LSE Professor Sparks Debate: Do India's Poor Pay More Tax Than Rich?

Tax Equity Debate Reignites in India

A London School of Economics anthropology professor has sparked a heated debate by claiming that India's poorest citizens bear a disproportionate tax burden compared to the wealthy. The assertion has drawn sharp criticism from economists and policymakers who question both the methodology and conclusions.

The Core Argument: Regressive Taxation

The professor's claim centres on tax regressivity—the idea that lower-income earners pay a larger percentage of their income as tax than higher earners do. The focus is primarily on indirect taxes like GST, excise duties, and customs tariffs.

A family earning ₹1 lakh annually might spend ₹80,000 on basic necessities, each purchase carrying GST rates between 5% and 28%. In contrast, a household earning ₹10 crore spends a much smaller proportion on taxable consumption, allowing wealth accumulation that escapes indirect taxation.

India's indirect taxes contribute roughly 6% to GDP, while direct taxes add around 5%. Since GST applies uniformly across income groups, lower earners who spend more of their income on goods effectively pay more as a percentage of earnings.

Income Tax: Progressive on Paper, Complex in Practice

India's income tax system is nominally progressive. Current slabs range from zero tax on income below ₹2.5 lakh annually to 30% on income exceeding ₹1 crore. However, effective tax rates tell a different story.

Wealthy taxpayers employ tax planning strategies including Section 80C investments, capital gains exemptions, and business expense deductions. These reduce their effective tax burden significantly below marginal rates.

Critics Fire Back

The professor's claim has triggered pushback from India's financial ecosystem. Critics argue the analysis oversimplifies a complex system and ignores structural features benefiting lower-income households.

Economists point out that less than 2% of India's population files income tax returns. The vast majority of poor Indians fall entirely outside the direct tax net, paying zero income tax. Their tax burden comes exclusively through indirect levies, which are necessary for government revenue collection.

Financial analysts note that India's poorest quintile benefits from transfer payments and subsidies—food grain subsidies, electricity subsidies, and direct benefit transfers (DBT)—that effectively reduce net tax burden. These welfare programmes are funded partly by taxation of higher earners.

Methodology Under Question

Detractors have questioned whether the analysis adequately accounts for tax deductions available to salaried employees and businesses, government subsidies and transfer payments received by low-income households, India's narrow tax base and administrative collection costs, or cross-country comparative data on actual tax incidence.

The Numbers Behind India's Tax System

India's total tax revenue as a percentage of GDP stands around 11–12%, significantly lower than developed nations. Corporate income tax and personal income tax combined account for approximately 50% of all tax revenue, with indirect taxes contributing the remainder.

Government data confirms that since GST applies uniformly across income groups, its regressivity is mathematically inevitable. However, whether this creates genuine inequity remains contested among economists.

Expert Perspectives Diverge

Independent tax policy researchers offer nuanced views. Some acknowledge that reliance on indirect taxation creates regressivity but argue this is offset by targeted welfare schemes. Others suggest improving tax administration, broadening the tax base, and raising standard deductions for lower earners could address inequities without disrupting revenue collection.

The debate underscores a fundamental tension in developing economies: the need for government revenue versus the capacity of low-income populations to absorb taxation. India's policymakers continue to grapple with this balance as they seek to fund growth while maintaining social safety nets.

The controversy has reignited important conversations about tax equity in India—discussions likely to intensify as the country pursues higher growth targets and improved welfare infrastructure.

Based on reports from Google News — Finance India.