India's Poor Bear Disproportionate Tax Burden, Says LSE Scholar

LSE Scholar Claims Regressive Tax Structure in India

An anthropology professor from the London School of Economics has ignited a significant debate in Indian policy circles by contending that India's tax system places a disproportionate burden on lower-income households compared to the wealthy. The assertion has drawn sharp criticism from economists, policymakers, and business commentators who question both the methodology and conclusions of the research.

The scholar's argument rests on the premise that when indirect taxes—such as GST, excise duties, and state levies—are factored into the overall tax burden, poorer Indians end up paying a substantially larger proportion of their income in taxes than richer Indians. This claim strikes at the heart of India's fiscal policy debate, which has intensified as the government pursues multiple revenue-raising measures.

Understanding the Tax Burden Argument

Direct vs. Indirect Taxes

The LSE professor's thesis hinges on distinguishing between direct taxes (income tax, corporate tax) and indirect taxes (GST, excise, customs duties). While India's income tax system is progressive—with higher earners paying higher rates—indirect taxes are regressive by nature. Since poorer households spend a larger portion of their income on consumption, they bear a heavier indirect tax load relative to their earnings.

For example, when a laborer earning ₹15,000 per month purchases groceries, fuel, and basic goods, nearly every transaction includes embedded GST at 5%, 12%, or even 18%. In contrast, a high-income earner might save a significant portion of income, thereby avoiding indirect taxes on that saved amount. Over a financial year, the cumulative indirect tax burden on the poor can exceed their direct tax contributions.

The Progressive vs. Regressive Debate

India's tax-to-GDP ratio stands at approximately 16.5%, with indirect taxes consistently accounting for roughly 45-50% of total tax revenue. The composition matters: if indirect taxes dominate the revenue base, the overall system becomes regressive despite having a progressive income tax structure. This nuance is central to the LSE professor's argument.

Criticism and Pushback

The professor's claims have faced robust criticism from multiple corners. Economic analysts argue that the comparison is methodologically flawed because it conflates different cohorts and time periods. They contend that while indirect taxes may be regressive in isolation, the Indian government's targeted welfare schemes—including direct benefit transfers, subsidised food grains, and healthcare vouchers—effectively offset the burden on the poorest citizens.

Business chambers and fiscal policy think-tanks have pointed out that indirect taxes fund essential public services including infrastructure, education, and healthcare. Removing or significantly reducing GST and excise duties, they argue, would require steep increases in income tax or consumption of public resources, potentially harming economic growth and employment.

Government economists have additionally noted that India's tax system has become progressively more progressive over the past decade, with frequent tax slabs adjustments favouring lower and middle-income earners. The standard deduction under income tax has nearly doubled since 2018, they note, reducing the effective tax burden on ordinary salary earners.

The Broader Context of Indian Tax Policy

Recent Tax Changes and Their Impact

India's tax regime has undergone substantial evolution, particularly post-GST implementation in 2017. The shift to a unified indirect tax system was intended to create a more transparent and efficient tax architecture. However, critics—including the LSE professor—argue that the complexity of GST rates (0%, 5%, 12%, 18%, 28%) has created situations where essential items for the poor are taxed, while some luxury goods benefit from lower rates.

The government has periodically adjusted GST rates to balance revenue needs with equity concerns. In recent years, several food items were exempted or placed in lower tax brackets, and the rates on petroleum products and industrial inputs have been restructured multiple times.

International Perspective

Comparative taxation studies from OECD countries reveal that most developed nations maintain a balance between direct and indirect taxation, with progressive structures designed to protect lower-income households. The gap between India's emerging economy status and developed-nation tax systems remains significant, though India's tax-to-GDP ratio has steadily improved from around 9% two decades ago.

What the Data Shows

The LSE professor's research points to data from the National Sample Survey Organisation (NSSO) and income tax records to substantiate claims about tax burden distribution. However, matching NSSO consumption data with tax department filings remains methodologically challenging, critics note, because the datasets use different sampling methodologies and temporal alignments.

The Reserve Bank of India's household finance surveys and the CEIC database on tax revenues show that marginal tax rates have increased marginally for salaried professionals earning between ₹10 lakh and ₹50 lakh annually, while those below ₹5 lakh face minimal direct taxation. Yet when consumption-based indirect taxes are included, the calculus shifts.

The Path Forward

The debate sparked by the LSE anthropology professor underscores a genuine tension in Indian fiscal policy: revenue mobilisation versus equity. 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.

Potential solutions discussed by economists include further rationalising GST rates to exempt or lower taxes on essential items, expanding direct benefit transfer programmes to offset indirect tax impacts, 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.