The Union Budget 2025 has been a subject of intense debate, with several policy measures attracting praise and criticism. While the government has positioned it as a pro-middle-class budget with tax reliefs and incentives for economic growth, some structural concerns need a more detailed analysis.
The introduction of significant tax rebates, shifts in household taxation policies, and broader fiscal decisions have sparked discussions on their long-term implications. While the budget aims to increase disposable income, stimulate demand, and drive economic growth, it also raises questions regarding fairness in taxation, potential shifts in consumer behaviour, and the credibility of government policies. This article highlights three key issues that merit attention.
Taxation disparity among households
A significant aspect of the new tax regime is that individuals earning up to ₹12 lakh per annum are exempt from income tax. On the surface, this appears to be a progressive step toward easing the financial burden on middle-class taxpayers. However, inconsistencies emerge when viewed in the context of household earnings.
Consider a scenario where both husband and wife earn ₹12 lakh each, resulting in a total household income of ₹24 lakh. Under the new tax structure, neither would be liable to pay income tax. However, if a single earning member makes ₹24 lakh alone, they are subjected to taxation. This policy unintentionally penalises single-earner households while favouring dual-income families.
Such a framework raises questions about fairness and inclusivity. It can be argued that this approach indirectly discourages one spouse from staying at home, which may be mandatory for families with young children, elderly dependents, or specific cultural preferences. While promoting workforce participation is a commendable goal, tax policies should not create financial disadvantages for single-income households.
A more balanced approach, such as household-based taxation or higher exemptions for single earners supporting dependents, should be considered to ensure equitable treatment across different family structures.
Drop in consumption due to expectations?
Another critical concern revolves around the economic consequences of tax rebates. The decision to provide tax rebates of up to ₹12 lakh aims to enhance disposable income and stimulate aggregate demand in the economy. However, the actual impact depends on how individuals perceive future economic conditions.
Rational expectations theory suggests that if people anticipate rising inflation, they may choose to save rather than spend the additional disposable income. Given the inflationary pressures in the economy, including global supply chain disruptions and domestic price fluctuations, many households may opt for savings as a precautionary measure rather than increasing their consumption demands.
This behavioural response could have unintended consequences for economic growth. A decline in consumption could weaken demand-driven sectors, slow production, and reduce employment opportunities. If businesses face lower sales due to cautious consumer behaviour, the expected multiplier effect of tax rebates on the economy may not materialise as anticipated.
Policymakers must address this issue by ensuring inflation remains under control and instil confidence among consumers that rising prices will not erode their increased income.
Trust deficit and the fear of hidden taxation
Despite the tax rebates, many taxpayers remain sceptical about whether the government will compensate for the revenue loss by imposing other forms of taxation. This trust deficit is particularly evident in the middle class, which often bears the brunt of indirect taxes such as GST.
One concern is the high GST rates on luxury and aspirational goods. While essential commodities remain taxed at lower rates, many items increasingly becoming part of middle-class needs—such as premium smartphones, cars, high-end appliances, and leisure travel—are subject to steep GST slabs. As a result, even as individuals receive tax rebates on their incomes, their overall purchasing power does not increase significantly due to high indirect tax burdens.
Moreover, historical instances where governments introduced new taxes after providing relief in one area fuel fears that the benefits of tax rebates may be short-lived. For instance, if fuel prices remain high due to excise duties or if there is an increase in service taxes in the future, the disposable income of taxpayers may still be constrained. The government must address these concerns by ensuring transparency in tax policies and providing long-term assurances that fiscal decisions will not result in hidden taxation.
Need for a holistic policy approach
While the Union Budget 2025 introduces several commendable measures, the above issues highlight the need for a more holistic approach to taxation and economic management. Addressing the disparity between single-income and dual-income households, ensuring that tax rebates lead to actual consumption growth, and rebuilding trust in the government’s tax policies are crucial steps toward creating a more inclusive and growth-oriented fiscal framework.
For an effective economic policy, it is essential to consider both the direct and indirect impacts of taxation.
While the government’s goal of providing relief to middle-class taxpayers is commendable, its success depends on ensuring that this relief translates into meaningful improvements in household welfare. Moreover, policies should be framed to accommodate diverse household structures and prevent unintended distortions in labour force participation.
Additionally, policymakers should work on enhancing consumer confidence through inflation control and transparent fiscal policies. Tax benefits should not be offset by higher indirect taxation, and steps should be taken to ensure that people feel secure in their financial planning. A sustainable approach would involve a long-term roadmap that aligns taxation policies with economic stability, ensuring that benefits reach the intended segments without generating unintended economic disruptions.
If these concerns are proactively addressed, the budget’s intended positive impact on the economy and citizens will be more effectively realized, paving the way for a robust and resilient economic future.
Views expressed are personal. The author is Assistant Professor, Department of Economics, Sibsagar University, Assam.
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