Editorial
Despite assurances of no additional taxes on the salaried workforce, the formal sector, which has its taxes automatically deducted from income, is now grappling with a heavier tax burden. This is not a minor increase, but a significant one, with reports indicating that this segment is now shouldering a tax incidence of 25-40%. This is particularly hitting those in the middle to upper-middle income brackets, who are finding it increasingly difficult to make ends meet, a struggle that policymakers and economists need to empathize with.
Over the past five years, this group’s purchasing power has notably diminished. With inflation surpassing 100% during this period, wages still need to catch up, often lagging behind overall inflation levels despite any increments.
Consequently, the continuous implementation of an increasingly burdensome tax regime has resulted in this segment bearing the brunt of taxation policies. Many individuals across various tax brackets have seen their post-tax real incomes plummet by over 40%, significantly deteriorating their living standards. As utility prices outpace inflation, households have been forced to scale back on essential expenses, further straining their financial stability.
This unfavourable environment has given little incentive for individuals to remain within the formal sector, exacerbating the brain drain and creating a considerable gap in the supply of essential skills for the country’s future. The rupee’s depreciation has also contributed to the decline in purchasing power, driving many skilled professionals to consider emigrating, while the government’s imposition of additional taxes only serves to compound their financial challenges.
Rather than broadening the tax base, the government has deepened it, reducing after-tax income for individuals in varying tax brackets. Moreover, expenses like education and healthcare have surged at a rate surpassing general inflation, further amplifying the impact of inflation on the formal salaried segment.
The heavy taxation initiatives and the erosion of the rupee’s value have accelerated the deterioration of the middle class, a vital component of the economy. This decline is evident in the stagnant per capita electricity consumption over the past five years, showcasing how households have tightened their belts in response to stagnant real incomes and escalating expenses.
By overburdening existing taxpayers, the government is inadvertently sowing the seeds for a host of unintended consequences. These include a potential brain drain, as skilled professionals consider emigrating to escape the heavy tax burden. This, in turn, could lead to a shift from formal employment to offshore arrangements, further destabilizing the economy. Moreover, the palpable erosion of trust in the government’s ability to implement fair taxation policies could have far-reaching implications for the country’s economic and social stability, a situation that government officials need to urgently address.
It has been repeatedly emphasized that the tax base needs to be expanded. However, the lack of innovative solutions or political will has made this task seem insurmountable. As a result, the tax base has expanded in a way that is detrimental to the economy, leading to declining real incomes for participants in the formal economy. The disincentive to operate within the formal economy remains strong, with little to no action from the government to address this pressing issue. It is high time for innovative solutions and political will to be put into action to rectify this situation, a call to action that individuals in the formal salaried segment should be inspired by.
