October 30, 2025

GST Needs Solid Structural Reforms, Not Tinkering

By Sunil Garodia
First publised on 2025-08-26 04:52:24

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Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.

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GST 2.0 Isn't Just Reform - it's Necessary Course Correction

The Goods and Services Tax (GST), rolled out in 2017 as a game-changing reform to unify India's indirect taxation system, is now in urgent need of recalibration. While GST was intended to simplify compliance, broaden the tax base, and foster a common market, its implementation has revealed structural flaws that are hobbling businesses and limiting revenue potential. The proposed GST reforms seek to correct these gaps - and they are both timely and necessary.

Pressing Issue

The most pressing issue is the complexity of the current GST structure. With multiple tax slabs - 0%, 5%, 12%, 18% and 28%  - GST has not lived up to the promise of a "one nation, one tax" regime. Businesses, especially small and medium enterprises, struggle with classification disputes, frequent notifications, and compliance costs that eat into margins. Simplifying the structure, ideally by rationalizing slabs into fewer rates, would not only make the system more transparent but also reduce litigation and uncertainty.

What is on the agenda

The GST Council is expected to move decisively on this front. A two-slab structure of 5% and 18% is under consideration, with a 40% levy on sin and luxury goods. Essential goods such as food and textiles may all be moved into the 5% bracket, while premiums for life and health insurance could become exempt from GST altogether. These proposals, if implemented, would significantly ease compliance and bring predictability for businesses and consumers alike.

Expert view

Revenue implications, however, are a concern. Experts estimate that the overhaul could temporarily strain government finances. Forecasts suggest a revenue loss in the range of Rs 85,000 crore to over Rs 1 lakh crore annually, potentially widening the fiscal deficit by about 0.2 to 0.3% of GDP. Yet most economists argue that this shortfall would be cushioned by higher consumption and investment over the medium term. Some project a consumption boost of nearly Rs 2 lakh crore, with GDP growth rising by 0.5 to 0.7 percentage points. Inflation too could ease modestly, giving monetary policy more flexibility.

Other concerns

Another concern is the uneven burden on different sectors. Inverted duty structures, where inputs are taxed at higher rates than finished goods, have distorted working capital cycles and discouraged investment. Correcting these anomalies is on the agenda and would restore fairness. Automation measures such as pre-filled returns, real-time invoice matching, and AI-driven fraud detection are also being considered to curb evasion and ease compliance.

States' perspective

From the states' perspective, revenue-sharing remains a thorny issue. Some states fear substantial losses and are pressing for compensation. Cooperative federalism will be crucial in making these reforms succeed. Without consensus and a credible framework for revenue protection, the effort risks political pushback.

Simple rationale

The rationale for reforming GST is clear: India cannot afford a tax system that hampers competitiveness, frustrates businesses, and limits revenue growth. If the country aspires to become a $5 trillion economy, its tax regime must be efficient, fair, and transparent. The upcoming reforms present an opportunity to deliver on the original promise of GST  - a unified market, easier compliance, and robust revenue generation. The challenge for policymakers is to act decisively, simplify the structure, and strengthen enforcement while keeping the federal spirit intact.

Reforms are a need

GST was always meant to be a dynamic system, evolving with the economy's needs. The proposed reforms are not just desirable; they are essential to ensure that India's most ambitious tax reform lives up to its full potential.