The Price of Equality: Reimagining India's Tax System as a Tool of Social Justice

The author is Samridhi Goyal, a Student from National Law University, Jodhpur.

Abstract:

India’s tax system stands at a moral and constitutional crossroads. Conceived as an instrument for advancing substantive equality and social transformation, taxation has increasingly become a tool of structural exclusion, entrenching inequality, shielding elite wealth, and marginalising the vulnerable. This article undertakes a critical examination of India’s fiscal architecture through the prism of constitutional values, democratic accountability, and redistributive justice. It interrogates the systemic privileging of capital over citizenship, ranging from the dilution of progressive direct taxation and the regressive impact of the Goods and Services Tax, to the fiscal immunities enjoyed by high-net-worth individuals and the erosion of state autonomy under a centralised GST regime.

The paper exposes how legal exemptions, opaque political financing through instruments like electoral bonds, and a ballooning shadow economy have collectively eroded the legitimacy of taxation as a civic institution. Drawing on comparative insights, empirical data, and doctrinal analysis, it challenges the prevailing growth-first orthodoxy that has subordinated equity to efficiency, and reform to inertia. It advocates for a reimagined fiscal order grounded in vertical equity, constitutional morality, and participatory governance.

This article advances a bold normative claim: that taxation must be reconceptualised as a democratic obligation, a civic expression of solidarity, and a foundational pillar of India’s constitutional republic. It proposes a new tax bargain, one that restores the role of taxation as a vehicle for inclusion, rights-realisation, and nation-building. Only through such a recalibration can India bridge the chasm between its economic aspirations and its constitutional promises.

Research Questions:

1. How has India’s taxation system evolved in relation to its constitutional commitment to social justice?

2. What structural deficiencies limit taxation’s redistributive potential in India?

3. What legal and policy factors enable the persistence of elite fiscal privilege while undermining equity in fiscal governance?

4. How do enforcement asymmetries affect public trust in the tax system and the broader social contract?

5. What legal and institutional reforms are required to reimagine taxation in India as a participatory and redistributive civic tool?

   
   

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I. India's Tax Justice Paradox

The Indian Republic was formed not merely as a political union but as a normative project with a vision grounded in principles of justice, equality, and fraternity as well. The constitutional blueprint explicitly situated economic justice at the heart of the State’s obligations, while directing it to minimise income disparities and ensure equal opportunity for all.[1] Yet, more than seven decades since its inception, the fiscal instruments designed to realise this promise have produced outcomes which maybe at best are ambivalent. India is standing at a peculiar crossroads in its journey towards development. On the one hand, it boasts itself as one of the world’s fastest-growing major economies, on track to become a $5 trillion economy within the decade whereas on the other hand, it harbours one of the starkest divides between the rich and the poor. According to Oxfam India’s 2023 report, the top 1% of Indians earn more than 40% of the nation’s wealth, while the bottom 50% hold only 3%.[2] This astonishing gap, which is reflective of both opportunity and resource asymmetry, calls for an urgent need of taxation, a key tool in a democratic state’s arsenal to be reimagined not just as a fiscal exercise but as a moral one and a purposeful instrument for social justice. Taxation, which ought to operate as a cornerstone of redistributive justice, today reflects a deeply skewed moral economy. In Mohit Minerals Pvt Ltd v Union of India, the Supreme Court reaffirmed that tax policy must not sacrifice constitutional principles at the altar of administrative convenience or fiscal pragmatism.[3] Yet successive governments have consistently privileged capital over equity and efficiency over fairness.

Since liberalization in 1991, successive governments have prioritized economic growth over redistributive justice. In the name of attracting investment and fostering innovation, corporate tax rates have steadily decreased from 35% in the early 2000s to an effective rate of around 25% in 2023.[4] The 2015 abolition of the wealth tax, which was a levy that symbolically and materially targeted asset concentration, further signalled the retreat of equity-oriented taxation.[5] In the 2019 tax cut, the government announced a ₹1.45 lakh crore giveaway to corporates outside the budget cycle, promising enhanced investment.[6] However, post-cut data from the Reserve Bank of India revealed no significant uptick in capital formation, rather companies used the retained profits to deleverage or pay dividends.[7] These concessions occur even as public welfare expenditure remains chronically underfunded. In 2022–23, the combined allocation to the Ministry of Agriculture and MGNREGA stood at ₹2.5 lakh crore, barely surpassing the annual revenue foregone through tax exemptions.[8] This results in severe implications as when the tax system favours wealth preservation over redistribution, it ceases to be a neutral tool and becomes a partisan instrument of inequality.

