Taxation and fairness: direct vs indirect taxes

Tax is how a democracy pays for its promises, and the type of tax matters for fairness. Direct taxes, such as income tax and corporate tax, are paid by the person or firm on whom they are levied and usually rise with ability to pay. Indirect taxes, such as the Goods and Services Tax (GST), are collected on goods and services and are ultimately borne by consumers in prices, even though businesses remit them. A tax system can therefore be progressive, regressive, or a mix, depending on its design.

GST, launched on 1 July 2017, subsumed many central and state indirect taxes into a destination-based system, meaning tax broadly accrues where consumption occurs. It is administered through the GST Council, which brings Union and state finance ministers together, making it a major experiment in cooperative federalism. In September 2025, the government simplified GST into two main slabs of 5% and 18%, with a 40% de-merit rate for select sin and luxury goods; most goods previously at 28% moved to 18% (or 40%), and most at 12% moved to 5% or nil, according to government summaries. Supporters present this as simpler and cheaper for consumers; critics ask whether states lose revenue flexibility and whether cuts reach consumers.

Revenue composition has shifted. A government table in Parliament for gross tax revenue put GST at 27.12% in 2024–25, income tax at 32.62%, and corporate tax at 26.06%. Analysis by Grant Thornton Bharat, summarising official collections, put direct taxes at about 58.5% of total tax collections in 2024–25, reversing an earlier pattern in which indirect taxes held a higher share. Fairness debates follow from these patterns. Direct taxes can target higher incomes, but only people and firms inside the tax net pay them, and India's formal income-tax base remains limited relative to its population. Indirect taxes reach almost everyone who consumes, making them a broad revenue source, but the same rate can take a larger share of a poor household's budget than of a rich household's. GST tries to soften this through lower or zero rates on essentials, yet exemptions and rate choices remain contested. There is also a federal question: states generating more revenue do not automatically receive the same share back, because Finance Commission devolution uses criteria such as population, area, income distance, and fiscal effort, not contribution alone.

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