LSE Scholar Claims India's Poor Pay Higher Tax Than Rich

Tax Equity Debate Heats Up in India

A London School of Economics anthropology professor has sparked controversy by claiming India's tax system disproportionately burdens poor households compared to wealthy ones. The assertion has triggered sharp responses from economists and policymakers who dispute both the methodology and findings.

The core argument centres on indirect taxes—GST, excise duties, and state levies. While India's income tax structure is progressive with higher earners paying higher rates, indirect taxes work regressively. Poor families spend nearly all their income on consumption, bearing heavier indirect tax loads relative to earnings.

How the Math Works Against the Poor

Consider a labourer earning ₹15,000 monthly. Nearly every purchase—groceries, fuel, basic goods—includes embedded GST at 5%, 12%, or 18%. Over a year, this cumulative indirect tax burden can be substantial. Meanwhile, high-income earners save significant portions of income, avoiding indirect taxes on those saved amounts.

India's tax-to-GDP ratio stands at approximately 16.5%. Critically, indirect taxes account for 45-50% of total tax revenue. When indirect taxes dominate revenue, the overall system becomes regressive despite progressive income tax rates. This structural issue forms the heart of the LSE professor's critique.

Strong Pushback from Economic Circles

Critics argue the comparison is methodologically flawed. Government economists contend targeted welfare schemes—direct benefit transfers, subsidised food grains, healthcare vouchers—effectively offset the burden on the poorest citizens. They point out India's tax system has become progressively more progressive over the past decade, with the standard income tax deduction nearly doubling since 2018.

Business chambers emphasise that indirect taxes fund essential public services including infrastructure, education, and healthcare. Significantly reducing GST and excise duties would require steep income tax increases or cuts to public spending, potentially harming growth and employment.

GST Complexity Adds to the Problem

Since GST implementation in 2017, India moved to a unified indirect tax system. However, the complexity of multiple GST rates (0%, 5%, 12%, 18%, 28%) has created situations where essential items for the poor face taxation while some luxury goods enjoy lower rates. The government has periodically adjusted rates to balance revenue needs with equity concerns.

Data Challenges Cloud the Picture

The LSE research draws on National Sample Survey Organisation data and income tax records. Critics note matching NSSO consumption data with tax department filings remains methodologically challenging because datasets use different sampling methodologies and time periods.

Reserve Bank of India household finance surveys show marginal tax rates have increased for salaried professionals earning ₹10-50 lakh annually, while those below ₹5 lakh face minimal direct taxation. When consumption-based indirect taxes are included, the burden distribution shifts dramatically.

Revenue Versus Equity Tension

The debate underscores genuine tension in Indian fiscal policy. As India aims to increase its tax-to-GDP ratio to fund infrastructure and welfare expansion, policymakers face growing pressure to ensure the poorest are not disproportionately burdened.

Economists discuss potential solutions including further rationalising GST rates to exempt or lower taxes on essential items, expanding direct benefit transfer programmes, and strengthening progressive income taxation. Others argue the state's welfare architecture should be the primary vehicle for redistribution, not the tax code itself.

The controversy highlights the need for more granular, longitudinal data on tax incidence across income groups—research that government agencies and independent institutions continue to develop. This debate will likely influence future Budget decisions and GST Council deliberations.

Based on reports from Google News — Finance India.