This moral asymmetry becomes even starker when juxtaposed with India's developmental needs. Public education, primary healthcare, social housing, and employment guarantee schemes continue to be grossly underfunded. When billionaires enjoy tax holidays under Special Economic Zone (SEZ) schemes or park their wealth offshore, anganwadi workers struggle with delayed payments. This injustice of India’s tax structure ceases to be abstract, rather it becomes a lived reality for millions.

It becomes more apparent in the structure of India’s direct tax regime. Despite being the world’s most populous country, fewer than two percent of Indians contribute to income tax revenues in any significant way.[9] As per official estimates, 6.68% of the total population filed Income Tax returns, a figure which severely undercuts the redistributive ambitions of a modern fiscal state.[10] This statistic has often been quoted to highlight non-compliance or a narrow base, but the underlying reasons are more complex.

The Indian economy continues to be dominated by informal employment and enterprise, where over fourth-fifths (78.4%) of the workforce operates outside formal wage structures[11], therefore devoid of formal contracts, social security, or tax registration. While informal enterprises contribute close to 45% of India’s gross value added (GVA), their participation in the formal tax system is negligible. Informality, coupled with the political reluctance to disturb entrenched interests, has created a tax system where most of the burden falls on a salaried middle class that is easy to monitor and hard to avoid. Salary earners, subject to Tax Deducted at Source (TDS), are captured within the tax net automatically, leaving them with little discretion. Conversely, self-employed professionals and small business owners enjoy greater latitude in income reporting. According to the Income Tax Department’s statistics for AY 2022–23, Salaried individuals contributed approximately 44% of total aggregate tax revenue and nearly all of personal income tax collections in AY 2023–24, even though they represented a minority among total earners.[12] Even schemes like the Aadhaar-linked Permanent Account Number (PAN) or financial inclusion programmes like the Pradhan Mantri Jan Dhan Yojana have failed to materially widen the tax base. These efforts have largely prioritised digital enrolment over sustained behavioural integration, resulting in data proliferation but not meaningful fiscal inclusion.

The tax code is not just merely failing to tax the rich, rather it is, in many ways, protecting them. A striking instance is the blanket exemption of agricultural income, regardless of amount, under Section 10(1) of the Income Tax Act. While originally intended to protect small farmers, this provision has increasingly been abused by wealthy individuals, who route non-agricultural income through fictitious agricultural ventures to evade taxes. The Central Board of Direct Taxes (CBDT) itself has noted instances where over ₹500 crore of alleged agricultural income was allowed as exemption in 2017-18 by the income tax authorities, which is clearly an implausible figure that highlights systemic abuse.[13] The lack of an income threshold or audit trigger for agricultural exemptions allows the wealthy to channel unrelated income streams through rural landholdings or fictitious leases, shielding them from legitimate tax liability. States, which constitutionally hold the power to tax agricultural income, have been reluctant to impose or even coordinate surcharge-based models, fearing political backlash from entrenched agrarian lobbies. As a result, this exemption has become one of the most regressive instruments in India’s tax code, favouring those with access to capital and land.

Data discrepancies further widen the enforcement gap. For instance, in FY 2022–23, over 2.5 lakh individuals were flagged for high-value expenditures on luxury items, such as cars above ₹20 lakhs, foreign travel, or significant jewellery purchases, despite of declaring either zero or minimal income on their tax returns.[14] A Press Information Bureau release from June 2023 revealed significant lapses in third-party reporting compliance, noting that several banks failed to file Statements of Financial Transactions (SFTs), omitted substantial data such as cash deposits exceeding ₹2,700 crore across more than 10,000 accounts, credit card expenditures over ₹110 crore, and interest payments surpassing ₹500 crore, while also submitting inaccurate or incomplete information.[15] The inability to convert information into actionable tax intelligence reflects a persistent bureaucratic lag in digitization and analytics capacity within the Income Tax Department.

Beyond structural design, public perception and political narrative around taxation in India have been deeply fraught. Taxation, rather than being seen as a civic duty, is often perceived as state overreach. Tax authorities have historically been criticized for ‘tax terrorism’ which is the aggressive pursuit of tax liabilities through coercive measures and often without sufficient legal recourse or accountability. Despite recent initiatives such as the Faceless Assessment Scheme and Vivad Se Vishwas which is a dispute resolution initiative, taxpayer morale remains subdued due to a deep-seated perception that tax revenues are either mismanaged or diverted for non-developmental purposes. Such practices further alienate the middle class and entrepreneurs from the tax net, eroding trust in the system and encouraging evasion. Unlike in social democracies, where citizens can see a tangible link between the taxes they pay and the services they receive, Indian taxpayers are seldom afforded such reciprocity. This further instigates resistance to tax compliance and undermines the ethos of civic responsibility.

