How should the tax system help the poor?

If a lower rate on essentials mostly benefits the rich (as the last question argued), how should a tax system protect the poor? The worry rests on the assumption that for the tax system as a whole to be fair, every tax within it must be fair on its own. It need not. A welfare system includes policies like old-age pensions, public food-kitchens, subsidized schools and creches, and work-guarantee programs. What matters is that the tax-and-welfare system taken together is fair—that those with more pay more and the poorest are protected—not that each part is progressive by itself. Once a country has a working income tax and welfare system, redistribution is better done through those than through different tax rates on individual goods (See “Shouldn’t essential goods be taxed at lower rates to help the poor?”). An income tax and a welfare scheme can see a household’s whole circumstances, while a tax on soap or footwear cannot. It charges the industrialist and the daily-wager the same, because the bar of soap does not know who is buying it.

India has already run this experiment. Until the reforms of 2014–15, the government subsidised cooking-gas cylinders for everyone who bought one. Because the subsidy rode on a product, richer households—who simply use more—took the larger share; the IMF found India’s energy subsidies flowing disproportionately to the better-off, with wealthy households drawing roughly twice the cooking-gas subsidy of poor ones. The solution was better targeting of the subsidy using direct cash transfers. Under the PAHAL scheme, households bought LPG cylinders at the market price, and the subsidy they were entitled to receive was transferred directly into their bank accounts. The government later used this logic to exclude consumers whose household taxable income crossed ₹10 lakh, encourage voluntary surrender and route targeted support to low-income households.

The key idea is a division of labour. Let GST be a broad tax at a single rate, doing what it does well—raising revenue without distorting how things are made. Tax cigarettes, liquor and luxury goods not by bending GST into extra slabs but with a separate excise on top, which is simpler to set and easier to adjust. And leave redistribution to the tools built for it: a genuinely progressive income tax, and cash paid straight into people’s bank accounts, as India’s Direct Benefit Transfer already does.

In a country where the income tax doesn’t apply to everyone, and the benefits of subsidies on electricity and education fail to reach the poorest households, this theory has its limits. The broader tax and benefit system cannot yet carry the whole weight of fairness—but that is a reason to widen the income tax, not to load the job back onto GST: don’t ask a tax on soap to do the work of a broader tax on incomes.