an individual does not directly benefit, that question will be asked more and more.

Data from the Central Board of Direct Taxes (CBDT) indicates that the number of people filing tax returns has risen by 82% over the past nine years, reaching 104 million in assessment year 2023-24. However, a closer examination reveals that the bulk of them contribute minimally to tax revenue. About 80 million individuals file tax returns but pay little or no tax, leaving just around 20 million actual taxpayers—a number that is set to halve in 2025-26.

Also Read: Andy Mukherjee: India has slashed income tax but still needs to snip red

Notably, individuals with taxable incomes exceeding ₹1 crore increased fivefold to nearly 230,000 in the same period. Yet, they remain a minuscule fraction of India's total working-age population of about 960 million.

India's tax system is directionless and its biggest flaw is not accidental—it is political. Successive governments, across party lines, have perpetuated the myth that only one section of society, the so-called 'annadaata' (food providers), deserve a complete tax holiday.

There was a time when poor and marginal farmers needed tax exemption. But today, large agricultural estates generate massive untaxed income, while a shopkeeper slogging 16 hours a day or a daily-wage labourer paying indirect taxes gets no special treatment. The kirana store owner, the cart-puller, the factory worker, the salaried official with a desk job—none of them is glorified as the "backbone of the nation."

Meanwhile, untaxed wealth flourishes, thanks to tax loopholes and various forms of patronage. The worst part is that despite the heavy taxation of a few, urban India's infrastructure remains abysmal. Roads are crumbling, urban transit systems are overstretched and public services are riddled with inefficiency. Honest taxpayers see no return on their contribution, as the quality of daily life remains poor.

Also Read: Income tax payers in India have good reason to feel neglected

Yet, we don't have political decisions that could distribute the tax burden more evenly. The political establishment must make a choice—either widen the tax net or prepare for the disaffection of a shrinking pool of overtaxed citizens.

It is time to abandon the outdated romanticism around agriculture and recognize that fairness in taxation is not about who wields more political influence but about ensuring that all high-income individuals, regardless of sector, pay their due.

The late Nobel laureate James Mirrlees is known for his work on optimal taxation theory. He advocated a system that balances efficiency, equity and economic incentives, while minimizing distortions. His research emphasized that a well-designed tax system should not overburden a small group of taxpayers, but instead ensure broad participation.

Applying this to India, we must move towards a broad-based, low-rate taxation model that reduces reliance on just around 1% of the population.

Also Read: A wealth tax is an idea best judged by the canons of taxation

This means eliminating unnecessary exemptions. Mirrlees also argued for progressive taxation that does not disincentivize productivity; India could adopt a more sophisticated framework that ensures earners across all sectors, beyond a certain threshold, contribute fairly.

Another critical insight from Mirrlees' work is the importance of reducing tax evasion through better enforcement and transparency. India's tax system has already started leveraging technology, with AI-driven monitoring and data analytics to track those who under-report income.

Simplifying tax procedures, reducing bureaucratic hurdles and integrating GST data with direct tax filings can also increase compliance. Additionally, the tax net could be expanded to include informal-sector workers through small, gradual levies.

Mirrlees' principle of ensuring that taxation aligns with drivers of long-term economic growth means India must go in for reforms. The system must take a trust-based approach that puts citizens first.

His research emphasized that a well-designed tax system should not overburden a small group of taxpayers, but instead ensure broad participation.

Mirrlees highlighted the role of incentives in compliance—if people believe their taxes lead to better public services, infrastructure and welfare, they are more likely to pay willingly. The government must strengthen its social contract with citizens by improving transparency in how tax revenues are used, reducing corruption and ensuring visible improvements in civic amenities. This responsibility does not rest solely with the central government. State governments and local municipalities must act too.

Citizens must get to see what their contribution is achieving. Otherwise, discontent could grow.

The author is a corporate advisor and an independent director on corporate boards.