In the global landscape, countries with high human development indicators, such as the Nordic nations achieve their equity outcomes through a deliberate policy of progressive taxation and expansive welfare. Denmark, Sweden, and Norway consistently rank at the top of the Human Development Index (HDI), all while maintaining tax-to-GDP ratios above 40%.[16] India, in comparison, has a tax-to-GDP ratio hovering around 11.7%, among the lowest for any major economy.[17] This suggests not only a narrow tax base but also a deep-rooted culture of resistance to taxation, especially among the wealthy. In a nation of 1.4 billion people, fewer than 2 crore individuals filed income tax returns in the assessment year 2022–23. The revenue foregone due to various tax exemptions and incentives in that year alone exceeded ₹1 lakh crore.[18]

If India seeks to transform into a more equitable society, taxation must be reinstated as a political and moral instrument. It must do more than just plug fiscal deficits, rather it must actively reduce the inequality it earlier helped perpetuate. The task is not merely technical but philosophical as well where it requires a shift in national thinking, where paying taxes is not an imposition but an investment in collective dignity. The road ahead demands more than legislative impositions. It demands a fundamental rebalancing of the social contract, where the wealthy are asked to pay their fair share, not out of compulsion but conscience. Where tax administration is reformed not just for efficiency but for equity. And where taxation is designed not just simply to fund the State, but to build the Republic, one which our constitution makers imagined it to be.

II. The Regressive Turn of the Indirect Taxation

The introduction of the Goods and Services Tax (GST) in July 2017 was hailed as the most significant indirect tax reform in independent India’s fiscal history. GST was conceived as a unified, destination-based value-added tax that would replace a multiplicity of cascading levies imposed by both the Centre and the States.[19] It subsumed a maze of central and state-level levies into a unified structure, promising efficiency, transparency, and ‘one nation, one tax’. However, as the dust of optimism settled, GST emerged not as a simple transformative promise but as a complex, often regressive fiscal instrument whose social and distributive consequences have been far more nuanced, disproportionately impacting low-income households, small businesses, and informal enterprises.

In its ideal form, a value-added tax system should be neutral, broad-based, and progressive in its incidence. Its design, however, had to accommodate India’s federal structure, economic disparities among states, and competing political interests. As a result, India adopted a multi-tiered GST rate structure: 0%, 5%, 12%, 18%, and 28%, which contradicts the global norm of a single or dual-rate system to maintain simplicity and transparency and introduces complexities that disproportionately burden the economically vulnerable.[20] The rationale behind such a gradation was to tax luxury goods and sin items at higher rates while keeping essential commodities lightly taxed or exempt. Yet, in practice, several anomalies persist. For instance, while basic food items like fresh vegetables remain exempt, items of mass consumption such as sanitary napkins, mobile phones, and footwear have been taxed at rates of 12% or higher, prompting concerns over the regressive nature of the system.[21] The result is that daily essentials for large segments of the population attract relatively high tax rates, eroding the purchasing power of the poor. The problem is compounded by the uniform application of rates across income classes. Whether a product is purchased by a daily wage worker or a high-net-worth individual, the tax liability remains the same. This effectively turns GST into a flat consumption tax, one that consumes a greater proportion of income from the poor than from the wealthy.[22]

The regressive nature of GST becomes even more problematic when seen in the context of India’s heavy reliance on indirect taxation. Since its introduction, GST and other indirect taxes have accounted for more than 50% of the country’s total tax revenue.[23] This overdependence on consumption-based taxation is not merely an administrative choice, rather it has deep distributive consequences. Unlike direct taxes, which can be designed to reflect the taxpayer’s capacity to pay, indirect taxes are inherently indifferent to income disparities. Consequently, a daily wage labourer and a high-net-worth individual pay the same rate of GST on goods like toothpaste or cooking gas. In effect, a larger proportion of the poor's income is taxed compared to that of the rich, rendering GST socially regressive in its current application. The 15th Finance Commission in its 2021 report subtly acknowledged this concern, recommending the rationalization of rates and the need to expand direct taxation to restore equity in tax incidence.[24] Therefore, this disproportionate impact on vulnerable populations contradicts the spirit of distributive justice envisioned by the Constitution.

