Beyond freebies: How poor people's hidden contributions fund state coffers

By Prof. Hamentkumar Shah* 

A widespread impression in India, carefully cultivated by the wealthy, is that only the rich bear the nation’s tax burden, while the poor pay nothing. This is a falsehood, even a conspiracy, reinforced further by claims that governments provide everything to the poor free of cost. Whatever is distributed as subsidies or welfare is often disparagingly labeled as “freebies.” But is it really true that the poor do not pay taxes?

When GST concessions are announced, it is said that taxes on essential goods have been reduced or eliminated. This itself proves that such goods were already taxed and that the poor were indeed paying. Even when the final product is exempt, the machinery or raw materials used in its production carry duties such as GST or customs tax, and these costs are inevitably built into the price. The consumer, including the poor, ends up paying indirectly.

In reality, every rupee that the government earns through GST, customs duty, or excise duty includes contributions from the poor. When a poor man buys a shirt, the button on it may not carry tax, but the machinery used to produce it does, which raises the cost of the shirt. A family that erects a shack out of wood, plastic, cloth, or bricks is indirectly paying the taxes levied on those materials or on the machinery that produced them. A vegetable vendor who buys a cart pays for the taxes built into its wood, tires, and other fittings. Even a poor woman who pays a dentist two hundred rupees for tooth extraction contributes to government revenue because that fee includes taxes on the doctor’s income, on medical instruments, and on the clinic’s infrastructure.

GST was introduced in 2017–18, bringing the government ₹4.43 lakh crore in its first year. Except for the pandemic year, revenues have steadily grown, with an estimated ₹10.62 lakh crore last year and ₹11.78 lakh crore projected for the current year. In just seven years, GST revenue has more than doubled. From 2017–18 to 2024–25, total GST collections reached ₹57.37 lakh crore. Against this, recent tax reliefs amounting to ₹48,000 crore are negligible.

According to the 2025–26 Union Budget, the government’s total tax revenue will be about ₹42.70 lakh crore, of which ₹14.22 lakh crore will be transferred to states and the rest retained by the Centre. GST alone contributes about 18 percent of this revenue, customs 4 percent, and excise 5 percent, making indirect taxes together nearly 27 percent of government income. By contrast, direct taxes—income tax at 22 percent and corporate tax at 17 percent—together form 39 percent. But even corporate tax is effectively an indirect levy, since companies typically pass the burden on to consumers by adjusting prices.

Thus, nearly 44 percent of central government revenue comes from taxes that are borne directly or indirectly by ordinary consumers, including the poor. To claim that the poor pay nothing is misleading. In truth, even the poorest citizens contribute through both direct and hidden taxes. That is why the Constitution’s Directive Principles of State Policy do not merely justify subsidies for the poor but envision broader welfare measures as essential for justice and equality.

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*Senior economist based in Ahmedabad