Mohanish Verma, Former PCCIT- IRS
The pace and pattern for growth of the Indian economy is being closely watched by developed and developing world and important financial, economic and progressive institutions across the globe. India remains one of the fastest growing economies of the world and has emerged with a strong 7.8 percent growth in the 1st quarter of 2025-26[1], defying multiple challenges. Real-time taxation and economic reforms by the government and regulators is promising stronger economic trends in coming times. At this juncture, Goods and Services Tax (GST) rationalization, can prove to be a game changer. Based on the principle of one nation- one tax, with simplification and reforms- there has been quick and smooth adaptability of these drastic changes by the consumers, manufacturers and all stakeholders in a short span of just 8 years. GST was introduced in India in 2017. We argue that current reforms were inevitable and are irreversible.
Evolution of GST in India
In a large and complex economy with a federal set up, the multiplicity of tax structures amongst States and absence of an organized monitoring mechanism had led to the introduction of GST as a single tax for ensuring a level playing field across the country, ensuring transparency and objectivity and also prevent cascading effect of taxation. It was envisaged as superior system also to eliminate the shortcomings of VAT, which was introduced in India in 2005. In 2024–25, GST recorded its highest-ever gross collection of ₹22.08 lakh crore, reflecting a year-on-year growth of 9.4 percent. The average monthly collection stood at ₹1.84 lakh crore[2].
The traditional arguments of regressive impact of indirect taxes have gradually been diluted through various global studies supporting the hypothesis that a well strategized indirect taxation (consumption based) regime can ensure a high degree of progressiveness and welfare in the economy[3]. The GST Council in India remains the final authority in regulating and reforming the GST rates and structures in India. It comprises of the Finance Ministers of Centre and States and ensures adequate representation of stakeholders.
Essentials of a vibrant GST System
France was the first country to implement the GST in 1954. Since then, Germany, Italy, the UK, South Korea, Japan, have introduced the GST. The countries which implemented GST first in their nation are France in 1954, Russia in 1991 and China in 1994[4]. Around 160 countries across the world have implemented the GST regime. Some essential components for a robust GST implementation system in present day context are:
1. Number of tax slabs and tax rates- fewer slabs, lower rates.
2. Online structures and designs for a smooth functioning system.
3. Sharply defining the goods and services in each slab, to avoid ambiguity-reduce corruption and arbitrariness.
4. Efficient mechanism for processing, refunds, credits and dissemination of shares to States-reducing litigation and grievances.
5. Overall impact of demand and supply of goods and services for boosting the economy apart from the revenue collection impact.
Complex economies like India will always face challenges in reaching the optimal solutions, very quickly. Over time the outcomes will improve with objectivity, transparency and simplification of the laws and systems.
Evolution in India
In a short span of time the GST Council in India has made significant reforms from the inception stage. Progress has been made in every Council meeting with tweaks at crucial junctures. The number of tax slabs at 5%, 12%, 18% and 28% had been initially envisaged and also in operation. More slabs and multiple rates were perhaps necessary to initiate and assess the system, with the complexities of the Indian economy, before considering a larger reform. The current reforms of September, 2025, have reduced the number of slabs to three- with rates at 5%, 18% and 40%. Most items are however confined to 2 rates of 5% and 18% while the 40% is only for exceptional sin goods and services. While some would argue these are not structural reforms, these are still very important reforms needed to boost the demand and supply chains in the economy.
Another significant impact of these rate changes is the reduction in costs, impact on inflation and perception of consumers and manufacturers, which will act as a catalyst for the economy.
GST, designed in an intelligent manner has gained acceptability by the larger sections of population in most countries and also in India. Further with more rates rationalization, it will be a more acceptable and transparent tax, also digested comfortably at social and political forums. The universal coverage of GST other than the exempt categories, which are few in number, has its advantages. Wishing away direct taxes may also not be possible- due to limitations of GST and indirect taxes to address issues of inequalities and resource mobilization from the higher income persons, whose share of consumption vis-à-vis income is very low. A robust combination of GST and Direct tax regime will work by complimenting each other.