The burden of GST is not confined to end consumers. On the supply side, the regime has introduced a compliance architecture that is particularly onerous for small and micro-enterprises. A tea vendor operating on the fringes of compliance, a tailor running a family-owned shop, or a small trader in Tier-II towns may now find themselves subject to GST registration, monthly return filings, and reverse charge mechanisms. The compliance burden for such actors, many of whom lack digital literacy, formal banking access, or accounting infrastructure, has turned out to be overwhelming. While the government introduced schemes like the Composition Scheme under Section 10 of the CGST Act to ease compliance for small taxpayers with turnover up to ₹1.5 crore, the benefits have been limited.[25] Composition dealers cannot avail input tax credit and are barred from making interstate supplies, restrictions that stunt their competitiveness and potential for expansion.

Moreover, the design of GST structurally disadvantages small businesses in supply chains dominated by larger entities. Input tax credit (ITC) being contingent on invoice matching means that delays or non-compliance by even a single player can deny credit to downstream recipients. This creates a de facto incentive for larger players to deal with only GST-compliant entities, thus pushing informal or marginal actors out of value chains. Empirical analyses and industry assessments conducted in the aftermath of GST’s implementation have signalled notable contractions in employment across sectors such as textiles, footwear, and unorganised retail domains historically reliant on informal labour and micro-enterprise structures. Analysts highlighted that while the Goods and Services Tax may enhance efficiency for larger, organised players, it simultaneously imposed heightened compliance burdens on small, informal businesses, leading to financial stress, downsizing, and job losses in these vulnerable segments.[26] These outcomes are not merely the result of automation or global trends, rather they are also attributable to a tax system that has raised entry barriers and increased compliance costs for labour-intensive small firms.

Another dimension of inequity lies in the classification and rate assignment of goods and services. The 28% tax slab was initially reserved for luxury and sin goods, such as SUVs, tobacco, and high-end electronics, but over time, many items with mass utility have been included in this category. For instance, cement, which is a key input for affordable housing, continues to be taxed at 28%, despite repeated industry appeals for rationalisation. The government’s refusal to adopt a social expenditure offset, where GST revenue on regressive goods is earmarked for welfare programmes, means that the redistributive harm caused by the tax system remains unaddressed.

The constitutional implications of GST's structure are equally troubling. Although the GST Council was envisioned as a federal institution where the Centre and the States would jointly deliberate on tax policy, in practice, the Council’s decision-making has often been dominated by the Centre.[27] The use of non-votable cesses, revenues from which are not shared with States, further undermines the principles of fiscal federalism and equitable revenue distribution.[28] In FY 2020–21, GST collections dropped significantly amid the pandemic, raising questions about its resilience and elasticity. Even after recovery, monthly collections have fluctuated and have remained below the 15% tax-to-GDP ratio projected at inception.[29] This challenge was compounded by the Centre’s obligation to compensate states for revenue shortfalls under the GST Compensation Act, 2017. This escalated into disputes over compensation payments which revealed deep fissures in the GST framework, with States accusing the Centre of abdicating its statutory responsibilities under the GST (Compensation to States) Act, 2017. The standoff between states like Kerala, Punjab, and West Bengal and the Union government over dues exceeding ₹1.6 lakh crore revealed deep fissures in India’s fiscal federalism and questioned the durability of the GST Council as a consensual platform.[30] These tensions have eroded trust and raised fundamental questions about the viability of cooperative fiscal governance under the current model.

To address these challenges, GST reform must be approached from both technical and normative standpoints. On the technical side, a simplified rate structure, with no more than three slabs and a clear distinction between essential and luxury goods, would significantly reduce compliance friction and distortions.[31] ITC rules must be re-engineered to be more forgiving of small delays and mismatches, rather than being used as a blunt enforcement tool. Composition limits should be raised and restrictions eased to allow small firms to grow without penalty. Digitisation initiatives should be paired with training and infrastructure support to ensure genuine inclusion rather than formal exclusion.

Essentially, GST must be anchored in the principle of vertical equity. Those with greater consumption power must contribute more and not just through higher rates on luxury goods, but through a broader progressive taxation ecosystem where indirect taxes do not substitute for direct taxes. Revenue buoyancy, while important, must not come at the cost of social fairness. A portion of GST revenue should be earmarked for essential public services, such as education, health, sanitation, to build trust and affirm the legitimacy of taxation as a tool for nation-building.

Ultimately, a fair tax system must do more than collect, rather it must distribute, enable, and empower. India’s GST, as currently structured, fails to meet this standard. Without substantive reform, it risks becoming not a symbol of fiscal unity, but an instrument of deepening inequality.

