GST in India: Transformation, Opportunities, and Future

Introduction: Why GST Was Needed

Before 2017, India’s indirect tax system was fragmented. Businesses had to deal with multiple levies such as VAT, service tax, excise duty, GST in India, luxury tax, entertainment tax, and purchase tax. Each state had its own rules and rates, which created confusion, added costs, and discouraged interstate trade.

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For example, a truck carrying goods from Maharashtra to West Bengal often spends hours at state borders due to paperwork and entry taxes. This slowed supply chains and increased logistics costs, making Indian businesses less competitive compared to global players.

The introduction of Goods and Services Tax (GST) on July 1, 2017, replaced this maze of taxes with one unified system. GST was envisioned as a destination-based consumption tax, which means the tax revenue goes to the state where goods or services are consumed, not where they are produced. This was a major structural reform in India’s economic landscape.

Governance and Structure of GST

The GST Council, formed under Article 279A of the Constitution, is the backbone of this system. It consists of the Union finance minister (as chairperson) and finance ministers from all states. The council decides tax rates, exemptions, compliance rules, and policy adjustments.

GST has three main components:

Central GST (CGST): Collected by the Union government on intra-state supplies.
State GST (SGST): Collected by state governments on intra-state supplies.
Integrated GST (IGST): Collected by the Union government on inter-state supplies and imports, which is later shared with the consuming state.

This dual model ensures that both the Centre and states have equal rights to levy taxes, preserving federal balance.

The Transformation Brought by GST

Unification of the Market

GST has effectively dismantled state barriers, allowing goods and services to move freely across India. A business registered under GST can sell across states without needing multiple state-specific tax registrations.

Simplification of Taxes

Earlier, a manufacturer had to pay excise duty, then VAT at the state level, and service tax for services used. These taxes often overlapped, leading to tax on tax (cascading effect). GST resolved this by providing input tax credit (ITC) across goods and services, ensuring that tax are paid only on value addition.

Boost to Formalization and Compliance

The introduction of e-way bills, e-invoicing, and mandatory GST registration thresholds has pushed many small traders into the formal economy. While this initially increased compliance costs, it also expanded the tax base.

Improved Revenue Collection

GST collections have shown steady growth, especially after compliance tightened with e-invoicing. For instance, monthly revenues now often cross ₹1.5 lakh crore, reflecting a healthier tax system.

Contribution to Ease of Doing Business

India’s rank in the World Bank’s Ease of Doing Business index improved significantly post-GST. Transparent tax rules and a common portal for filing returns reduced the red tape faced by businesses.

The Challenges of GST Implementation

While GST has been transformative, its journey is far from smooth.

Multiple Tax Slabs

Initially, GST had five major slabs 0%, 5%, 12%, 18%, and 28% along with special rates on gold and a compensation cess on luxury and sin goods. Frequent changes confused businesses. For example, restaurants moved between 12% and 18% over time, forcing them to change billing software repeatedly.

Compliance Burden

Small and medium enterprises often find compliance costly. Monthly return filings (GSTR-1 and GSTR-3B) along with annual reconciliation can be overwhelming for businesses with limited staff.

Delayed Refunds for Exporters

Exporters face delays in getting refunds of input tax credits, which locks up working capital. Although the system has improved, it remains a concern for export-oriented industries.

Dependence on Compensation Cess

The Union government promised states a 14% annual revenue growth for five years after GST implementation, funded by a compensation cess. This arrangement ended in June 2022, leading to disputes between the Centre and states over revenue shortfalls.

Technology Glitches

The GST portal initially faced outages and technical glitches, particularly during peak filing dates. While infrastructure has improved, small businesses in rural areas still struggle with internet connectivity.

GST Overhaul in 2025: A Turning Point

On September 3, 2025, the GST Council made one of its boldest reforms since 2017.

Simplification of Slabs: The 12% and 28% slabs were removed. Now, there are mainly two standard rates—5% and 18%, with a 40% slab only for certain sin products such as luxury cars, tobacco, and aerated drinks. This move aims to reduce confusion and compliance burden.

Exemption for Essential Goods and Services: Life and health insurance, along with several life-saving medicines, are now GST-free. This directly benefits households by reducing out-of-pocket expenses.

Implementation Timeline: The new rates will apply from September 22, 2025, giving businesses a short window to adjust billing and compliance systems.

This reform is expected to simplify the structure, reduce classification disputes, and make GST more consumer-friendly.

Sectoral Impact of GST

Manufacturing

Manufacturers benefit from input tax credit across goods and services. However, the high compliance cost still weighs heavily on small manufacturers. With the 2025 reforms, reduced slabs are expected to streamline processes.

Real Estate

Initially excluded from GST, real estate has seen partial inclusion. Under-construction properties attract GST, while completed properties do not. This dual treatment creates confusion, and there are demands to bring the entire sector under GST.

E-commerce

Platforms like Amazon and Flipkart faced challenges with TCS (Tax Collected at Source) rules under GST. However, the unified system has also made it easier for small sellers to expand across states without multiple registrations.

Healthcare and Insurance

With GST exemptions on health insurance and life insurance in 2025, the sector is set to see wider adoption among middle-class households, aligning with government goals of improving financial inclusion.

Export Industry

Exporters operate under a zero-rated framework, which means exports are GST-free. Yet, refund delays remain a hurdle, especially for MSMEs dependent on timely cash flow.

GST in Indian States: Uneven Impact

Different states have experienced GST differently.

Consumer states like Uttar Pradesh, Bihar, and Kerala benefit because GST is destination-based. Producer states like Maharashtra, Gujarat, and Tamil Nadu were initially concerned about revenue loss. Compensation helped, but disputes remain about post-2022 arrangements.

Northeastern states, with smaller formal economies, face challenges in compliance capacity.

Global Comparisons

India is not the first country to adopt GST. Around 160 countries have some form of Value Added Tax (VAT) or GST.

Canada: Has a federal GST combined with provincial sales taxes in some states, similar to India’s dual structure.

Australia: Has a single GST of 10% across the country, making compliance simpler.

European Union: Each member state has its own VAT rate, but rules are harmonized for cross-border trade.

Compared to these, India’s multiple rates and complex compliance remain hurdles, though the 2025 reform takes a step toward simplification.

Future Pathways for GST in India

One Nation, One Rate

Experts suggest moving toward a single standard rate (perhaps around 15–16%) to reduce disputes and simplify compliance. While politically difficult, this could be a long-term goal.

Stronger Digital Ecosystem

Automation in return filing, AI-driven fraud detection and better analytics will improve compliance and reduce human intervention. Expanding e-invoicing to all businesses can close tax leakages.

Simplified Return System

Reducing filing frequency for micro and small enterprises will help them stay compliant without additional financial strain.

Wider Coverage of Sectors

Bringing petroleum products, electricity, and real estate fully under GST can further unify the tax structure and prevent cascading taxes.

Strengthening Centre-State Relations

A robust mechanism for revenue-sharing is critical to ensure states remain financially stable without frequent disputes.

Conclusion

GST is both a success story and a work in progress. It has unified India’s market, reduced cascading taxes, improved revenue collection, and expanded formalization. At the same time, complexity in rates, compliance burden, refund delays, and centre-state disagreements remain challenges. The 2025 reform, with fewer slabs and key exemptions, is a decisive move toward simplification. If India continues on this path, supported by technology, inclusive policymaking, and fiscal cooperation between Centre and states, GST can truly become the cornerstone of a transparent and efficient tax system.