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The Story
Eight years ago, the government achieved what many deemed impossible. It unified a disjointed indirect tax system spanning 29 states, 7 union territories, and numerous local nuances into a singular framework known as the Goods and Services Tax (GST). Gone are the days of VAT in one area, service tax in another, octroi at the borders, and a chaotic mix of entry taxes. Just one system. One framework. One nation, one tax.
Overall, it has largely succeeded.
Gross GST revenue has doubled over the last five years from ₹11 lakh crore in FY21 to ₹22 lakh crore in FY25. The number of active GST taxpayers has exceeded 1.5 crore. Small businesses and large corporations alike claim it has simplified tax administration and improved the ease of doing business. Trade between states has become more seamless. Digital compliance has surged. Consequently, India’s ambitious consumption-based tax reform appeared to be progressing well.
However, several concerning indicators remain. GST collection growth has not aligned with GDP growth, posing a troubling question for a system designed to scale alongside the economy. The issues extend beyond mere statistics. Businesses, policy analysts, and even state governments are increasingly worried that GST, in its current state, is becoming more of a hindrance than a facilitator. This mounting pressure brings significant attention to the 56th GST Council meeting set to take place this month, where a long-awaited overhaul could finally be on the agenda.
So, what’s amiss, you ask?
For starters, GST was never intended to be straightforward. It was a compromise between the central government and the states, predicated on a shared commitment: each state would relinquish its individual tax authority in exchange for a unified, fairer, and more efficient system. The Centre even provided assurances to compensate states that would incur losses: guaranteed revenue growth for five years. To fund this, it levied a compensation cess on certain ‘sin’ goods, such as tobacco, soft drinks, and luxury vehicles.
But then COVID-19 disrupted that agreement. Revenue plummeted, compensation payments fell short, and the Centre resorted to borrowing to fill the gap. Although the compensation agreement officially concluded in 2022, the cess continues, with the government stating it will remain in effect until March 2026. While funds are still being gathered, they are now used by the Centre to repay its debts rather than benefitting the states.
This situation has sparked discontent. The trust that initially underpinned GST is beginning to fray. Moreover, without a consensus from the GST Council, where states participate in voting, meaningful reforms are likely to stagnate. And many are indeed stalling already.
Following the expiration of the compensation cess, the Centre proposes to replace it with two new levies: a Health Cess on tobacco and other harmful substances, and a Clean Energy Cess on coal and automobiles. The primary concern now is how to fairly distribute the proceeds from these cesses. Will they benefit the states or the Centre? Achieving an answer hinges on the principles of co-operative federalism.
Additionally, there is the issue of rationalizing tax rates. Presently, GST operates with four main slabs: 5%, 12%, 18%, and 28%, along with a variety of exemptions and additional taxes. This creates a confusing structure, and even worse, a regressive one. Necessities like toothpaste, soap, and umbrellas are taxed at 12% or 18%, while some luxury items fall into similar categories.
Consequently, the Centre is advocating for a bold shift to eliminate the 12% slab entirely. This would involve lowering the tax on key goods to 5% and slightly increasing the rate on select items to 18%. This transition could potentially cost the exchequer about ₹40,000 to ₹50,000 crore in the short term, but there are hopes that reduced prices would spur consumption, expand the tax base, and eventually recover the losses over time.
The challenge, however, is that not all states are in agreement. Punjab, Kerala, Madhya Pradesh, and West Bengal have already voiced their opposition. Still, reform feels crucial as it emanates not just from policymakers but the industry as well. Rajiv Memani, President of the Confederation of Indian Industry (CII), accurately highlights the necessity of a “2.0 iteration of reform” in a recent interview, emphasizing increased simplification, especially in audits and compliance.
This is not an exaggeration.
One of GST’s foundational promises was allowing businesses to claim credits on taxes paid for raw materials. However, in practice, this process breaks down frequently. Vendors filing late can result in lost credits, invoice mismatches lead to stuck refunds, and constant changes in rules torpedo clarity. Consequently, capital-intensive sectors find themselves with crores of rupees in limbo. In fact, we previously reported on how GST officials uncovered a fake credit invoice scheme worth ₹11,500 crores back in 2021.
The audit situation is equally messy.
GST treats each state registration as an independent entity. Thus, a business operating across five states is subjected to multiple audits without any coordination. This lack of coherence complicates the entire process. As Memani succinctly puts it:
“If you’re operating in five states, it doesn’t mean you need to have five audits. You can have one audit and all the states can rely on that audit.”
Moreover, sectors such as fuel and alcohol that remain outside the GST framework are significant revenue sources. However, states depend on these for independent revenue, making them hesitant to relinquish control. This absence breaks the input tax credit chain and distorts pricing. For example, a logistics company pays GST for truck maintenance but not on fuel, which contradicts the intention of a unified system. The Centre could remedy this by offering a more substantial share of central taxes, yet that proposal has yet to emerge, further complicating cooperation.
Certainly, GST has fulfilled many promises. However, now, the system feels bogged down by implementation challenges and patchwork solutions instead of advancing the necessary reforms.
Hence, the necessity for GST 2.0 has become evident.
The government acknowledges this urgency as well. Recently, the Public Accounts Committee of Parliament recommended a massive reformation. The call for change is growing louder.
There’s already a list of aspirations circulating: a transition to a three-rate structure (like 5%, 15%, and 28%) with cesses only applicable to sin goods; gradual inclusion of insurance and fuel within GST; immediate cessation of the compensation cess since its original purpose is fulfilled; and, most importantly, revitalizing the Centre–State partnership that made GST feasible in the first place.
None of these changes will be straightforward. Political dynamics are complex, financial implications are substantial, and achieving consensus will require effort. Nonetheless, the alternative—an approach defined by sporadic reforms, incessant tinkering, and rising fatigue—is considerably worse.
This is why the upcoming GST Council meeting is so significant. It represents not merely another policy review, but a pivotal moment for India to determine whether GST will be considered just a tax, or whether it can still embody a transformative vision.
After all, GST was envisioned not merely as a fiscal solution, but as a beacon of unity and reform. A tax designed to unify India should not feel burdensome eight years in, right?
