Bridging the Gap: Evaluating the Role of Taxation in Addressing Wage Inequality under Labour Law Frameworks in India

The Persistent Challenge of Wage Inequality

Income inequalities have become a core socio-economic concern in contemporary India. India’s economy is expanding rapidly globally, yet it continues to have huge disparities in cash between individuals who work differently. Income inequality fell until the mid-1980s but began rising and has risen considerably since approximately 2000. The inequality spreads beyond socioeconomic divides to include variations in workplace patterns of organization, gender roles, geographic locations, and occupational fields. In twenty-twenty-three, there were twenty-two instances. Six percent of the nation’s overall wealth was fully owned by the richest one percent, which peaked in 1922. (Nitin Kumar Bharti, Lucas Chancel, Thomas Piketty, Anmol Somanchi).

Historical Background of Wage Inequality in India

Indian wage inequalities date back many decades. There were colonial labor markets characterized by exploitation, absence of protective labor legislation, and systematic wage repression. Laborers toiled under hard conditions in plantations, mines, and railways with little rights and protections. Following independence, India established the Indian Constitution as a template for society that values the welfare of human beings. The framers sought to establish economic and social equality by including the DPSPs in their policy. Articles 38 and 39 of the Constitution obligated the state to make a sincere effort to decrease income inequalities and ensure equal pay for equal work. Article 43 said that all should get a fair wage, lead a decent life, receive good health care, and have arts and culture.

In spite of these constitutional assurances, India’s labor market remained polarized. The enactment of the Minimum Wages Act, 1948 was a significant move towards controlling wage imbalances, but its enforcement was weak and largely ineffective in the unorganized sector. The Equal Remuneration Act of 1976 was intended to fight gender-based wage differences, but it did not provide for adequate measures of enforcement. In recent history, as economies have opened up, there has been more of an increase in freelance labor, which has resulted in higher income inequality among workers. Good taxes and labor laws were absent within these new arrangements of work, resulting in a wider problem.

Constitutional Safeguards for Wage Equality

The Indian Constitution provides a solid foundation for equal pay, highlighting the nation’s commitment to equity in society and the economy. Article 14 guarantees equality before the law, and all employees are ensured equal rights and protections. Article 15 prohibits discrimination against gender, guaranteeing equal pay for both genders. Equality under Article 16 ensures a level playing field for all people aspiring to work in the public sector so that there are equitable opportunities for work application and remuneration.

In addition, Article 39(d) mandates that the state shall ensure “equal pay for equal work,” which is a major objective towards ensuring wage parity in all spheres. In addition, Article 43 mandates the state to make efforts towards equitable wages and hygienic working conditions, recognizing the overall economic requirements of employees. These ideals, although not enforceable by law, are the basis for India’s labor legislation, informing policy and law that aims to reduce wage disparities and ensure equity in the workplace.

Integrating Taxation with Labour Law Frameworks

In India, labor and tax laws overlap quite notably, especially influencing income inequality and wage discrimination. The primary challenge arises from the type of work available in the labor market, where the majority of work is informal. Almost all employees have employment that is not based on formal contracts, social security, or effective wage protection laws. The Economic Survey 2024 identifies that more than half of the workers (57%) encounter difficulties in their employment. Self-employed constitutes 3%, and 18% of others. Three percent of individuals labor for free in family businesses, which contribute largely to their operations. Nine percent of individuals have fixed salaries with expected earnings. The budget of 2024 features an economic survey indicating 57% of the entire workforce being self-employed, while 18.3% labor as unpaid workers.

The uneven distribution has made it difficult to enforce labor laws, especially minimum wage and wage code laws (1948 and 2019), which are often weakly enforced in the unregulated economy. On the taxation front, direct taxes predominantly account for those who received formal compensation with proof of salary, while unofficial income frequently escapes the net. On the other hand, indirect taxes like GST touch all and are regressive in nature, as poor families consume a significant portion of their earnings on consumption. The tax-to-GDP ratio of India stood at 11.7% in the year 2021-22, direct taxes accounted for merely 6.1% of GDP, a thin tax base to formal jobs. Advantages of progressive taxation like reductions under Section 80C reach individuals with most formal documents, apart from informal workers.

This incompatibility puts a double pressure on low-wage workers. On the one end, they usually miss proper wage security in labour legislation, and on the other end, they get a bigger blow from intake taxes that gobble into their meager earnings. Consider GST on employment services, for example it’s 18%, a charge critics argue makes it harder for employers to take on workers in the official books. There are many reviews supporting the reduction of this right to 5% so as to encourage businesses to comply and workers to have additional security and protection.

Formalisation of Unorganised Workers as a Driver of Tax Revenue Growth

Shifting workers into the formal economy is where taxation and labour legal guidelines intersect. Formal employment not only provides workers with comfy minimal wages and social protection benefits but also brings individuals into the tax apparatus, but this transformation is often thwarted by challenges as well as high compliance costs for employers, weak enforcement of labor standards, and a tax system that relies heavily on regressive indirect taxes. Consequently, labor protections and tax regulations in India often appear in silos, limiting their blended potential to minimize wage inequality.

