Context:

India marked eight years since the launch of the Goods and Services Tax (GST) on July 1, 2017 — a landmark reform aimed at unifying the indirect tax system under the motto “One Nation, One Tax.”

Key Features of GST

• Destination-Based Taxation: GST revenue accrues to the state where goods or services are consumed, unlike the earlier origin-based tax system.
• Dual GST Structure: Taxes are levied both by the Centre and the States/Union Territories:
  • Central GST (CGST) by the Union government,
  • State GST (SGST) or UT GST by States/UTs,
  • Integrated GST (IGST) on interstate transactions and imports, shared between Centre and consuming state.
• Input Tax Credit (ITC): Facilitates seamless credit of taxes paid on inputs throughout the supply chain, preventing tax-on-tax cascading.
• Zero-Rated Exports: Exports are treated as zero-rated supplies, enabling exporters to claim refunds on input taxes and boosting global competitiveness.
• Tax Rate Structure: Four main slabs – 5%, 12%, 18%, and 28% – plus special rates for precious metals and stones (e.g., 3% on gold), and a GST Compensation Cess on select goods like tobacco and vehicles to offset states’ revenue losses during transition.

Achievements in Eight Years

• Unified Tax System: GST replaced 17 central and state taxes plus 23 cesses, simplifying compliance and administration.
• Record Revenue Collections: Gross GST collections reached ?22.08 lakh crore in 2024-25, with an average monthly intake of ?1.84 lakh crore and 9.4% annual growth.
• Expanded Tax Base: Active GST registrations have grown to over 1.51 crore as of April 30, 2025.

Challenges Faced by GST

• Exclusion of Key Sectors: Petroleum products and alcohol remain outside GST, undermining the goal of a unified tax framework.
• Complex Tax Rates: Multiple slabs and special rates create classification challenges and increase litigation.
• Frequent Law Changes: Businesses, especially MSMEs, struggle with evolving compliance requirements, return formats, and penalty regimes.
• Inverted Duty Structure: Certain sectors like textiles face higher tax on inputs than outputs, causing cash flow problems.
• ITC Restrictions: Input tax credit is often denied due to supplier non-compliance or procedural issues, unfairly burdening buyers.
• Delayed Dispute Resolution: GST Appellate Tribunal was inactive for years, leading to backlog and judicial overload.

Suggested Reforms for GST 2.0

• Include Petroleum and Electricity: Bringing these into GST will reduce cascading taxes and increase transparency.
• Simplify MSME Compliance: Quarterly returns with easy formats and automatic ITC reconciliation can ease compliance burdens.
• Expand Tax Base: Rationalize exemptions and comprehensively cover emerging sectors like the gig economy and digital services.
• Improve ITC Mechanism: Allow provisional credit and enhance invoice matching tools to minimize unfair denials.
• Rationalize Tax Slabs: Fewer tax slabs will reduce disputes and improve ease of compliance.
• Enhance GST Council Functioning: Greater transparency, stakeholder engagement, and timely decisions are needed, possibly with weighted voting to resolve deadlocks.

About the GST Council

• Established under Article 279A via the 101st Constitutional Amendment, the GST Council is chaired by the Union Finance Minister.
• It recommends tax rates, exemptions, laws, and apportionments, and resolves disputes between Centre and States.
• Voting power is divided with the Centre holding one-third and States collectively two-thirds.

Conclusion

After eight years, GST has revolutionized India’s indirect tax landscape but remains a work in progress. As India advances toward a $5 trillion economy, GST reforms (GST 2.0) are crucial to sustain growth, ensure stable revenues, and reinforce cooperative federalism.

Source: The Hindu