Do Poor Indians Pay More Tax Under GST? Understanding India’s Indirect Tax Debate

The Goods and Services Tax (GST), introduced as India’s biggest indirect tax reform, is once again at the centre of a heated economic and Political Debate.

The latest Controversy began after Mukulika Banerjee, a professor of social anthropology at the London School of economics, argued during a podcast discussion that poorer Indians effectively pay more tax relative to their income under the GST system.

Her comments quickly triggered strong reactions from economists, policy experts, bankers, and political commentators, many of whom accused her of oversimplifying how India’s indirect tax structure actually works.

At the heart of the debate lies a larger economic question that goes far beyond one podcast clip:

Is India’s GST system unfair to the poor, or does the structure of exemptions and low tax slabs protect lower-income households more than critics acknowledge?

The answer is more complicated than either side initially presented.

What Exactly Did Mukulika Banerjee Say?

During a podcast discussion, Banerjee argued that Indians often misunderstand who actually pays taxes in the country.

She pointed out that while only a relatively small percentage of Indians pay income tax directly, almost everyone contributes through indirect taxes like GST whenever they purchase goods or services.

Her central argument was that GST affects poorer households more heavily because the tax rate on a product remains the same regardless of the buyer’s income.

To explain her point, she used the example of a packet of biscuits.

If a wealthy professional and a daily wage labourer both buy the same product, both pay the same GST amount.

However, because the poorer individual earns far less money, the tax consumes a larger percentage of their total income.

This concept is not new in economics.

It is one of the classic criticisms of indirect taxation systems worldwide.

Understanding the Difference Between Direct and Indirect Taxes

The controversy has exposed widespread confusion about how taxation works in practice.

Broadly speaking, taxes are divided into two categories:

Direct taxes are considered progressive because higher earners typically pay a larger share.

Indirect taxes, however, are often described as regressive because poorer households spend a larger portion of their income on consumption.

This means the same tax burden may feel heavier for low-income families.

Why Economists Call Consumption Taxes “Regressive”

In economic theory, indirect taxes such as GST are frequently classified as regressive taxes.

This does not necessarily mean the tax system is “anti-poor.”

Instead, it refers to how taxation affects income proportions.

For example:

• A wealthy person may spend 20% of their monthly income on taxed consumption
• A poorer person may spend nearly all their monthly income on consumption
• As a result, indirect taxes absorb a larger share of the poorer household’s income

This basic principle applies globally, not just in India.

Countries including the United Kingdom, Canada, Australia, and European nations also impose value-added taxes or consumption taxes that economists often describe as regressive in structure.

However, governments usually offset this effect through exemptions and lower tax rates on essential goods.

How India’s GST System Actually Works

India’s GST structure is more layered than many simplified online arguments suggest.

When GST was launched in 2017, it replaced multiple indirect taxes with a unified national tax system.

The goal was to simplify taxation, reduce cascading taxes, and create a single national market.

Over time, the system evolved significantly.

Recent GST reforms reduced complexity further by restructuring tax slabs and lowering taxes on several essential products.

Today, many mass-consumption essentials used heavily by poorer households either attract zero GST or fall under the lowest slabs.

Examples of items commonly exempt or minimally taxed include:

• Unpacked food grains
• Fresh vegetables and fruits
• Lentils and pulses
• Fresh meat and fish
• Eggs
• Basic dairy products
• Educational materials
• Essential medicines

Several packaged essentials also attract only 5% GST rather than higher slabs.

Why Critics Challenged the Podcast Claim

Many economists and financial commentators argued that Banerjee’s statement lacked important context.

Their main counterargument was that India’s GST system intentionally shields essential goods consumed by lower-income families.

Critics pointed out that higher GST rates generally apply more heavily to:

• Luxury products
• Premium electronics
• Air travel
• High-end services
• Luxury vehicles
• Expensive lifestyle goods

Therefore, wealthier households typically pay significantly more GST in absolute terms because they consume more taxed products and services.

Some experts argued that while indirect taxes may theoretically be regressive, India’s exemptions reduce the burden substantially for poorer consumers.

Others noted that the issue is not unique to GST itself but applies to almost all consumption-based tax systems globally.

The “Parle-G” Example and Why It Became Symbolic

The biscuit example used during the podcast quickly became symbolic of the wider debate.

On a purely mathematical level, the argument is correct.

If two people buy the same product, they pay the same indirect tax regardless of income.

However, economists argue that real-world taxation is more complex because consumption patterns differ dramatically between income groups.

