Tax Terrorism in India

Tax Terrorism in India: A Decade-Long Struggle with Inflation and Tax Burden

India’s tax regime, historically complicated and cumbersome, has often been criticized for its complexity, inefficiency, and perceived ‘tax terrorism’ – a term that has gained traction in recent years. This article delves into the phenomenon of tax terrorism in India, with a special focus on the last decade. The discussion also takes into account inflation and tax burden data from the last 10 years, offering a comprehensive look at how the nation’s tax policies have evolved and their impact on citizens and businesses.

What is Tax Terrorism?

The term ‘tax terrorism’ is used to describe the oppressive and overzealous enforcement of tax laws, where taxpayers face undue harassment, excessive scrutiny, and arbitrary penalties by tax authorities. This term reflects a sense of fear among taxpayers who feel they are subject to unjust treatment, particularly small and medium-sized businesses, and even individuals who are honest taxpayers but become victims of high-handed tax officials.

The causes of tax terrorism in India can be traced to various issues: complicated tax laws, corrupt practices within the system, high compliance burdens, and a lack of transparency. These problems result in an overall atmosphere of mistrust and fear. For many, dealing with the tax authorities is an ordeal that requires navigating through a labyrinth of bureaucratic hurdles.

Evolution of India’s Tax System

India’s tax system has undergone significant changes in recent years, but the fundamental issues surrounding tax terrorism have persisted. A decade ago, India’s tax system was marked by multiple tax regimes – income tax, sales tax, service tax, excise duty, and more. These taxes often overlapped, making compliance difficult for taxpayers.

The Goods and Services Tax (GST), implemented in July 2017, was a major step towards simplifying the tax regime. GST aimed to streamline the tax system by consolidating multiple indirect taxes into a single, uniform tax. While it has reduced complexities in some areas, it has also created new challenges, including technical issues in its implementation and compliance burden, leading to frustration among taxpayers and the persistence of tax terrorism.

Despite these reforms, the problem of tax terrorism remained entrenched. The shift from a legacy of complex tax laws to a new system like GST didn’t immediately address the deeper structural problems within the tax administration. The focus of tax enforcement remained on revenue collection at any cost, often at the expense of fairness and transparency.

Inflation and Tax Burden: A Decade in Review

To understand the interplay between tax terrorism and inflation, it is important to examine how India’s tax policies have evolved over the last 10 years and how inflation has impacted both the cost of living and the tax burden on citizens.

Inflation Trends (2015-2025)

Inflation in India has fluctuated considerably over the past decade. According to data from the Reserve Bank of India (RBI), India saw inflation rates ranging from 3% to 12% during this period. Inflation affects the cost of living, but it also has a direct impact on the effectiveness of the tax regime.

2015-2017: India experienced relatively moderate inflation levels, hovering around 5%. This period saw the economy gearing up for the implementation of GST, with tax compliance expectations growing.
2018-2020: Inflation surged to an average of 7% in 2018, driven largely by rising fuel prices and food inflation. However, the Indian government took several steps to control inflation, such as implementing fiscal measures and reducing excise duties on fuel.
2021-2022: India faced heightened inflation due to global supply chain disruptions, with inflation rising above 6%. The COVID-19 pandemic aggravated these challenges, pushing the government to introduce emergency fiscal measures, which included additional tax reliefs for affected industries and individuals.
2023-2025: As of 2025, inflation has moderated somewhat, stabilizing between 4-5%, primarily due to the RBI’s monetary policy interventions. However, the impact of inflation on the cost of living remains a pressing issue for the average Indian household.

Tax Burden Trends (2015-2025)

Over the last decade, India’s tax burden has shown an upward trend, both in terms of direct and indirect taxes.