III. The Billionaire Exception: India's Reluctance to Tax the Ultra-Rich

In the world’s most populous democracy, where over 230 million people live in multidimensional poverty, the fiscal treatment of India’s billionaire class reveals a paradox at the heart of its economic governance. Over the last decade, India has witnessed a meteoric rise in the number of ultra-high-net-worth individuals (UHNWIs), even as public spending on health, education, and social security has remained modest by global standards.[32] Instead of recalibrating its taxation policies to address this widening chasm, the Indian state has systematically refrained from imposing meaningful tax obligations on the ultra-rich. The absence of wealth, inheritance, and even super-rich surcharges of substantive scale underscores what may be termed India’s ‘billionaire exception’: a deliberate fiscal blind spot that spares the richest while overburdening the salaried middle class and the poor.

The data is staggering. According to Oxfam’s 2023 report, the top 1% of Indians owned over 40.5% of the country’s total wealth, while the bottom 50% possessed only 3%.[33] The wealth of Indian billionaires surged by over 121% during the pandemic years, even as unemployment rose and millions fell into poverty.[34] Despite this stark inequality, India remains conspicuously resistant to progressive wealth taxation. The Wealth Tax Act of 1957, which imposed a modest levy on net wealth above a specified threshold, was repealed in 2015.[35] The official rationale was administrative inefficiency and low revenue collection, yet the repeal occurred precisely when wealth inequality was intensifying. Similarly, the absence of any estate or inheritance tax in India, abolished in 1985, allows vast intergenerational transfers of wealth to occur tax-free.[36]

One of the ugly faces of tax cuts was revealed in September 2019, when the Government of India slashed the base corporate tax rate for domestic companies from 30% to 22%, and for new manufacturing firms to 15%, through the Taxation Laws (Amendment) Ordinance, 2019.[37] The move, which bypassed the usual budgetary process, resulted in a fiscal sacrifice of approximately ₹1.45 lakh crore annually.[38] Framed as a bold reform to enhance ‘India's competitiveness’ and attract global supply chains amid the US-China trade war, the cut was intended to revitalise a flagging economy.[39] However, despite the magnitude of the giveaway, subsequent economic data revealed little evidence of an investment revival or meaningful job creation.[40] These types of Corporate tax cuts that fail to deliver demonstrable public benefit, arguably violate the constitutional directive of Article 39(b) of the Indian Constitution, which  mandates that the ownership and control of material resources of the community be so distributed as best to subserve the common good.[41]

In comparative perspective, India is an outlier. Countries such as France, Spain, Norway, and Switzerland continue to tax wealth or estates in some form, while even the United States, long a bastion of market liberalism, retains a federal estate tax.[42] The argument that wealth taxes are administratively cumbersome or yield limited returns is not without merit; however, in a country where a handful of individuals control more wealth than entire State budgets, the refusal to tax wealth is not a matter of efficiency, rather it becomes a political choice. It reflects the strength of elite capture, the entrenchment of plutocracy, and the unwillingness of successive governments to confront entrenched capital.

India’s primary reliance on income taxation to address equity is further undermined by how lightly the ultra-rich are taxed even under that regime. The Finance Act, 2020 introduced a new personal income tax regime that lowered tax rates for those who forgo exemptions, but retained the previous regime with its exemptions and deductions.[43] For UHNWIs with access to sophisticated tax planning, family offices, and charitable foundations, the exemptions route remains vastly more lucrative. As a result, effective tax rates for the ultra-rich are often lower than for upper-middle-income salaried professionals, who are subject to tax deducted at source and face limited avenues for legal avoidance.

Further, India has failed to adopt any robust form of a solidarity levy or pandemic windfall tax, unlike countries such as the United Kingdom, Italy, and Spain, which introduced temporary wealth or excess profit taxes post-COVID to fund recovery efforts. Despite calls from economists, civil society, and international institutions, the Indian government has resisted these measures. The Economic Survey 2022–23, while acknowledging inequality, maintained its focus on growth-first strategies, asserting that redistributive taxation might dampen investment sentiment.[44] The World Inequality Report 2022 finds that high inequality impairs growth, undermines democratic functioning, and exacerbates social fragmentation.[45]

The problem is compounded by institutional opacity and weak enforcement. India’s tax administration has made significant strides in digitisation and faceless assessments, but enforcement remains disproportionately focused on small taxpayers and middle-class filers. High-profile evasion cases involving corporate entities or politically connected individuals seldom result in meaningful penalties or convictions. The Central Board of Direct Taxes (CBDT) has repeatedly cited manpower shortages and litigation delays as structural constraints. Yet, these issues have not deterred the targeting of small businesses or NGOs, many of which report aggressive audits and freezing of accounts without due process. The result is a perception of selective enforcement that further entrenches public cynicism.