In order to close this gap, India wants more effective enforcement of labour and wage rights, a more progressive and equitable tax system, and policies that combine worker protection with monetary redistribution in a unified manner.

Progressive Taxation and the Redistribution of Income

A progressive tax system can help to minimize income inequality by making the rich pay a greater proportion of their income into public coffers, which in turn can be utilized to fund welfare programs, social security, and subsidies for the poor. But in India, tax and labour law regimes tend to operate in silos. Tax policies are neither expressly made to accompany labour protections, and wage laws are poorly enforced, especially in the unorganized sector.

The consequence is that even though India has progressive tax laws as well as wage protection legislations in place, the two together have not been successful in filling the gap of inequality. As per the Periodic Labour Force Survey (PLFS) 2022–23, Ministry of Statistics and Programme Implementation, almost 48% of casual workers and 28% of regular wage/salaried workers continue to receive less than the state-fixated minimum wages.

Enforcement of labour laws in India faces an acute shortage of personnel, on average, a lone labour inspector is tasked with supervising almost 70,000 workers. Against this, the International Labour Organization (2020) suggests that ideally, one inspector should have around 10,000 workers to look after in industrialized economies, highlighting just how stretched India’s inspection machinery is in reality.

India’s tax system is largely covered by the Income Tax Act, which has been amended a number of times in the past to ensure it is in line with evolving economic realities and the challenges of globalization. Annually, Parliament enacts the Finance Act that provides for the rates applicable through income tax slabs and fixes the exemption limits for the financial year. To relieve the tax burden on taxpayers, particularly the middle and low-income earners, the Act provides for deduction under Section 80 of the Income Tax Act. These expenditures include investment in approved schemes, life insurance premium payments, and contributions to pension funds, thus cutting down the amount of taxable income and granting relief financially.

Another milestone Indian taxation reform was the implementation of the Goods and Services Tax (GST) in 2017. While GST is a consumption tax, as opposed to income tax, it still affects income trends indirectly. Because GST is charged on consumption and services, its effect varies in relation to expenditure behavior. For example, poor households, who tend to spend a greater proportion of their income on consumption, experience its impact more significantly than other affluent segments.

Suggestions

Closing the gap between tax and labour law in India will involve a combination of more robust worker protections as well as wiser fiscal strategies. The first step is enforcement particularly in the informal economy, where the great majority of workers are beyond legal protection. Having more inspectors as well as digital technology can help make it simpler to track wages and enforce compliance. On the taxation side, policy must go hand in hand with labour law.

For instance, reducing GST on employment services from 18% to 5% may lower the cost of hiring and attract more formal employment, while providing tax rebates to compliant firms and direct relief for low-income earners would further enhance wage security. Incentives such as lower tax rates or subsidies for companies that register workers under social security and provident fund schemes would also nudge formalisation, expand the tax base and enhance protections.

At a more general level, making India’s tax system more progressive would decrease dependence on indirect taxes that hit poorest the hardest and direct resources into welfare, wage subsidies, and social security. Experience from the Nordic nations and Brazil indicates how bringing tax and work policies in concert can make societies more equitable. India also requires such coordinated action to approach true wage justice.

End-Notes

1. Nitin Kumar Bharti, Lucas Chancel, Thomas Piketty & Anmol Somanchi, Income and Wealth Inequality in India, 1922–2023: The Rise of Billionaire Raj (World Inequality Lab, 2024).
2. R. Tomlinson, The Economy of Modern India, 1860–1970 (Cambridge University Press, 1993).
3. The Constitution of India, Article 38.
4. The Constitution of India, Article 39.
5. The Constitution of India, Article 43.
6. The Minimum Wages Act, 1948.
7. The Equal Remuneration Act, 1976.
8. Ministry of Finance, Economic Survey 2023–24 (Government of India, 2024).
9. Ministry of Statistics and Programme Implementation, Periodic Labour Force Survey (PLFS), 2022–23.
10. International Labour Organization, Labour Inspection and the Informal Economy (ILO, Geneva, 2020).
11. The Constitution of India, Articles 14, 15 & 16.
12. The Constitution of India, Article 39(d).
13. The Constitution of India, Article 43.
14. Code on Wages, 2019.
15. The Income Tax Act, 1961 (as amended by successive Finance Acts).
16. Goods and Services Tax (GST) Act, 2017.
17. Section 80C, Income Tax Act, 1961.
18. Ministry of Finance, Budget at a Glance 2024–25 (Government of India, 2024).
19. Organisation for Economic Co-operation and Development (OECD), Revenue Statistics 2023: India.
20. Marcelo Medeiros, “Income Inequality in Brazil: New Evidence from Household Surveys” (UNDP Research Paper, 2016).
21. Jonas Pontusson, Inequality and Prosperity: Social Europe vs. Liberal America (Cornell University Press, 2005).