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Eights Years On, the Structurally Flawed GST has Failed to Achieve its Goals

Arun Kumar

GST Was launched on July 1, 2017 with the promise that it would transform the Indian economy. It was characterized as a second freedom since it would unify the nation. Eight years later, it is time to assess its performance. While the Prime Minister has lauded the tax, the Leader of Opposition in the Lok Sabha Rahul Gandhi, has criticised it since it marginalises the marginals.

Benefits

GST supposedly subsumed seventeen different taxes, thereby simplifying indirect taxation. Further, with a common tax rate applicable across the country, India was to become one unified market, leading to ease of doing business. The cascading effect of taxes was expected to be eliminated, resulting in lower incidence of taxes and reducing inflation. Black income generation was expected to decline, leading to additional tax collection which could help social development. So, growth was expected to accelerate leading to creation of more jobs.

It was slated to reduce inequality by benefiting the poorer states. GST is collected at the last point of sale even though it is applicable at every stage of production and distribution. The consumer pays the entire amount when the final sale occurs. Since the poorer states produce proportionately less than the better off states, their share of consumption in their state GDP (‘GSDP’) is higher, so they were expected to collect proportionately more of GST, thereby causing inter-state disparities to decline.

This expected benefit to the consuming states became a stumbling block for introduction of GST. The producing states, like Gujarat and Tamil Nadu, feared losing tax revenue and opposed GST. To bring them on board, they were promised a 14 percent increase in tax revenue over the base year, 2015-16. Further, the cash cows of petroleum goods and liquor for human consumption were kept out of GST to allow flexibility to the States. The Centre and the States could levy their own excise on these items and collect extra taxes as per their needs. This came in handy during the pandemic when tax collections plummeted.

In brief, the promise was that GDP would rise, inflation would decline, black economy would be checked, inter-state inequality would decline and social sector spending would rise thereby benefitting the marginalised sections. It seemed like a win-win. Did it turn out as promised?

Assessment

Going by official data, did growth accelerate?

Three complications arise in assessing this. First, the pandemic changed the basic parameters of the economy as it experienced its biggest downturn in 2020-21, three years after GST’s introduction. In 2021-22, the economy started recovering but it has remained below the level it should have achieved if the pandemic had not stuck. Second, GST was initiated 7 months after demonetisation which had damaged the economy. So, the GDP base was already low. Third, the three years of pre-pandemic functioning of GST can be termed as transitional for such a complex tax. Similarly, the three post pandemic years are also transitional. So, given these and other complications, both global and local, is it fair to assess the impact of GST on GDP?

Nonetheless, going by the available statistics, the economy’s rate of growth declined from 8 percent in Q4 of 2017-18 to 3.1 percent in Q4 of 2019-20, just before the pandemic struck. Post the pandemic, the economy recovered from a low, therefore a high growth rate was expected. But, it has slowed down significantly in 2024-25. The cause of slowdown in both these periods is due to rising inequality leading to inadequate demand and consequent slowdown in private investment, in spite of increased public investment. And, GST has significantly contributed to aggravating disparities.

Inequality and inflation

GST has adversely impacted the non-agriculture unorganised sector which employs 48 percent of the workers and produces 30 percent of the output. It is mostly outside the GST net. So it does not get input credit which is available to the organised sector. Thus, the cost of production declines for the organised sector but not for the unorganised sector. Further, the organised sector stops buying from it since it has to pay a reverse charge which increases working capital requirement – a double jeopardy for the unorganised sector. Thus demand has shifted to the organised sector which is growing at the expense of the unorganised sector. Consequently, disparities rise and so does unemployment given the automation and mechanisation in the organized sector.

Further, the backward states have a higher share of the unorganised sector in their GSDP. So, a decline of the unorganised sector impacts them more than the advanced states. The benefit of a proportionately greater share of GST is negated by the decline in their growth and higher unemployment. Consequently, inter-state disparities increase.