Some operational issues
Designing and operating a vibrant and precision oriented online system always remains a challenge in complex economies like India. The functionality issues relating to categorization of items, credits for inputs, dissemination of shares to States and multiple grey areas in day to day tax administration have to be addressed on a real-time basis. While GST collections have mostly been reflecting an upward trend and many issues have already been streamlined by the Council, there is substantial untapped potential in the Indian economy.
There is little doubt that these reforms are “spot on” with the economy poised to boom in coming years. Tweaking with the multiple features of the GST mechanism is required. Real-time and appropriate modifications will result in benefits both for revenue mobilization and also for energizing the multiple sectors of the economy. Like most tax systems the primary challenges relate to implementation issues of processing, giving credits, refunds and real-time response to systemic issues. Cost of compliance with a simpler and less complicated regime with few slabs, (preferably only one) has often been advocated by many countries. A single tax regime with reasonable rates and aiming for simplification can only result in enhanced economic outcomes.
Fiscal tools for Government.
Several countries have implemented single rates of GST in their tax regimes, which makes simpler compliance. However India is a large economy with multiple levels of Government and a complex economy with wide ranging aspirations and perceptions. A higher level of acceptability of the GST mechanism by larger sections of population, by simplifying and keeping rates at reasonable levels is itself an achievement.
There are also some challenging issues regarding the resource share of State Governments and also urban and local bodies who also have a crucial role in impacting quality of life of citizens on a daily basis. Some economists also suggest the share of Urban and local bodies from the Gross GST Collections for boosting their resources. This can be considered once the buoyancy of GST is ensured and the kitty gets bigger.
The reduction in tax rates might have short term impact on GST revenues of the government, but in the medium and long term the tax revenues from GST can be expected to boom for various reasons like (a) Higher consumption (b) Acceptable and streamlining of tax systems (c ) Lower cascading effect on inputs and costs (d) Larger coverage of taxes amongst the population with increase in disposable incomes.(e) Enhanced global competitiveness.
The financial instruments available with the Central, State and Local governments have mostly been merged in a single instrument of GST with the logic of ensuring uniformity and simplicity. With better structuring, streamlining and superior technological systems, GST will remain the backbone of indirect taxes mobilization. It can have far reaching impact in every section and sector of the economy and can maintain its robust character with regular adaptive mechanisms.
Studies and Positive Impact:
The performance of GST in India has also been reaffirmed through multiple studies which analyzed the data and future trends for GST in India.
The implementation of GST in India is a comprehensive tax reform that aims to simplify the taxation system, improve tax compliance, and promote economic growth. In summary, GST is a significant step towards achieving these objectives. A specific bibliographic study (Sharma and Arora, 2024) has established that a planned and well formulated GST in the Indian context will help in sustained benefits for the economy. The government must tackle the obstacles and streamline the Goods and Services Tax (GST) framework to facilitate efficient operation and achievement[5].
A study across multiple GST Tax systems in India, Canada, UK, Malaysia, Singapore, Australia concluded that there was increased revenue in a sustained manner with fewer slabs, better implementation mechanisms and it also had a strong positive impact on the economy[6].
Some specific studies relating to the benefits of GST system in India and abroad have consistently revealed positive impact to the economy in various ways[7]:
- Avoiding cascading effect of tax i.e. elimination of tax on tax and generation of greater tax revenue for the Government to finance public expenditure (Charlet & Owen, 2010).
- Optimum Resource allocation can truly be ensured by the system of integrated tax. If there are tax differential, the resources will be shifted from the high tax sector to the low tax sector (Khan et al., 2012).
- Absence of the set off system hampers the capital investment, capital formation and thereby the productivity.
- The share of the export to the GDP has increased over time in India but there is strong potential to reinforce the competitiveness by introduction of the logical kind of tax system such as GST (Chada, 2009).
- Increasing the tax base by incorporating the large informal sector and thereby augmenting the Government Revenue.
