Why the poor land up bearing the greater GST burden

Ashraf Engineer

May 27, 2023


Hello and welcome to All Indians Matter. I am Ashraf Engineer.

Does India unfairly tax its poor? I’m not referring to direct taxes, which are based on income, but indirect taxes that everyone pays when they buy any goods or services. An Oxfam report released a few months ago said that, contrary to what most believe, the poorest 50% of Indians pay most of the indirect or consumption-related taxes. The ‘Survival of the Richest: The India Story’ report says that almost two-thirds, or 64.3%, of the Goods and Services Tax collection comes from the bottom 50% of the population, one-third from the middle 40% and only 3%-4% from the richest 10%. For perspective the GST collected in 2021-22 was Rs 14.7 lakh crore and Rs 18.1 lakh crore in 2022-23. The Oxfam report adds that the poorest 50% of Indians spend a higher percentage of their income paying indirect taxes than the rest combined. How does this happen and what does it mean?


The Oxfam report says: “Estimates suggest that the bottom 50% spends 6.7% of their income on taxes for select food and non-food items. Middle 40% spend half of that at 3.3% of their income on food and non-food items. However, the top 10% wealth group spends a mere 0.4% of their income on these items.”

In other words, the cost of essentials is disproportionately high for the poor because of the way GST is applied. A larger percentage of their income goes in just acquiring the bare minimum required for survival whereas the rich earn so much that the cost of essentials is a mere fraction of what they earn. It’s not just an indicator of bad tax philosophy but also the wealth gap.

The answer, of course, is to drastically reduce GST on essential commodities which comprise the majority of living costs for the poor and raise taxes on luxury goods. The poor need all the help they can get and the rich can afford the higher prices, although they will complain about it like crazy.

Oxfam puts in further perspective the wealth gap and what the rich can afford. A mere 3% tax on the total wealth of Indian billionaires could fund the entire National Health Mission for five years. It’s the largest healthcare scheme in India with a current annual allocation of Rs 36,785 crore.

Further underscoring the findings, the report said that the number of billionaires in India rose from 102 in 2020 to 166 in 2022, the combined wealth of the richest 100 touching Rs 54.12 lakh crore. This amount could fund the entire Union Budget for 18 months.

Between 2012 and 2021, the wealthiest 1% owned more than 40% of the wealth created in India while only 3% went to the bottom 50%, said the report. Consequently, today, a mere 5% of Indians own more than 60% of the country’s wealth.

So, the need of the hour is for measures such as wealth and inheritance tax, which would be a step towards dealing with widening inequality, and drastically raise health and education spending.

Instead, what we’ve had is huge loans written off by public sector banks to corporations – Rs 11.17 lakh crore in the six years till financial year 2021-22. This has been accompanied by a reduction in corporate tax and other exemptions. On the other hand, the indirect nature of GST and fuel taxes burden the poorest. Because of the tax levels and rising fuel prices, essential goods and services get costlier and the poor have no choice but to pay.

Meanwhile, what was the reduction in corporate tax? It went from 30% to 22%, with newly incorporated companies paying only 15%. In 2020-21 alone, the government lost an estimated Rs 1.03 lakh crore due to this. This amount could have funded the Mahatma Gandhi National Rural Employment Guarantee Act, or MNREGA, scheme for 1.4 years.

What other tax measures could have been taken? Here are a few the report mentioned:

  • A one-off tax on unrealised gains from 2017 to 2021 on just one billionaire, Gautam Adani, would have raised Rs 1.79 lakh crore. That’s enough to employ more than five million Indian primary school teachers for a year
  • Taxing the richest 10 billionaires 5% on their current wealth, which would cover the cost of tribal healthcare for five years
  • A one-time tax of 2% on the wealth of billionaires would support the requirement of Rs 40,423 crore for the nutrition of the malnourished for three years

These are, of course, for perspective but the last two can be implemented. A tax on just one billionaire, Adani, might be unfair, impractical and open to challenge in court – never mind what I think of Adani and his rise.

There is also the perfectly legitimate option of increasing annual taxes on the richest 1%. These could span capital gains, inheritance, property and land taxes. Simultaneously, the budgetary allocation for health should be set at 2.5% of the GDP by 2025 and that of education to 6%. This was committed earlier in the National Health Policy and National Education Policy.

While we’re talking about GST, let me address also the flawed argument that the record collections are an indicator of how great the economy is doing. What is GST in the first place? It’s what is known as an ad valorem tax on domestic consumption. That means it is charged at a fixed percentage of the price of a product or service. It doesn’t matter if what you buy has been produced in India or imported. If the price is high, the GST charged will also be higher. We have also been passing through a phase of skyrocketing inflation and our imports have been growing faster than our exports. This means that the cost of most products, including food, clothing and fuel, have been very high. And that is why the GST collected on them is very high too. The collections are the consequence of inflated product and service costs, not a roaring economy.

All this results in a very lopsided burden on the poor. Their consumption is mainly essentials like food for which there is inelastic demand. That means they need to eat no matter what the cost of food is. Higher prices hurt them disproportionately more. When it comes to the affluent, their consumption basket has a lot of discretionary goods and services that have an elastic demand. This means that sellers have to be circumspect about raising prices even when input costs rise.

The solutions were outlined earlier and, as a first step, exemptions and lowering taxes for the rich should end. The rich can be taxed more; it won’t make a difference to their affluence but they do wield immense power. That means it won’t be easy, but then the government is meant to do stuff that’s hard. Cut fuel taxes too to lower food prices.

GST is an indiscriminate tax – which means that it’s a fixed percentage of the price of a product or service no matter who buys it. But that’s worked against the poor. Naturally it’s not possible to implement one GST for the poor and the other for the rich. That’s why the changes have to be implemented in the direct taxes. Will the rich allow that? Is the government even interested in doing that? We all know the answer.

Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at editor@allindiansmatter.in. Catch you again soon.