A wealthy household spends far more overall on taxed discretionary consumption than a poor household.

For example:

• Restaurant dining
• Luxury goods
• Travel services
• Premium gadgets
• High-end housing services

These categories often attract higher GST rates and are consumed disproportionately by richer households.

As a result, total GST collections from upper-income groups remain significantly larger.

The Welfare State Argument

Another major point raised by critics involves government welfare spending.

Several experts argued that focusing only on indirect taxes ignores the broader welfare structure funded by public revenue.

India operates one of the world’s largest welfare systems, including:

• Free food grain distribution
• Subsidised healthcare programmes
• Rural employment schemes
• Housing support
• Direct benefit transfers
• Subsidised cooking gas programmes

Supporters of the current GST system argue that tax collection helps finance these large-scale welfare programmes.

Therefore, evaluating fairness requires examining both taxation and redistribution together.

How GST Changed India’s Tax Structure

Before GST, India’s indirect tax system was fragmented and complicated.

Different states imposed separate taxes including:

• VAT
• Octroi
• Entry taxes
• Excise duties
• Service taxes

This often created inefficiencies, hidden taxes, and logistical bottlenecks.

GST unified much of the system into a single tax framework.

Major impacts of GST included:

• Simplification of interstate trade
• Improved tax compliance
• Expansion of the tax base
• Digitalisation of tax administration
• Reduction in cascading taxes

However, critics continue to argue that compliance burdens remain difficult for small businesses and informal traders.

The Political Dimension of the GST Debate

The GST debate in India is not purely economic.

It is also deeply political.

Opposition parties frequently accuse governments of over-relying on indirect taxes because they affect all consumers equally.

Supporters of GST, meanwhile, argue that:

• The system improved transparency
• Tax evasion became harder
• State revenues became more stable
• India’s formal Economy expanded

The debate often intensifies during periods of Inflation because rising prices make consumers more sensitive to taxation.

As household expenses increase, even low GST rates can feel politically significant.

Why the Debate Matters Beyond Economics

The controversy reveals something larger about India’s economic transformation.

India is simultaneously trying to:

• Expand tax collection
• Maintain welfare spending
• Formalise the economy
• Encourage consumption
• Reduce inequality

Balancing all these goals is extremely difficult in a country with massive income disparities.

Indirect taxes are easier to collect because they are embedded within consumption.

Direct taxes, meanwhile, depend heavily on formal income reporting something still limited in parts of India’s economy.

This is one reason governments worldwide often rely substantially on consumption taxes.

International Comparison: India Is Not Unique

India’s GST debate mirrors similar debates worldwide.

Countries across Europe, Asia, and North America also face criticism that consumption taxes disproportionately affect lower-income households.

Many governments respond by:

• Exempting essential goods
• Reducing tax on food items
• Providing welfare transfers
• Offering income support programmes

India’s current GST framework follows a similar balancing strategy.

The challenge is that no indirect tax system is perfectly progressive.

Governments therefore attempt to soften the impact through targeted exemptions and welfare measures.

The Bigger Question: Is India Moving Toward a Consumption Economy?

Some economists believe the GST debate also reflects India’s transition toward a more consumption-driven economy.

As digital payments expand and formal retail grows, governments increasingly prefer tax systems that capture spending activity efficiently.

GST plays a central role in that transformation.

However, the system’s long-term success depends heavily on:

• Stable inflation
• Job growth
• Income expansion
• Effective welfare delivery
• Lower compliance burdens

If incomes rise faster than inflation, GST burdens generally become more manageable.

But during periods of economic stress, consumption taxes become politically sensitive very quickly.

Conclusion: The GST Debate Is More Nuanced Than Viral Claims Suggest

The controversy surrounding GST and taxation inequality reflects a genuine economic debate but one that is often oversimplified in public discussions.

Mukulika Banerjee’s central economic point that indirect taxes can consume a larger share of poorer households’ incomes aligns with standard economic theory regarding consumption taxes.

However, critics are also correct in noting that India’s GST framework contains extensive exemptions and lower tax slabs designed specifically to reduce the burden on essential consumption.

The reality lies somewhere in between.

GST is neither a completely anti-poor system nor a perfectly progressive one.

Like most consumption tax systems worldwide, it involves trade-offs between revenue collection, simplicity, welfare funding, and economic fairness.

The broader challenge for India is not merely about GST rates.

It is about how the country balances taxation, growth, inflation, welfare, and rising aspirations in one of the world’s most unequal yet rapidly transforming economies.