Is India's income tax system fair? What are the flaws in it?

Yes, its flawed and its more unfair to the Rich than poor.

I read this interesting story somewhere, explaining the tax system in India. Bear with me and then decide if India’s tax system is fair or not.

There were four friends, A, B, C and D. A earned ₹1L per month, B earned ₹20000, C earned ₹5000 and D made ₹1000 per month. They decide to reunite and go to a restaurant to eat. Since their income gap is huge so they mutually decided that the total bill shall be paid in the ratio of their incomes ie, A shall pay 100 times that of D, 20 times that of C and 5 times that of B. The total bill came out to be ₹12600. As decided earlier, A, B, C and D contributed ₹10000, ₹2000, ₹500 and ₹100 respectively. Now, the shop steward comes to this group returns ₹1260 telling them that they were entitled to a 10% discount.

Since C and D are very poor, in wake of finishing the income gap and helping the poorer of the friends,they distribute the discounted money in the reverse ratio, ie, now D gets ₹1000, C gets ₹200, B gets ₹50 and A gets ₹10 in return.

So D who earlier paid ₹100, got ₹1000 at the end. He starts loving this idea and would always ask his friends to go out to eat with such a distribution system. He becomes so complacent that he has given up on improving his standard of living and enjoy being poor.

This is exactly how our income tax system works. Since the Rich can pay, we have higher tax percentage for them. 30% slab then 10 or 15% surge and then cess of 3% on top of everything if you a billionaire [1] All this money goes on farmers loan waivers[2] , pro-poor schemes like giving away school bags[3], cycles[4] etc for free and nothing for the Rich who contribute more in value and in percentage. May be the Rich and the government have agreed on some under-the-table deal or the government has agreed to favour the Rich in undue ways but the bottom-line is these favours are never legitimate. So officially, being Rich does no good to you thus encourages corruption. By the way, giving away SEZs is not a ‘favour’ but a duty of the government because the super Rich industrialists generate employment to the poor and unemployed in these SEZs which otherwise would be government’s liability and don't forget they pay more income taxes. Also, the newly employeed workers may also become taxable. SEZs are win-win for both government, the industries and the employment seekers. I won’t blame the government here, but the common men, the middle class who are not poor but have a soft-corner for the poor and due to some weird reasons this pro-poorness makes you against the industrialists. Even without any substantial proofs, undermining the hardwork and efforts with which the Tatas, Birlas, Ambanis made their empires, we presumptively conclude that these people must have used unfair, illegal means to reach where they have. Singur Tata Nano controversy is one such example of how anti-industrialism can bring about an end to 34 years of rule and bring the protester to power. Farmers, don't even need be poor to seek public sympathy. Somehow, the loan waivers to farmers make the governments more ‘sensitive’ to poor. And this mindset is what the governments have banked on to make the tax system ‘unfair’. One complains of this ‘unfairness’ only when he/she has entered into a high tax slabs himself and the tax deductions in the Form 16 hurts. But reaching the 30% slab takes time to reach for normal people and until you reach that point, you seem to be careless about this ‘unfairness’. This is the major flaw. If A earns 10000 and B earns 100, 10% of A’s income is itself more in value than 10% of B’s income. Anyone who learnt percentages in class 3rd knows this, I am not telling you something new but just reminding you that if the system is ‘unfair’ it’s because of our mindset.

Another flaw in the system is not everyone who is taxable is taxed. Our love for farmers, our inadequacy to account the incomes of unsalaried people are also flaws. A doctor in my relation who visits 2–3 hospitals, runs a private clinic and owns a Range Rover also has a BPL card and shamelessly takes the LPG subsidies! Though, we are making progress in accounting all such transactions by making PAN mandatory [5] , linking Aadhar with all schemes but as this proposal is challenged in the court we’ll have to see how things turn out.

I by no means want to undermine the poverty situation in the country. I don't blame the poor. They are not educated enough to think about themselves. Yes, we, the ‘educated’ and comparatively richer have the liability to uplift them from the darkness of poverty but that cannot happen by giving them free goodies. It can only be a short term solution and makes them complacent on the long run. That said, I support the idea of free education as I believe only education can uplift the poor.