- Reduction in the inflation as evidenced from the many other economies. (Simon & Clinton, 2008).
- Reduction of the overall compliance cost for the assessees (Dickson & White, 2008).
- Reduction of the administrative cost for the Government (Kumar, 2016).
- Fostering economic growth and development (Leemput & Wiencek, 2017)
The reforms in the GST mechanism for making it aligned both with the requirements of our emerging economy and also complimenting with lower rates and simplification, will boost the economy at this crucial juncture. It may prove to be a historic turning point for the Indian economy.
Conclusion
The latest GST reform in terms of primarily relying on 2 rates of 5 % and 18% and using the 40% rate for sinful Goods and Services is a major step towards generating comfort and ease for its citizens and also placing confidence in the domestic markets apart from making our goods and services cheaper at a global level too. In the present challenging scenario of high tariff wars, such strengthening of our own taxation systems sends a loud message indicating a turning point for the Indian economy. Measuring the short-term revenue impact will be an unfair assessment of this momentous decision. Global experiences have confirmed sustained benefits from a fairly designed and intelligently implemented GST regime.
An average rate of 15.3 percent GST was considered to be revenue neutral[8]. Better designing, wider coverage and simpler tax regulation supported by technology can compensate for the present lower average rates of GST in the long run. Gaining confidence of citizens and generating higher domestic and global demand, longer term benefits of lower costs, wider coverage of GST and a simpler GST regime, is expected to provide higher revenues in a sustained manner along with systemic benefits to the economy. The GST reforms through rate and slab rationalization could not have come at a better time.
(The author is an ex- Principal Chief Commissioner of Income Tax, IRS, past Visiting Researcher at Georgetown University, Washington D.C and has multiple publications on economic, taxation and public policy issues. The views are personal.)
Notes:
[1] https://www.mospi.gov.in/dataviz-quarterly-gdp-growth-rates (last visited 4th September, 2025)
[2] https://www.pib.gov.in/PressNoteDetails.aspx?id=154789&NoteId=154789&ModuleId=3#:~:text=In%202024%E2%80%9325%2C%20GST%20recorded,average%20of%20%E2%82%B995%2C000%20crore.
[3] David A. Weisbach & Joseph Bankman, “Consumption Taxation Is Still Superior to Income Taxation,” 60 Stanford Law Review 789 (2007).
[4] Online at https://mpra.ub.uni-muenchen.de/95152/ MPRA Paper No. 95152, posted 16 Jul 2019 16:20 UTC
[5] Journal of Informatics Education and Research ISSN: 1526-4726 Vol 4 Issue 2 (2024) 315 http://jier.org GST A Robust Tax Regime: A Bibliometric Analysis on GST Yashraj Sharma, Research Scholar, Faculty of Management Studies, Gurukula Kangri (Deemed to be University), Haridwar, Uttarakhand, India. Dr. Bindu Arora, Professor, Department of Management Studies, Gurukula Kangri (Deemed to be University), Haridwar, Uttarakhand, India.
[6] International Journal of Scientific Research in Engineering and Management (IJSREM) Volume: 09 Issue: 03 | March – 2025 SJIF Rating: 8.586 ISSN: 2582-3930 © 2025, IJSREM | www.ijsrem.com DOI: 10.55041/IJSREM42635 | Page 1 A Comparative Study of GST Implementation Across Countries Analysis different GST models, their effectiveness economic impacts Dr. Aju Saigal.
[7] Impact of Goods & Services Tax: The Global Experiences vis-à-vis The Domestic Expectations By Sumit Kumar Maji. https://www.researchgate.net/publication/321091296_Impact_of_Goods_Services_Tax_The_Global_Experiences_Vis—Vis_the_Domestic_Expectations (last visited 4th September, 2025)
[8] https://www.moneycontrol.com/news/india/we-are-much-below-revenue-neutral-rate-in-gst-says-fm-sitharaman-12814987.html (last visited 4th September, 2025)
