Taking stock of the GST regime
Jul 1, 2025
GST has unified India's market, stabilizing revenue, but challenges remain with its complexity and state fiscal autonomy amid calls for reform.
Goods and Services Tax (GST) is the single most important indirect tax reform India has seen. It created a unified national market for most goods and services — some such as fuel and alcoholic beverages are still outside its ambit — 60 years after the country became independent.
GST, in many ways, was a leap of faith for the Indian state and economy. States had to be assured of guaranteed revenue growth for the first five years to agree to it, and give up their constitutional right to tax. There were concerns whether such guarantees would take a toll on the fisc. Eight years later, the answer is clear: revenue performance of the GST, as a share of GDP, has stabilised.
An HT analysis of the number of e-way bills — each GST transaction generates a unique e-way bill — shows that intra-state numbers continue to rise at a faster pace than inter-state transactions. This suggests that the local economy is as much, if not a bigger driver, of the GST universe of transactions than inter-state trade. GST aside, this data point also tells us about the importance of the local and perhaps even hyperlocal economy in India.
Its successes aside, as GST completes eight years, some challenges loom large. GST is still far from a simple tax regime in the true sense of the term. While some of the teething troubles have eased with time, it could still do with fewer slabs. The 2015 Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax recommended three GST rates with most goods being taxed at the standard rate of about 17-18%. Currently, GST has four non-zero slabs (5%, 12%, 18% and 28%). The biggest impediments to achieving this goal are revenue and political considerations associated with any such changes. Everyone wants lower GST rates for most things and higher revenues from GST at the same time.
This is where another of GST’s biggest impacts needs to be thought of more seriously. State governments have been left with very little fiscal autonomy in the post-GST environment. Many of them (including some with BJP governments) are now pushing for greater devolution from the Centre in the ongoing 16th Finance Commission consultations. This clamour is coming at a time when almost all states are spending money to politically weaponise welfare gains. GST has achieved its economic objectives, but it must adapt to the shift in the political part of the larger political economy dialectic.
[The Hindustan Times]
