Why in news?
August 2025 marked eight years since the Goods and Services Tax (GST) was introduced. Analysts used the anniversary to review how GST has evolved, its successes and the challenges that remain.
Background
GST replaced a maze of central and state taxes on 1 July 2017. It is a destination‑based consumption tax collected at each stage of the supply chain. The Constitution was amended to allow a dual structure — the Centre levies Central GST (CGST), states levy State GST (SGST) and interstate transactions attract Integrated GST (IGST). A GST Council of federal and state finance ministers decides rates and rules.
Evolution of GST
- Multiple tax slabs: Initially there were seven tax rates (0 %, 3 %, 5 %, 12 %, 18 %, 28 % and a compensation cess). Rates for many items have since been reduced, but the structure remains complex.
- Compliance improvements: The rollout of e‑way bills for goods movement and e‑invoicing for large businesses has improved transparency and reduced tax evasion.
- Compensation scheme: To persuade states to join, the Centre guaranteed five years of revenue protection. This ended in June 2022, straining state finances.
- Reform proposals: By 2025 the Council was considering moving towards four tax slabs and bringing petroleum products and electricity into the GST net.
Achievements
- Revenue growth: GST collections have been robust, crossing ₹1.5 lakh crore per month in 2024. The tax has created a nationwide market and reduced logistics costs.
- Transparency: Digital returns and invoice matching discourage under‑invoicing and tax evasion. Consumers benefit from uniform pricing across states.
- Cooperative federalism: The GST Council provides a platform where the Centre and states can negotiate tax issues and share best practices.
Challenges
- Rate complexity: Multiple slabs cause classification disputes and compliance burden. Essential items sometimes fall in higher slabs while luxury items enjoy lower rates.
- State finances: The end of compensation has left some states with revenue shortfalls. The Centre has provided loans to bridge the gap, but disagreements persist.
- Compliance burden: Small businesses and micro enterprises find monthly filings and digital processes difficult. There are calls for simpler return formats.
- Exclusions: Petroleum, alcohol and real estate remain outside GST, reducing its effectiveness and creating opportunities for arbitrage.
Way forward
- Rationalisation: Gradually merge slabs into a simpler structure with fewer rates. Consider a single standard rate with low and high rates for essentials and luxuries.
- Expand the base: Bring petroleum products, electricity and high‑value real estate into the GST regime to reduce cascading and widen the tax net.
- Support states: Devise a new formula to share revenues fairly and ensure fiscal autonomy for states.
- Simplify compliance: Offer quarterly filing for small taxpayers, strengthen help‑desks and provide training to micro enterprises.
- Leverage technology: Use artificial intelligence to detect fraud and simplify audit processes while protecting taxpayers’ data.