GST was made revenue neutral. So, in the aggregate, the effective tax rate remained unchanged and even if the cascading effect of taxes decreased, prices did not decline. Given the complexity of GST, the cascading effect, though less, persisted. Further, the growth of the organised sector at the expense of the unorganised sector has given it higher pricing power, as seen post pandemic, and that prevents inflation from declining. Even if the effective tax rate is reduced, profit margins could be raised so that the benefit would not accrue to the consumers as price declines.

Complexity and black

Indian GST is a half-way house and not in its ideal form. But, that is also true for other countries. The ideal form requires one rate of tax on all items.

But that is not feasible in India since indirect taxes are regressive which put an undue burden on the marginalised sections. To reduce regressivity, essentials are exempted or taxed at low rates. It was famously said, ‘A Benz car and Hawai chappals cannot be taxed at the same rate’.

India has a multiplicity of tax rates – in percent, 0, 0.25, 1, 1.5, 3, 5, 6, 12, 18 and 28. Additionally, on luxury items and sin goods there is a Compensation Cess which varies from 11 percent to 290 percent depending on the category. Finally, within a given category like hotel rooms and suites, different rates of tax exist that enable misclassification and tax evasion.

Routinely, fake companies are detected that enable businesses to claim input credit. Several times it has been reported in the Parliament that about Rs. 2 lakh crore of GST evasion is being detected annually. Actual evasion is often a multiple of what is detected. Tax officials have been found to be in cahoots with tax evaders. Manipulation of e-way bills and bribes paid during transportation are being reported.

So, GST has not been able to impact tax evasion. If tax evasion had declined, the tax/GDP ratio and especially the direct tax/GDP ratio should have risen. In 2014-15, indirect tax/GDP ratio was 11 percent and total tax/GDP ratio 16.73 percent. In 2023-24 they were 11.9 percent and 18.5 percent respectively. This small increase can be attributed to the rising share of the organised sector in GDP (from which 95 percent of the GST is collected), rather than better compliance.

Reform needed

GST in its present form is not suited to India given a) the nation’s diversity b) the complexity of the GST introduced and c) the rampant corruption sustained by the ‘triad’ consisting of businessmen, politicians and the executive. The argument that GST was initiated in France in 1954 is specious since the two economies are very different.

Introducing a very complex tax where governance is fraught was bound to lead to failure. So, hundreds of amendments have had to be made in GST since its inception and there are innumerable court cases. GST benefitted the organised sector since it was already computerised and obtained additional markets. The small and micro businesses lost since their account keeping is rudimentary and improvements in it will be unsustainable given their low profits. GST has impacted federalism by taking away the power of the states to fix their tax rates – that undermines the basic structure of the Constitution.

In brief, GST in India has not delivered, not because of faulty or hurried implementation, as some argue, but because it is structurally flawed. The large unorganised sector which lies outside the fold of the government poses an irresolvable problem. So, promises remain unfulfilled and to overcome the difficulties there is need for urgent reform of GST, as this author has been suggesting.

[Arun Kumar is a Retired Professor of Economics at the Jawaharlal Nehru University. He is the author of ‘Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’. 2020. And, Indian Economy since Independence: Persisting Colonial Disruption. 2013. Courtesy: The Leaflet, an independent platform for cutting-edge, progressive, legal & political opinion, founded by Indira Jaising and Anand Grover.]

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Eight Years of GST: Many Gains, Lingering Pain

G. Srinivasan

The Goods and Services Tax (GST), widely hailed as a good, simple tax, has the best and the worst of all features of the country’s indirect tax system at this juncture, over eight years after its rollout. Both the United Progressive Alliance (UPA) government (2004-2014), led by the Congress, and the National Democratic Alliance government (NDA), led by the BJP in its first two tenures (2014-24), have claimed credit for this consumption-based tax, which was launched on July 1, 2017, at a midnight special session of Parliament by the then Finance Minister Arun Jaitley. He used all his lawyerly acumen and persuasiveness to bring on board all the States and Union Territories.

