Everyone Loves a Good GST, The Case for Completing India’s Indirect Tax Revolution

Everyone Loves a Good GST, The Case for Completing India’s Indirect Tax Revolution

Goods and Services Tax (GST) today is a drag on Indian success. The way GST works hinders investment, exports, and productivity. Faced with a fresh wave of economic stress through protectionism in the United States and the war in Iran, there is a crying need for a better functioning economic-policy machinery in India. The time has come to complete GST reform. The long journey to GST began when a group of economists built the Vijay Kelkar report on FRBM (Fiscal Responsibility and Budget Management) implementation in 2004, showing a fully articulated design of GST and its importance for economic strategy. As with all important ideas, this began as novel concepts, gained acceptance in the export community, and then got broadly accepted in the policy community. Once the policy consensus shifted, the idea was ripe for implementation. However, in the effort to build a consensus, early compromises on design diluted the core principles of a value-added tax. All political parties signed off on these compromises, so there is plenty of blame to go around. The nice thing about standing in 2026 is that everyone sees these mistakes with crystal clarity. Everyone now sees the value of a good and simple tax. A single low rate, a comprehensive base, complete input tax credit, removal of all traditional indirect taxes such as various kinds of cess, zero rating of exports, and GST on imports at the border. There is now broad agreement in Indian politics that GST needs to be reformed in these directions. The question is no longer whether reform is needed, but whether the political system can deliver it.

The Original Vision: A Good and Simple Tax

Prime Minister Narendra Modi, on July 1, 2017, in the Central Hall of Parliament, described GST as “a good and simple tax.” That was the vision. A single rate, a comprehensive base, seamless input tax credit, and the removal of all cascading taxes that had plagued the pre-GST regime. The reality, however, has fallen short. Multiple rates, cesses, GST exemptions, and cholesterol in input tax credit have fragmented the base and reintroduced cascading, undermining both simplicity and efficiency. What was supposed to be a unified national market has become a complex patchwork of rate categories, compliance burdens, and interpretation disputes.

Union Finance Minister Nirmala Sitharaman, in recent GST Council briefings, emphasised that “GST revenues are strong and the system is stabilising.” Revenue buoyancy, however, is not a measure of design quality. The real adverse impact that should worry the Ministry of Finance is on economic growth. High revenue collections can coexist with high compliance costs, distorted investment decisions, and suppressed formalisation. The test of a good tax system is not how much it collects, but how efficiently it collects it—and whether it supports, rather than hinders, productive economic activity.

The Political Consensus: Everyone Sees the Flaws

Remarkably, there is now broad political consensus across the ideological spectrum about the flaws of the present GST. Former Union Finance Minister P. Chidambaram has argued that “GST is too complex and should move to fewer rates.” This diagnosis is directionally correct but incomplete. The weaknesses of GST run beyond rate multiplicity. For example, a simplified rate structure cannot deliver efficiency if the credit chain remains broken. Rahul Gandhi has repeatedly described GST as “a Gabbar Singh Tax” in the context of micro, small, and medium enterprises during campaign speeches between 2017 and 2019. The burden on small businesses is real, but it reflects the weaknesses of the present Indian GST design and not the GST when done right. Threshold effects, compliance complexities, and broken credit chains increase informality instead of reducing it.

M.K. Stalin (Dravida Munnetra Kazhagam) has argued that “GST undermines the fiscal autonomy of states.” The concern is overstated. States receive a substantial share (71 per cent) of GST revenues and retain full control over major non-GST tax bases such as alcohol, fuel, and property. A key difficulty lies in how states have utilised their role in the GST Council to reflect their interests. Raghav Chadha (Aam Aadmi Party), in the Rajya Sabha in 2024, criticised “multiple GST rates on everyday items like popcorn.” Such anomalies are symptoms of a fragmented system. These structures are approved within the GST Council. The gap between endorsement in policy forums and criticism in public reflects a deeper accountability deficit.

Abhishek Banerjee (Trinamool Congress) has argued that “GST has hurt state finances and burdened consumers.” The burden on consumers, however, stems largely from cascading caused by exemptions and restrictions on input tax credit. Fiscal stress is linked to the flaws of GST as implemented. Akhilesh Yadav (Samajwadi Party) has stated that “GST has complicated compliance and hurt traders.” Compliance challenges arise from structural design rather than from GST itself. Multiple rates, threshold discontinuities, and credit restrictions increase complexity. Simplification requires restoring a clean credit chain rather than merely lowering rates.

Mamata Banerjee (Trinamool) has argued that “GST has eroded state fiscal autonomy.” States collectively hold two-thirds of the voting powers in the GST Council and have endorsed all its major decisions. They also have significant powers in shaping GST. The issue is, therefore, not loss of autonomy but sophisticated public-finance policy in states, and their exercise of their powers in the GST Council. Y.S. Jagan Mohan Reddy (YSR Congress) has stated that “GST has increased dependence on the Centre.” Revenue uncertainty reflects a fragmented base design and exemptions. Strengthening the integrity of the tax by restoring input tax credit would improve both stability and fiscal capacity.