Personal Income Tax (2015-2025): The personal income tax rates have remained relatively stable, but the threshold for tax payments has not increased significantly, leading to a larger population being brought under the tax net. The introduction of the Pradhan Mantri Jan Dhan Yojana (PMJDY) and increased digitization led to a rise in the number of taxpayers. As of 2025, the tax base in India has expanded significantly, but many still feel burdened by the sheer complexity of the tax filing process.
Corporate Tax (2015-2025): In 2019, the Indian government slashed the corporate tax rate for domestic companies from 30% to 22%, which was hailed as a major reform aimed at boosting the Indian economy. However, the overall corporate tax burden still remains high, especially for smaller businesses, which often struggle with compliance costs and paperwork.
GST and Indirect Taxes: GST, which replaced multiple indirect taxes, has had a complex impact on the tax burden. While the idea behind GST was to make it easier for businesses to operate across state lines, it introduced an additional layer of compliance. The GST system itself has faced numerous technical issues, with many small businesses struggling to adapt. Over the years, the government has reduced the number of GST slabs, but compliance continues to be a significant challenge.
Tax Enforcement and Penalties: Tax terrorism is often linked to the aggressive enforcement of tax laws. Tax audits, scrutiny, and penalties are an everyday reality for many businesses, especially those in the informal sector. With the advent of technology and increased data tracking, tax authorities have gained more power to scrutinize individual and business tax returns. Many argue that this has led to an increase in tax terrorism, with tax officers often using the power of discretion to impose heavy penalties on taxpayers.

Impact of Tax Terrorism on the Economy and Society

Tax terrorism has had a detrimental effect on both the Indian economy and society at large. Below are some of the key consequences:

Stifling of Business Growth: Small and medium-sized enterprises (SMEs) in India, which constitute a significant portion of the economy, are often the most affected by tax terrorism. Many SMEs face harassment from tax authorities, leading to higher costs, delayed projects, and sometimes the closure of businesses.
Loss of Trust in the Tax System: One of the most damaging effects of tax terrorism is the erosion of trust in the tax system. When citizens and businesses feel they are being unfairly treated, they are less likely to comply with tax laws willingly. This creates a vicious cycle where non-compliance and evasion become more common.
Impact on Investments: Both domestic and foreign investments are often deterred by the tax environment. Investors want certainty and transparency, and when they perceive an unpredictable and hostile tax regime, they are less likely to invest in India. This, in turn, affects job creation and economic growth.
Government Revenue Loss: Ironically, the very issue of tax terrorism can lead to a reduction in tax revenue. When businesses are harassed by tax officials or face excessive compliance costs, they often look for ways to evade taxes, leading to a reduction in the tax base and government revenue.
Social Discontent: Tax terrorism also breeds social unrest. Many citizens, particularly in the informal economy, feel that they are being unfairly targeted by tax authorities. This resentment can lead to greater social dissatisfaction, protests, and a sense of injustice.

The Path Forward: Addressing Tax Terrorism in India

While the problem of tax terrorism cannot be resolved overnight, there are several steps the Indian government can take to address this issue and ensure that the tax system is more equitable and less oppressive.

Simplification of Tax Laws: India’s tax system remains overly complicated. The government should focus on simplifying tax laws, reducing compliance burdens, and ensuring that they are easy to understand and follow. A simplified tax code will reduce the room for arbitrary interpretation and harassment by tax officials.
Strengthening the Rule of Law: Reforming the behavior of tax officials is crucial. The government should ensure that tax authorities are held accountable for any abusive behavior, with stricter guidelines on penalties and audits. This would help foster a more transparent and just tax system.
Incentivizing Compliance: Offering tax incentives for timely and accurate tax filings could help improve compliance. This would also reduce the number of audits and penalties, creating a more cooperative relationship between taxpayers and tax authorities.
Promoting Digitalization: The increased use of technology, such as e-filing and automated systems for tax collection, can reduce human discretion in tax enforcement. By making tax processes more transparent, digitalization can minimize the chances of tax terrorism.
Public Awareness: Educating citizens about their rights and responsibilities under the tax system can reduce misunderstandings and give people the confidence to engage with the system without fear.

India’s tax system has undergone significant reforms over the last decade, but the issue of tax terrorism remains a challenge. The relationship between inflation, the tax burden, and the fear of arbitrary tax enforcement continues to weigh heavily on the economy. By simplifying the tax system, strengthening the rule of law, and fostering a more cooperative environment between taxpayers and tax authorities, India can address the issues surrounding tax terrorism and build a fairer, more efficient tax system for the future.