Are Indians Being Over-Taxed? 5 Key Charts That Show Where India Stands Globally

As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2025-26 preview on February 1, there is growing public concern about whether the Indian government is over-taxing its citizens. The tax burden in India 2025 is a topic of ongoing debate, especially as the middle class begins to question whether the income tax rates in India 2025 are becoming too heavy. Here’s an Indian taxation system analysis based on key global comparisons, providing insight into the current tax landscape and potential tax reforms in India 2025.

India's High Dependence on Tax Revenue

The Union Budget expectations 2025 include maintaining a high reliance on tax revenues to fund government expenditure. Chart 1 shows that about 80% of the Indian central government’s spending is funded through taxes. This is much higher than countries like Brazil, Mexico, and China, which depend less on tax collection. Any tax reforms in India 2025 that reduce tax rates could force the government to borrow more, which might raise interest rates and create economic pressure across the country.

Tax Revenues as a Share of GDP

While India’s government revenue and taxation largely depend on tax collections, Chart 2 illustrates that India’s tax revenues as a share of GDP are relatively low, hovering below 20%. This figure is far lower than that of developed nations in Europe, who manage to collect a higher share of GDP through taxes. This raises questions about whether the Indian taxation system is efficient enough and if there is room for improvement in income tax rates in India 2025.

Tax Revenues vs GDP Per Capita

Chart 3 places India’s tax revenue in the context of GDP per capita. The data suggests that richer countries tend to have more efficient taxation systems that raise a higher proportion of tax revenue. While India is still behind countries like China and the US, it does better than nations such as Mexico and Indonesia, which are wealthier but collect less tax revenue as a percentage of GDP. This indicates that as India’s economy grows, its ability to raise taxes will also likely improve, which could have a direct impact on the tax burden in India 2025.

Tax Composition: Direct vs Indirect Taxes

In Chart 4, we observe how direct and indirect taxes in India are split. While detailed data on India is unavailable in this chart, it is known that direct taxes (such as personal income taxes) and indirect taxes (such as the GST) each contribute about 7% of GDP. India’s balance between these two tax types compares favorably to countries like Brazil, Chile, and Poland, where the share of indirect taxes is disproportionately higher. A potential tax reform in India 2025 could include a more progressive tax system that focuses more on direct taxes, which are typically more equitable and affect the wealthier sections of society more.

Electoral Democracies and Tax Collection

Chart 5 explores the relationship between electoral democracy and tax revenue collection. The data shows that countries with higher rankings in electoral democracy tend to collect more in taxes. India performs well compared to countries like Bangladesh but still lags behind nations like Brazil, Germany, and the US. This trend suggests that as India’s democratic institutions strengthen and its electoral democracy ranking improves, the country’s government revenue and taxation could rise, leading to more efficient tax systems and possibly a reduction in the tax burden in India 2025.

Conclusion

Despite the perception that the Indian government is over-taxing its citizens, the data reveals a different story. India’s tax revenues as a percentage of GDP are not as high as those of many developed countries, even though India depends heavily on taxes to fund government expenditure. As India’s economy continues to grow and its taxation system becomes more efficient, we can expect tax reforms in India 2025 that may lead to higher tax revenue in the future. This could ease the tax burden in India 2025, especially on the middle class, while enabling the government to invest in critical infrastructure and development.