The Telugu Desam Party and the Biju Janata Dal have both raised concerns that “GST has created revenue uncertainty for states.” Yet states governed by these parties have participated in and endorsed GST Council decisions that fragmented the base through exemptions and rate dispersion. The resulting pressures, therefore, reflect collective policy choices as much as institutional constraints. The Left Democratic Front in Kerala has characterised GST as “regressive.” Regressivity arises primarily from hidden cascading caused by exemptions and denial of credit. A clean GST with full input tax credit, a broad base, and targeted direct cash transfer would be more progressive than the current structure.

The Six Elements of a Rational GST

All parts of the Indian political system want a rational GST that comprises six elements:

1. A single low rate such as 8-12 per cent: Multiple rates create classification disputes, compliance costs, and incentives for misclassification. A single rate eliminates these distortions.

2. A comprehensive base: Exemptions fragment the base, break the credit chain, and reintroduce cascading. A comprehensive base means no exemptions except for final consumption goods that are subject to direct cash transfers to protect the poor.

3. Complete input tax credit: The core principle of a value-added tax is that tax is paid only on value added, not on inputs. Broken credit chains violate this principle, embedding tax within tax and distorting production decisions.

4. Removal of all traditional indirect taxes such as cesses: Cesses are surcharges on the GST that reintroduce the very cascading the GST was designed to eliminate. They should be abolished and their revenue replaced through the single rate.

5. Zero rating of exports: Exports should be completely free of GST, with full refunds of input taxes. This is essential for international competitiveness. The current system of refund delays and partial credits hurts exporters.

6. GST on imports at the border: Imports should be subject to GST at the same rate as domestic production, collected at the border. This ensures a level playing field and protects the domestic tax base.

The Role of the GST Council: Accountability Deficit

The GST Council, composed of the Union Finance Minister and state finance ministers, has made all major decisions on rates, exemptions, and rules. It has endorsed the multiple-rate structure. It has approved the various cesses. It has agreed to the exemptions that break the credit chain. And yet, individual political leaders routinely criticise these very decisions in public. The gap between endorsement in policy forums and criticism in public reflects a deeper accountability deficit.

This is not a bug; it is a feature of the current institutional design. The GST Council operates largely in secret, with decisions made behind closed doors and announced without detailed minutes or dissenting opinions. Individual members can claim credit for good outcomes and blame the “system” for bad ones. Reforming GST requires reforming the functioning of the GST Council itself—making its deliberations more transparent, its decisions more accountable, and its members more responsible for the outcomes they collectively produce.

The Economic Imperative: Why Now?

The current economic environment makes GST reform urgent. The US has become more protectionist, with tariffs and trade barriers rising. The Iran war has disrupted global supply chains and energy markets. Indian exports face headwinds from both directions: higher input costs and reduced market access. A well-designed GST would improve export competitiveness by zero-rating exports and ensuring full input tax refunds. It would reduce costs for domestic manufacturers, making them more competitive against imports. It would simplify compliance for small businesses, encouraging formalisation and reducing the burden of tax administration.

Moreover, the fiscal pressures from the war and the global slowdown require a more efficient tax system. The government cannot afford to leave revenue on the table due to design flaws. It cannot afford to impose unnecessary compliance costs on businesses that are already struggling. A reformed GST would be revenue-neutral or even revenue-positive in the medium term, while reducing distortions and supporting growth.

The Path Forward: A Dedicated Parliamentary Discussion

What is needed is not another round of incremental adjustment but a fresh political discussion. The GST Council has been meeting for years, making incremental changes, but the fundamental structure remains fragmented. A dedicated, full-day discussion in Parliament—focused exclusively on GST design, its structural distortions, and the role of the GST Council—would help all political formations to translate their angst into a shared agreement on reforms.

Such a discussion would serve several purposes. It would force political leaders to reconcile their public criticisms with their Council votes. It would create a public record of who supports what, increasing accountability. It would educate the public and the media on the technical issues involved. And it would generate the political momentum needed to overcome the collective action problem that has kept GST reform stalled.

Conclusion: Completing the Revolution

The GST was a revolutionary reform. It replaced a chaotic patchwork of central and state taxes with a unified national market. It reduced cascading, simplified compliance, and increased revenues. But the revolution is incomplete. The compromises made to build consensus—multiple rates, exemptions, cesses, broken credit chains—have created a system that is far from the “good and simple tax” that Prime Minister Modi envisioned in 2017.