A proposal by the World Inequality Lab recommends the introduction of an annual 2% wealth tax on individuals with net wealth above ₹10 crore, alongside a 33% inheritance tax on estates exceeding ₹10 crore. The proposal outlines that such a package could generate revenue equivalent to 2.7% of India’s GDP under a baseline scenario, with more ambitious tax schedules raising up to 4.6% of GDP, while impacting only 0.04% of the adult population.[46] These figures are not speculative, instead they are based on conservative valuations using public disclosures and real estate indices. Yet, the political consensus remains firmly against such measures.

India’s reluctance to tax the ultra-rich also carries fiscal federalism implications. While income taxes and corporate taxes are collected by the Centre, public goods such as health, education, and rural infrastructure are largely the domain of State governments, whose financial autonomy has been eroded post-GST. The failure to augment direct tax revenues at the Centre, combined with declining devolution and growing centralisation of funds through non-divisible cesses, leaves States dependent on loans and grants.[47] In effect, the Centre’s unwillingness to tax wealth impairs the redistributive capacity of the federation as a whole.

A just tax system must aim not merely at efficiency or compliance, but at structural fairness. This means shifting the burden of revenue away from consumption taxes and toward those most able to bear it. Wealth taxes, inheritance duties, and capital gains reforms are not instruments of class warfare, instead they are constitutional imperatives in a republic committed to justice. Unless India rediscovers the moral and fiscal courage to tax its richest citizens, it cannot claim to pursue inclusive development in any meaningful sense. The billionaire exception, if left unaddressed, will calcify into a democratic failure.

IV. Black Money to Electoral Bonds: India's Shadow Economy Challenge

The persistence of a vast shadow economy in India continues to frustrate efforts toward building a transparent, equitable fiscal order. The term ‘black money’ has come to symbolise the nexus of tax evasion, illicit financial flows, and opaque political financing that cumulatively undermine the legitimacy of the State’s taxation machinery. Estimated at nearly 20–30% of India’s GDP, this parallel economy not only erodes the state’s revenue base but also distorts markets, inflates asset prices, and perpetuates socio-economic inequality.[48] This figure may even understate the scale of the problem, as large volumes of illicit funds are channelled abroad through trade mis-invoicing, transfer pricing abuses, and offshore trusts. According to the Global Financial Integrity 2021 report on illicit financial flows, India ranked among the top five countries globally in trade-related illicit financial outflows, with an estimated US $83.5 billion lost between 2008 and 2017.[49] Even more importantly, it undermines the moral authority of the state to levy taxes equitably, since the tax burden increasingly falls on the visible and the compliant, while the invisible accumulate untaxed wealth in cash, gold, real estate, and increasingly, political channels.

Historically, India has experimented with multiple policy instruments to address the black money conundrum, ranging from voluntary disclosure schemes and income tax amnesties to demonetization and international cooperation under the OECD’s Common Reporting Standard (CRS). Each approach has yielded varying, often limited, results. The most dramatic intervention came in November 2016, when the government invalidated ₹500 and ₹1,000 currency notes overnight, withdrawing over 86% of the currency in circulation in a bid to flush out unaccounted wealth. The move, described as a ‘surgical strike on black money,’ was justified on grounds of disrupting the cash economy, curbing counterfeit currency, and formalizing financial transactions.[50]

Yet, the empirical outcomes of demonetization reveal a far more nuanced, if not contradictory, reality. According to the Reserve Bank of India’s annual report for FY 2017–18, over 99.3% of the demonetized currency was returned to the banking system, suggesting that black money holders either found legal loopholes or that most unaccounted wealth was not held in cash to begin with.[51] Meanwhile, the informal economy, especially in rural and small enterprise sectors, suffered severe disruption, leading to job losses and income shocks. The operation’s long-term benefits in terms of widening the tax base or formalization remain contested, with critics arguing that it imposed disproportionate costs on those least equipped to bear them while leaving entrenched evasion mechanisms largely intact.