Early years

Broadly seen as a precursor to a “one-nation, one tax” in a country where the indirect tax system was riddled with multiple taxes and mind-boggling rates, GST was not instantly endorsed by trade and industry; it had to face a whole host of problems ranging from teething troubles to ground-level glitches that any new tax regime must wrestle with.

GST subsumed as many as 17 local levies and taxes and 13 cesses into a five-tier structure, broadly simplifying the tax rates at 5, 12, 18, and 28 per cent. Bullion and jewellery had its own sui generis GST rate.

Luxury and demerit goods such as tobacco are taxed at the highest rate of 28 per cent in the name of “sin tax”, while packed food and essential items attract the lowest rate of 5 per cent. The threshold limit of annual turnover for registration under GST for units engaged in supply of goods was raised from Rs.20 lakh initially to Rs.40 lakh effective from April 1, 2019, to ensure that GST compliance was not is required by small units below the threshold turnover and they were exempted from GST.

Grey areas

With the benefit of hindsight, experts have contended that while GST has by and large simplified indirect taxes, many grey areas still linger despite the passing of eight years. They encompass a wide swath of issues, from rate rows to procedural complexities, burdening domestic taxpayers and professionals with compliance hurdles and troubles galore.

This is conclusively borne out by the avalanche of GST circulars down the eight years which show ongoing compliance issues. There are numerous instances where the courts have conclusively ruled that clarifications of the Central Board of Indirect Taxes and Customs (CBIC) circulars could not override the CGST Act, bringing clarity and relief to the taxpayers.

According to fiscal experts, because tax authorities are inundated with representations and courts give new interpretations, it is no surprise that the CBIC issues circulars to clear the air, ensure uniformity, and facilitate smooth compliance. But it is certainly not a commendable state of affairs when there are over 8,000 disputes involving the GST system over eight years, even as the long-delayed process of setting up an appellate tribunal has barely begun, with the GST Appellate Tribunal (Procedure) Rules, 2025, coming into force in April this year.

GST Council meeting

Meanwhile, the the GST Council has not held a meeting for over six months. The Council, which meets every quarter, last held a meeting on December 21, 2024, wherein the States discussed many issues bearing on the fiscal relationship with the Centre in the light of GST revenues not growing at the 14 per cent annual rate as assumed with the advent of the tax. There is also a need for higher allocation from Central taxes to their revenue kitty now that the 16th Finance Commission has completed the process of consultations with the States and is in the midst of getting its report ready by October 2025.

Even as the High Courts are neck-deep in disputes, most of which would invariably relate to procedure or method rather than the statute itself, the professional tribunal will hopefully deliver, and to the satisfaction of the stakeholders.

June collection growth slips

Be that as it may, the eighth anniversary of GST on July 1 was coterminous with the dismal tax collection for the month of June, after two resounding performances of of Rs.2 lakh crore each in April and May 2025. GST collections in June grew only 6.2 per cent year-on-year, the slowest since June 2021 and lower than the fantastic run of 12.6 per cent and 16.4 per cent in April and May, respectively. The slide-down stemmed from a dip in collections in domestic transactions and imports.

Net GST revenue adjusted for refunds and transfers (input tax credit and after States’ share) stood at Rs.1.59 lakh crore, marking am even lower and tepid 3.3 per cent year-on-year rise. As it is a consumption tax, a tangible fall in yields mirrors anaemic economic activity, besides inveterate inefficiencies in the system, which need to be tackled with new processes and procedures to ensure et the cooperation of all the beneficiaries and stakeholders for the overall efficacy of the tax.

GST and ease of doing business

Undoubtedly, the simplified GST regime has, by degrees, transformed the ease of doing business in the country over the years, as it has resulted in a 33 per cent improvement in transport time, enabling the logistics business to prune drastically the dwelling time in various check-points that had become choke points in the free movement of goods across the States and within States. There has also been a distinct improvement in the number of commercial taxpayers, from 60 lakh to 1.5 crore, with an average monthly collection that is close to Rs.2 lakh crores.