The good news is that everyone now sees the flaws. Across the political spectrum—from the BJP to the Congress, from the DMK to the TMC, from the AAP to the Left—there is agreement that GST needs to be reformed. There is agreement on the direction: a single low rate, a comprehensive base, complete input tax credit, removal of cesses, zero rating of exports, and GST on imports. The question is whether the political system can translate this agreement into action.

The time has come to complete GST reform. The economic environment demands it. The political consensus supports it. The technical solutions are known. What is needed is leadership—the courage to move beyond incremental adjustments and enact a clean, simple, efficient GST. Everyone loves a good GST. It is time to give India one.

Q&A: GST Reform and the Path to a Good and Simple Tax

Q1: The article argues that “revenue buoyancy is not a measure of design quality.” What does this mean, and why is it important?

A1: The government often cites strong GST revenue collections as evidence that the system is working well. The article argues that this is a misleading metric. High revenue collections can coexist with high compliance costs, distorted investment decisions, and suppressed formalisation. A tax system can collect a lot of money while still being inefficient, complex, and harmful to growth. For example, a system with multiple rates, exemptions, and broken credit chains may generate revenue, but it also imposes significant compliance burdens on businesses, distorts production decisions (favoring some sectors over others), and encourages informality. The real test of a good tax system is not how much it collects, but how efficiently it collects it—and whether it supports, rather than hinders, productive economic activity. The adverse impact that should worry the Ministry of Finance is on economic growth, not just on revenue.

Q2: What are the six elements of a “rational GST” that the article says all parts of the Indian political system now support?

A2: The six elements are:

1. A single low rate (8-12 per cent): Multiple rates create classification disputes, compliance costs, and incentives for misclassification.

2. A comprehensive base: No exemptions except for final consumption goods (with direct cash transfers to protect the poor).

3. Complete input tax credit: The core principle of a value-added tax—tax paid only on value added, not on inputs.

4. Removal of all traditional indirect taxes such as cesses: Cesses reintroduce the very cascading GST was designed to eliminate.

5. Zero rating of exports: Exports completely free of GST with full refunds of input taxes—essential for international competitiveness.

6. GST on imports at the border: Imports subject to the same GST rate as domestic production to ensure a level playing field.

Q3: The article criticises the “accountability deficit” in the GST Council. What does this mean, and why is it a problem?

A3: The GST Council, composed of the Union Finance Minister and state finance ministers, has made all major decisions on rates, exemptions, and rules. It has endorsed the multiple-rate structure, approved various cesses, and agreed to exemptions that break the credit chain. Yet individual political leaders routinely criticise these very decisions in public. For example, a state finance minister may vote for a particular rate in the Council and then publicly criticise the same rate as “burdensome.” The gap between endorsement in policy forums and criticism in public reflects a deeper accountability deficit. The Council operates largely in secret, with decisions made behind closed doors and announced without detailed minutes or dissenting opinions. Individual members can claim credit for good outcomes and blame the “system” for bad ones. Reforming GST requires reforming the functioning of the GST Council itself—making its deliberations more transparent, its decisions more accountable, and its members more responsible for the outcomes they collectively produce.

Q4: Why does the article argue that the current economic environment makes GST reform urgent?

A4: The article identifies three pressures:

• US protectionism: The United States has become more protectionist, with tariffs and trade barriers rising. Indian exports need to be as competitive as possible; a well-designed GST would improve export competitiveness by zero-rating exports and ensuring full input tax refunds.

• Iran war: The war has disrupted global supply chains and energy markets, raising input costs for Indian manufacturers. A reformed GST would reduce domestic costs by eliminating cascading and ensuring seamless credits.

• Fiscal pressures: The war and global slowdown require a more efficient tax system. The government cannot afford to leave revenue on the table due to design flaws, nor can it impose unnecessary compliance costs on struggling businesses.
  A reformed GST would be revenue-neutral or even revenue-positive in the medium term, while reducing distortions and supporting growth.

Q5: What does the article propose as the path forward for GST reform, and why a “dedicated full-day discussion in Parliament”?

A5: The article argues that what is needed is not another round of incremental adjustment by the GST Council but a fresh political discussion at the parliamentary level. A dedicated, full-day discussion in Parliament—focused exclusively on GST design, its structural distortions, and the role of the GST Council—would serve several purposes:

• Force political leaders to reconcile their public criticisms with their Council votes (accountability).

• Create a public record of who supports what (transparency).

• Educate the public and media on the technical issues involved.

• Generate the political momentum needed to overcome the collective action problem that has kept GST reform stalled.
  The article notes that everyone across the political spectrum now agrees on the direction of reform. The missing element is not technical knowledge or political will, but a forum to translate that agreement into a shared, binding commitment. A parliamentary discussion would provide that forum. The time has come to complete GST reform and give India the “good and simple tax” that was promised in 2017.