“Costs of inflation” is not a new phenomenon in macroeconomic theory. Developing economies like India face significant inflation every year and suffer huge costs due to distortions created by inflation. Inflation affects governments and residents alike. In this paper, we try to explain the effects of inflation caused due to distortions created in income tax structure. Further, we will be discussing the various aspects of unchanged income tax structure over time and will try to give a rationale for an inflation indexed income tax structure for high inflation countries like India.

KEYWORDS: inflation, tax rate, economy, tax revenue, purchasing power