Dr Kamal Monnoo
I just happened to be looking closely at how, over recent years, India has managed to shore up its tax-to-GDP ratio so significantly and impressively. The findings are very interesting, yet so simple. In the last 10 years, India’s tax returns signalled a steep scaling-up, and the scale of this shift is mind-boggling: the number of tax filers grew nearly 600%, and the most notable growth was in the salary slabs of Rs 10–15 lakhs and Rs 15–20 lakhs (for both, x3 in the case of Pakistan).
Upon a deeper dive, this upward mobility of taxpayers appears neither accidental nor due to a mere increase in wages. Instead, it signals the fundamental effect of continuous tax reforms during this period to make taxation easier and more affordable. India’s economic story is often discussed in extremes. Either it is about the travails of those at the bottom of the pyramid, or it is celebratory headlines about the growing tribe of millionaires and billionaires at the top. The focus in a new trend has today shifted to the middle part of the economic pie, and this concentration continues to grow. In 2014, these two tax slabs were a near-exclusive club of salaried taxpayers, but today, ten years later, they are no longer so.
When you look at them in absolute terms, it is a crowded club in 2025 and is emerging as the new growth engine of India, dominated mostly by micro, small and medium-sized entrepreneurs. They have been induced by assurances that a fixed and ‘easy to tabulate’ tax return can be submitted without the fear of being hounded by the tax authorities, and additionally, that their entitlement to benefits and ease of doing business will directly correlate with becoming part of the tax net or the documented economy. This simple and reassuring initiative has worked beautifully. This scaling-up is also revealing another positive development, which points to a pivot with respect to formalisation and equitable distribution of wealth, in that the structure of wealth accumulation is shifting from a pyramid to a diamond-shaped image. This means that growth is not only moving away from big businesses to MSMEs (micro, small and medium-sized enterprises), but also that this mushrooming effect is making a positive dent in overall poverty.
The acceleration in economic reforms in 1991 and incremental liberalisation in subsequent decades inspired an unprecedented expansion of the Indian consumer economy, where for the first time Indian consumers had a choice. The last decade marked the emergence and consolidation of the Indian middle class as a key cohort of the Indian economy, and with the right tax reforms that were more inspiring than coercive, the resulting dividends are evident in an explosion of small and middle-income taxpayers. Further, the data on average salaries reveals a fascinating trend: in most of the brackets that experienced explosive growth in the number of filers, the average salary remained remarkably stable or even slightly decreased. For example, in the Rs 10–15 lakh tax slab, where the number of tax filers grew by over 600%, the average salary declined marginally from Rs 12.11 lakh to Rs 12.05 lakh. It is reasonable to conclude that the dramatic expansion in these tax brackets was fuelled by a significant influx of new taxpayers crossing the bottom threshold into these higher income levels. In other words, the new entrants, who are more likely to populate the lower end of their respective tax slabs, lowered the overall average, masking the income growth that existing earners within that bracket may have experienced. More importantly, it points to an expansion in employment generation at a level that merits individuals and businesses enlisting as taxpayers.
This is exactly what one has been writing and explaining all along, stating that such trends have significant economic implications, especially with respect to the underlying potential to influence positive consumption, poverty reduction, employment generation and revenue collection patterns in an economy. Fast forward, and the range of options becomes even more staggering. Savings and household investments, as they supplement incomes, in turn begin to diversify the savings portfolio to partake in the growth trajectory of an economy — opportunities become limitless. And here we are, where ironically our tax policies ‘practically’ discourage enlistment and savings by taxing them excessively, to an extent that they become undesirable.
In short, our neighbour’s prospering middle bulge is growing exponentially and, thanks to some prudent tax reforms, it is emerging as the new centre of gravity — economically, socially and politically. It is time we changed course as well!
The writer is an entrepreneur and economic analyst. Email: kamal.monnoo@gmail.com
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