Expenditure-Based Income Taxation and Integration of Direct and Indirect Taxation in India

Abstract

India’s taxation landscape continues to be characterized by a pronounced disconnect between direct tax declarations and real economic activity. While the Goods and Services Tax (GST) provides a comprehensive digital trail of consumption, the income tax system continues to rely primarily on self-declared income, resulting in persistent underreporting, inequity, and administrative inefficiency.

This paper presents a novel expenditure-based model for computing income tax, grounded in the macroeconomic identity that income equals consumption plus savings. Unlike the traditional Indian income tax framework, which relies heavily on self-reported income, this model reconstructs taxable income by analysing indirect taxes paid on consumption and combining them with documented savings and investments. The model aims to integrate the direct tax structure with indirect taxes—primarily the Goods and Services Tax (GST). The indirect taxes serve as a verifiable proxy for personal expenditure, while savings reflect the unspent portion of income. A key feature of the model is an offset mechanism that allows taxpayers to deduct indirect taxes paid from their final income tax liability to prevent double taxation and promote fairness. The study outlines the conceptual underpinnings, computational pathways, administrative requirements, and policy implications of the model. It also addresses special considerations including cash transactions, cross-border spending, financed purchases, property investments, securities, insurance, and foreign assets. Additionally, it discusses data integration, compliance safeguards, and a phased implementation roadmap. Through this framework, the paper argues for an equitable, transparent, and technologically advanced tax system capable of broadening the taxpayer base, reducing evasion, and enhancing revenue efficiency in India.