A more recent and controversial development in India’s shadow economy is the rise of opaque political funding, especially through the mechanism of electoral bonds. Political parties in India have remained outside the ambit of transparency laws that govern NGOs, corporations, and even trade unions. They are not subject to mandatory disclosure of donor details under the Right to Information Act 2005, nor are their audited accounts subjected to regulatory scrutiny. In this permissive environment, the introduction of the Electoral Bonds Scheme in 2018 added another layer of opacity.[52] Introduced in 2017 under the Finance Act, electoral bonds were marketed as a tool for cleansing political donations by replacing cash with traceable, bank-mediated instruments.[53] However, the scheme was structured to ensure donor anonymity, with bonds issued by the State Bank of India and redeemable only by notified political parties within a limited window.[54] This asymmetry, where the ruling party can potentially access donor identities while rivals and citizens cannot, has raised serious concerns about the institutional integrity of elections. Companies Act 2013 was also amended to remove the cap on corporate donations (previously limited to 7.5% of average net profits) and eliminate the requirement to disclose the recipient party in financial statements.[55]

The result has been a systematic laundering of political money, with corporate entities routing donations in favour of the ruling party in anticipation of regulatory or contractual favours. Data released by the Election Commission and subsequent investigative reporting revealed that over 54.8% of total funds collected through electoral bonds between 2018 and 2023 went to the Bharatiya Janata Party (BJP), followed by Congress and other regional parties.[56] Crucially, the identities of donors remained shielded from public scrutiny, thereby neutralizing the transparency that the scheme purported to offer. The result is a vicious cycle: black money enters the political system through anonymised donations, which in turn finance campaigns that perpetuate policies favourable to elite interests, such as corporate tax cuts or regulatory forbearance.

What emerges, then, is a two-tiered political economy. On the one hand, the government appeals to citizens to adopt digital payments, link Aadhaar to PAN, and bear the scrutiny of faceless tax assessments. On the other, it facilitates untraceable financial flows into the most powerful institutions in the country. This not only weakens the credibility of the tax administration but corrodes the normative legitimacy of the democratic process. Ultimately, in February 2024, the Supreme Court of India declared the scheme unconstitutional, ruling that the right to know the source of political funding was integral to electoral integrity and public accountability.[57] The judgment marked a critical reaffirmation of democratic norms but also underscored how institutional complicity in fiscal opacity had become normalized over the past decade.

Beyond the political domain, tax evasion remains rampant across sectors, such as real estate, mining, construction, and electoral politics, which have historically served as black money havens due to their cash-intensive nature and regulatory opacity.[58] The real estate sector, in particular, has long functioned as a repository for unaccounted wealth, with benami transactions and undervaluation of property deals acting as routine mechanisms of evasion. While the enactment of the Prohibition of Benami Property Transactions Act, 1988 (revamped in 2016), and the establishment of the Benami Prohibition Units were welcome steps, enforcement has been patchy and politically selective.

The legal and institutional architecture designed to tackle black money suffers from both fragmentation and lack of autonomy. Multiple agencies, such as the Income Tax Department, Enforcement Directorate (ED), Central Bureau of Investigation (CBI), and Financial Intelligence Unit (FIU), operate with overlapping mandates and limited coordination. Investigations are often stymied by inter-agency turf wars, judicial delays, and selective enforcement. The Prevention of Money Laundering Act 2002 (PMLA), despite its expansive powers, has been criticised for low conviction rates and procedural opacity.[59] In Vijay Madanlal Choudhary v Union of India, the Supreme Court upheld the broad provisions of the PMLA, but concerns remain regarding due process and misuse of arrest and attachment powers.[60]

Another persistent challenge is the lack of synergy between India’s financial intelligence and taxation authorities. The Financial Intelligence Unit (FIU-IND) generates Suspicious Transaction Reports (STRs) based on bank and insurance data, but these often fail to translate into actionable tax investigations due to inter-departmental silos, bureaucratic inertia, or lack of trained personnel. The absence of a centralized, real-time risk analysis architecture, akin to that used by agencies like the U.S. Internal Revenue Service or the UK's HMRC, limits India’s ability to proactively detect and disrupt tax evasion networks.[61]

Similarly, the efficacy of faceless assessments introduced in 2020 by the Central Board of Direct Taxes (CBDT) under the Taxpayers' Charter has come under critical scrutiny. The idea behind faceless assessments was to eliminate discretion, minimize corruption, and improve efficiency by allocating tax scrutiny cases randomly and digitally. However, several tax professionals have reported that the scheme, while innovative, lacks nuanced understanding at the ground level, leading to inconsistent assessments, prolonged litigation, and inadequate taxpayer representation. National Mission for Clean Ganga have also criticised the scheme, reported frustration with digital-only notices and inadequate personal hearings that have prompted the government to initiate a review and consider enhancements.[62] Moreover, the faceless regime does little to address the problem of wilful evaders who operate through shell companies, round-tripping, and cross-border structuring, areas that require robust forensic capability and inter-agency coordination, which are still underdeveloped in India.

