Urgent Reforms Needed for GST: Insights Ahead of the 56th Council Meeting

Introduction

Think back to 2017 for a moment. The year India took one of its biggest economic leaps—rolling out the Goods and Services Tax, or GST. It wasn’t just a policy tweak; it was a sweeping reform aimed at simplifying a notoriously complex tax system. Suddenly, the patchwork of dozens of state and central levies was flattened into a unified structure. The promise? More transparency, smoother interstate trade, and fewer bureaucratic hiccups at every border. And to be fair, in the early days, there was a genuine sense of progress. Revenues were up. Compliance seemed better. But now, with the 56th GST Council meeting just around the corner, there’s a shift in the air.

GST: What’s Gone Right

For all the criticism GST has attracted over the years, it would be shortsighted to overlook what it’s actually delivered.

Revenue Boom: Let’s start with the numbers. The government’s GST collections have doubled over a five-year stretch—growing from ₹11 lakh crore in FY21 to a projected ₹22 lakh crore in FY25. That’s a significant jump, and frankly, not something to dismiss lightly. Whatever else one may argue, the unified tax regime clearly did its bit for the exchequer.

Bigger Tax Net: Then there’s the massive uptick in compliance. Over 1.5 crore taxpayers are now under the GST umbrella. That’s a solid step toward formalising Indian business—a goal that’s long been elusive in the informal-heavy economy.

Easier for Business: For businesses, especially those operating across multiple states, GST has meant fewer logistical headaches. Thanks to digital filing and harmonised rates, the old days of juggling inconsistent state levies are mostly behind us. The digitalisation of GST filing has, for many, turned out to be a quiet enabler of growth.

But It’s Not All Rosy: The Ongoing Struggles

Still, let’s not kid ourselves. The system’s far from perfect, and the cracks are starting to show.

GST vs GDP Growth: One recurring concern is that even though GST collections are rising, they’re not quite keeping pace with India’s overall economic expansion. The mismatch raises tough questions about how well GST is tracking with broader growth, and whether the design is really as efficient as we hoped.

Growing Disillusionment: From business owners to state finance ministers, there's a steady hum of dissatisfaction. More and more voices are saying that GST, in its current form, might be slowing India down rather than speeding it up.

High-Stakes Decisions at the Next GST Council Meeting

So, as policymakers prepare to gather, what are the key issues they’ll be grappling with?

Compensation and Revenue Sharing: When GST was first introduced, states agreed to give up their independent taxation powers in exchange for guaranteed compensation—at least for five years. But the pandemic scrambled the calculations, and the Centre had to borrow just to keep that promise alive. These days, the GST compensation cess, extended to March 2026, is being used mainly to service that debt. That’s left many states feeling short-changed. Now, there’s fresh talk of new levies—like a Health Cess on tobacco and a Clean Energy Cess on coal. But this is reigniting an old and thorny debate: if these cesses are outside the GST framework, who gets the money? Shouldn’t states have a bigger say? The question of federal balance is back on the table, and it’s not going away quietly.

Tax Rate Overhaul: The current structure has four main slabs—5%, 12%, 18%, and 28%—with far too many exemptions and grey areas. What was supposed to be a clean and transparent system now feels cluttered. Basic essentials being taxed at higher rates has even raised concerns of regressiveness. The Centre is now exploring a rework: scrapping the 12% slab, bringing basic goods down to 5%, and nudging some luxury items into the 18% bracket. The downside? A short-term dip in revenues—possibly ₹40,000 to ₹50,000 crore. But the bet is that lower rates might encourage more spending, and ultimately offset the initial loss.

Fixing Audit and Compliance Hassles: The promise of seamless input tax credit under GST has been undermined by a tangle of ever-changing rules, invoice mismatches, and procedural red tape. Many businesses are sitting on credits they can’t actually use. And those with operations in multiple states are being hit with separate audits in each jurisdiction—driving up costs, wasting time, and adding to frustration.

Fuel and Alcohol Left Out: Perhaps one of the biggest paradoxes is that major revenue earners like fuel and alcohol are not under GST. States prefer it that way, since they rely heavily on those levies. But it creates odd distortions. A logistics company can claim GST credit on truck maintenance, but not on the fuel that keeps the trucks running. That kind of inconsistency does no one any favors.

Looking Loosely Ahead: The Idea of GST 2.0

With so many unresolved challenges piling up, the idea of a full-scale overhaul—a GST 2.0, if you will—is gaining serious traction.

Parliamentary panels and expert bodies are recommending bold changes, including:

Switching to a cleaner three-rate system: 5%, 15%, and 28%. This would simplify compliance and help phase out the more arbitrary brackets.
Gradually bringing excluded sectors like insurance and fuel into the GST fold, closing loopholes and expanding the tax base.
Phasing out the GST compensation cess altogether, now that most states have adjusted to the new normal.
Most importantly, nurturing a more cooperative spirit between the Centre and states—because without trust, any reform is bound to hit roadblocks.

Of course, big reforms aren’t easy. They require negotiation, give-and-take, and a political will that stays the course. But if the current system is allowed to stagnate, the price will be paid in missed opportunities and mounting inefficiencies.

Bringing It Home

The upcoming GST Council meeting isn’t just another technocratic exercise. It’s a moment of reckoning. Eight years into India’s GST experiment, the time has come to ask hard questions: Is the system delivering on its promise? Is it keeping pace with India’s ambitions?

Because here’s the thing—if GST was supposed to unify the country and fuel economic growth, then patchwork fixes won’t do anymore. What’s needed now is a bold, balanced push for reform. And with the eyes of the nation watching, this just might be the best shot we’ve got.