E-invoicing and e-way bills have had a tremendous effect in terms of efficiency in operations for business and trade. It is not all hunky-dory in the GST ecosystem, though, as the total number of GST evasion cases detected by the Central government since 2020 has gone up significantly from 12,596 in 2020-21 to 25,397 in the first 10 months of 2024-25, involving a total amount of Rs.6,79,505 crore in a total of 86,711 cases in the period.

Of this, Rs.1,23,896 crore has been recorded as voluntary deposits by the defalcators. In input tax credit or refund claims, there were 42,673 cases during this period involving Rs.1,66,241 crore, of which Rs.12,367 crore was accounted for by voluntary deposits, according to Minister of State for Finance Pankaj Chaudhary in a written query in the Lok Sabha on March 10, 2025.

Finance Ministry mandarins claim that there are several ways to help in improving compliance and preventing tax evasions such as digitisation through e-invoicing.

Operational efficiency

Besides, GST analytics such as automated risk assessment based on compliance attributes of taxpayers, highlighting of outliers based on system-flagged mismatches, and providing intelligence inputs with a view to manage GST revenue risks through various tools have gone a long way to bring efficiency in operations.

Efficiency has been improved by the ability to generate actionable reports, gleaning inputs about GST non-compliance or evasion on the basis of identified anomalies in taxpayer comport—including potential tax evasion, fraudulent registration, and suspicious e-way bill activity—and selection of returns for scrutiny and taxpayers for audit based on various risk parameters.

The GST Amnesty Scheme under Section 128A of the IT Act announced this year is a welcome step to help taxpayers clear old arrears sans excruciating penalties.

It is germane to note that a PricewaterhouseCoopers report forwarded to the GST Council, whose Chairperson is the Union Finance Minister and all State Finance Ministers are Members, pitched for the simplification of procedures, lessening of compliance burdens, and reduction in rates to three with a view to broadening the base by bringing petroleum products under the GST ambit. PricewaterhouseCoopers said: “A transition from a 4-tier to a 3-tier rate structure would reduce interpretational disputes, improve tax certainty, and simplify compliance.”.

Even as these crucial reforms are underscored to render this important tax to improve its operational efficiency, it is not altogether out of place to highlight the overwhelming urgency on GST reforms recommended by the Public Accounts Committee (PAC) of Parliament. The 19th report of the PAC, tabled in the Budget session of Parliament, sought a comprehensive review of the GST framework to preclude “unnecessary procedures and requirements” and advocated a a “revamped GST 2.0”, with due consultations of all the stakeholders.

Room for improvement

In its scathing review of the extant GST, the PAC noted that the failure to put in place the mandatory Comptroller and Auditor General (CAG) audit of the Compensation Fund Account for more than six years had “adversely affected” release of compensation to States.

It may be noted that GST’s advent in 2017 had led to apprehensions among States about loss of fiscal autonomy and centralisation of all collections to the Union. The GST (Compensation to States) Act, 2017, came into force to compensate for this loss of revenue and promised States a 14 per cent annual revenue growth for five years (2017-22). But many States have bemoaned either non-receipt of funds or undue delays which they said negatively impacted governance.

Alluding to filing and refunds by GST payers, the PAC lamented the extant mechanisms as inadequate, pointing at unconscionable waiting periods for refunds which could result in potential cash flow problems to businesses operating on wafer-thin margins in a high-cost economy. It said that the refund processing system ought to provide clearer timelines for processing claims and regular updates on their status.

According to fiscal experts, the time is ripe for the Finance Ministry to strongly consider the growing concerns of the States regarding their financial requirements and the revenue share they get not only through this indirect tax but also in the overall devolution of taxes, and reduce the Centre’s recourse to cess, as it is not not shareable with States. Alongside, other overriding concerns voiced by trade and industry also need to be factored in by the GST Council in its forthcoming meeting so that the beneficiaries bear this tax with less pain and more gain to the treasury in a mutual win-win game, going forward.

[G. Srinivasan is a freelance journalist based in Delhi who previously worked with The Hindu Group. Courtesy: Frontline magazine, a fortnightly English language magazine published by The Hindu Group of publications headquartered in Chennai, India.]