Efforts to curb offshore tax evasion through global information exchange treaties have shown some success, particularly with India’s participation in the OECD’s Common Reporting Standard and the India-Switzerland Automatic Exchange of Information Agreement. However, the utility of such data depends heavily on follow-up investigations and prosecution capacity. India’s track record in this respect remains weak. For example, despite the sensational revelations of the Panama Papers and Paradise Papers, both of which named prominent Indian nationals, few convictions or substantive asset recoveries have resulted. The layering of transactions across jurisdictions, combined with weak mutual legal assistance treaties (MLATs) and capacity constraints within the Enforcement Directorate and Income Tax Department, have blunted the impact of these disclosures.[63] 

Ultimately, tackling the shadow economy demands more than headline-making announcements or procedural tweaks. It requires a systemic overhaul of regulatory institutions, greater fiscal transparency, political will, and above all, a normative reassertion that taxation is not merely a financial obligation but a civic commitment to the public good. Until the loopholes, exemptions, and political-patronage pathways that allow the rich and powerful to launder wealth remain intact, the social legitimacy of taxation will remain fragile. For the vast majority of honest taxpayers, small businesses, salaried professionals, and even compliant corporations, the perception of a two-tiered tax system breeds resentment, erodes morale, and weakens voluntary compliance. The task, therefore, is not just to plug revenue leakages but to restore the moral economy of taxation, where fairness, transparency, and accountability are non-negotiable.

V. Conclusion and Recommendations

Taxation is not merely a fiscal tool, rather it is the architecture through which the State expresses its normative commitments to justice, equity, and constitutional morality. In India, however, the tax regime has struggled to realise these ideals. Across multiple domains, whether in the narrow base of direct taxation, the regressive tilt of the GST, the selective generosity toward corporations, the unchecked proliferation of black money, or the fiscal exemption granted to billionaires, the tax system increasingly reflects a structural bias in favour of the powerful. It is a regime that demands more from those with less, while often exempting those with the greatest capacity to contribute.

The consequences of this design are not limited to revenue shortfalls or macroeconomic inefficiencies. They extend into the social contract itself. When the tax system fails to uphold the principle of vertical equity, by ensuring that those with greater means pay proportionately more, it not only exacerbates material inequality but also erodes the legitimacy of the State. This is particularly dangerous in a context like India, where constitutional democracy depends on the promise of inclusion, welfare, and social transformation. The silence of the tax code on intergenerational wealth, the invisibility  of political donations, and the erosion of State fiscal autonomy under GST cumulatively dilute the redistributive and federal character of the Constitution. Correcting this trajectory requires more than isolated policy reforms. It demands a fundamental reimagination of the tax system as an instrument of social justice, grounded in constitutional values rather than short-term expediency.

A new tax bargain for India must begin by addressing five core areas. Firstly, India should highly consider expanding its narrow direct tax base. A serious effort should be made to include high-earning professionals in the informal sector, enforce third-party reporting, and reduce unjustified exemptions that favour the affluent.

Secondly, a modern wealth tax should be reintroduced, targeting only the ultra-rich with high thresholds and valuation safeguards. Its proceeds should be ring-fenced for core public goods like health and education. Alongside, personal income tax slabs should retain a progressive structure. At the highest brackets, a well-calibrated surcharge on super-rich individuals should be imposed to reflect their greater capacity to contribute to nation-building.

Thirdly, GST must be recalibrated to align with vertical equity. States should be granted greater fiscal autonomy within the GST regime. This includes partial flexibility in rate-setting, statutory compensation guarantees, and a restructured GST Council that operates on consensus, not central dominance.

Fourthly, Enforcement agencies under the PMLA and Income Tax Act should be given procedural safeguards and operational independence to prevent political misuse, while enhancing their technological capacity to detect large-scale evasion. India should also strengthen its participation in global transparency frameworks such as the OECD’s automatic exchange of information, beneficial ownership registries, and global minimum tax initiatives.

Finally, the public discourse around taxation must shift. From being framed as a burden or a sacrifice, taxation must be reimagined as a form of civic solidarity, a shared investment in the collective good. This requires not only legal reform but a cultural change: a national narrative that sees tax compliance not as coerced extraction but as a moral and democratic obligation.

The Indian Constitution promises equality not merely in form, but in substance. For that promise to be realised, taxation must serve as its fiscal foundation and not a loophole-ridden structure that shelters wealth and punishes poverty. As Amartya Sen once observed, “No famine has ever taken place in a functioning democracy.”[64] One might equally argue that no unjust tax system can survive long in a truly participatory polity.

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