The Goods and Services Tax (GST) introduced in India in 2017, represents one of the most significant structural reforms in the country’s taxation system and has been widely recognized as a transformative step in its economic trajectory.
As a destination-based value-added tax, GST replaced the earlier cascading ‘tax-on-tax’ regime. Anchored in the principle of ‘one nation, one tax’, it unified a fragmented system of state-and central-level levies under a single framework.
Since its implementation, GST has demonstrated robust growth in both revenue mobilization and tax base expansion, thereby consolidating India’s fiscal capacity while enhancing the efficiency and transparency of indirect taxation.
This indirect tax reform is known to have enhanced the competitiveness of Indian businesses in the global market, facilitated seamless inter-state movement of goods, strengthened revenue collection by reducing leakages, and contributed to greater efficiency and transparency in the tax administration system.
The trajectory of collections underscores this trend: in 2020-21, gross GST revenue stood at Rs. 11.37 lakh crore with an average monthly collection of approx. Rs. 95,000 crore. This increased to Rs. 14.83 lakh crore in 2021-22 and further to Rs. 18.08 lakh crore in 2022-23.
In 2023-24, collections rose to Rs. 20.18 lakh crore, before reaching a record high of Rs. 22.08 lakh crore in 2024-25, representing a year-on-year growth of 9.4% and an average monthly realization of Rs. 1.84 lakh crore. The steady upward trend reflects improvements in compliance, widening of the tax base, and the resilience of economic activity under the GST regime.
Notably, from the ramparts of the historic Red Fort, the honorable Prime Minister, Narendra Modi in his Independence Day address announced that the citizens could look forward to a forthcoming ‘Diwali gift’ in the form of long-awaited reforms to the Goods and Services (GST) tax regime.
Thus, through the announcement, it might be worthwhile to draw attention to the critical question: While every reformative measure is accompanied by initial challenges, has the country successfully overcome the teething issues of the revolutionary GST reform, or does the system still require further fine-tuning?
In its early years, the GST faced hurdles such as technical glitches in the GSTN portal, delays in input tax credit reconciliation, compliance burdens for small enterprises, and disputes arising from classification across multiple tax slabs. Over time, many of these challenges have been partially mitigated through digital infrastructure improvements, simplified return filing mechanisms, and better coordination between the Centre and States.
Nevertheless, persistent concerns remain – particularly around inverted duty structures and frequent rate rationalizations – that continue to create uncertainty for businesses. Against this backdrop, the proposed rationalization into a two-slab structure with a distinct rate for ‘sin goods’ signals both the maturation of the GST framework and the recognition that further refinement is necessary to balance efficiency, equity and fiscal stability.
Rather it is interesting to note that most efficient GST / Value added tax systems worldwide either use one standard rate with limited exemption (eg. New Zealand, Singapore, Australia) or a two-rate system (eg. Germany, Canada and many European Union countries). Countries that had complex, multi-rate structures over the years have progressively moved towards fewer slabs to reduce disputes and improve compliance.
Importantly, from a macroeconomic perspective, lowering of GST rates can ease inflationary pressures, enhance consumer affordability, thus catalyze domestic consumption and aggregate demand. Given the regressive nature of indirect taxes, reduction of the indirect tax burden – especially on consumption oriented goods can lead to lower price levels thereby benefitting low income households.
Also, a two-rate structure would operationalize the principle of vertical equity by ensuring that essential goods, which constitute a larger share of expenditure for low income households, are taxed at a minimal rate, while higher rates are reserved for discretionary or luxury primarily consumed by the more affluent segments of society.
As per estimates of Morgan Stanley this can result in a 40 basis point reduction in consumer price index inflation thereby increasing the purchasing power of households. Increased affordability and improved purchasing power can give the much needed boost to discretionary spending particularly in the automobile, FMCG and consumer durable sectors.
Higher consumption in turn can have a multiplier effect in the economy and spur business sentiment, increase capacity utilization and support private investment. Stronger economic growth in turn can mitigate some of the fiscal revenue losses due to rate reduction thereby resulting in a net positive effect on the economy.
Last but not the least, the long term vision of GST rationalization lies in its alignment with the country’s broader development trajectory toward 2047, when the nation aspires to be a ‘Viksit Bharat’. A simplified, transparent, and efficient tax structure is foundational to this transition, as it directly influences investment climate, competitiveness, and fiscal stability.
Reducing compliance burdens, streamlining rate structures, and curbing revenue leakages will strengthen the tax to GDP ratio and ensure resource mobilization for public investment in infrastructure, social welfare and human capital – all being critical enablers of inclusive growth.
Furthermore, harmonization of the indirect tax framework with prevalent global best practices, will help integrate the country more effectively into the global value chains, thereby supporting export competitiveness.
To sum it up, over the next two decades, as the country seeks to harness its demographic dividend, urbanization and technological transformation, a predictable and growth-friendly tax system will play a pivotal part in the transition from a middle income economy to a high income economy, ensuring that fiscal policy is not merely revenue-oriented but is more developmental in character.
(The author is a Professor in Economics and Area Chair at the Birla Institute of Management Technology; Views expressed are personal)
