Eight Years of GST

On July 1, 2025, India marked the 8th anniversary of the rollout of the Goods and Services Tax (GST). However, this milestone coincided with the lowest GST collection in four months — ?1.85 lakh crore for June 2025. This reflects not only slowing consumption but also structural inefficiencies in the current GST regime. The editorial underscores urgent reforms such as rate rationalization, inclusion of fuel under GST, and removal of GST Compensation Cess.

Slowing Collections and Structural Inefficiencies

• Decline in Growth of Net GST Revenue: Gross GST collections for June 2025 grew by just 2% YoY, the slowest pace in 4 years. After refunds, the net growth in collections dropped to only 3.3%, reflecting poor underlying economic activity.
• Domestic Consumption Lagging Behind Inflation: Revenue from domestic transactions (excluding imports) grew by only 6% YoY, which is barely above average inflation, suggesting stagnation in real consumption — a concerning sign for a consumption-based tax regime.
• Inefficiencies Within the System: The editorial flags systemic inefficiencies, including non-uniform tax coverage and continued exclusion of fuel and alcohol, which distort the 'one nation, one tax' objective of GST.

Policy Gaps and the Federal Revenue Conflict

• Need to Bring Fuel Under GST: Despite long-standing demands, fuel remains outside the GST purview due to resistance from States. States view fuel and alcohol as critical sovereign revenue sources, but continued exclusion undermines GST's comprehensiveness and simplicity.
• Centre-State Fiscal Imbalance: The Centre’s increasing reliance on non-divisible cesses and declining shareable tax pool are sources of fiscal stress for States. In return, States often divert funds to untargeted electoral subsidies, diluting productive spending.
• Strengthening Cooperative Federalism: To uphold the spirit of cooperative federalism, the Centre must increase States’ share in central taxes, while States should commit to fiscal responsibility and transparency in expenditure planning.

Rate Rationalization and Compensation Cess Reform

• Overdue GST Rate Rationalization: India currently operates with multiple GST rate slabs (5%, 12%, 18%, 28%), which create classification disputes and compliance burdens. The GST Council is exploring rate merging and simplification for efficiency.
• Time to Remove GST Compensation Cess: Originally intended for five years to compensate States post-GST rollout, the cess has been extended to March 2026 to repay COVID-related borrowings. The editorial urges non-extension beyond this period.
• Restoring Public Trust in Taxation: Retaining a cess whose purpose has been fulfilled weakens the taxpayer-state social contract. Removing it can boost urban consumption, send a positive policy signal, and restore public confidence in fiscal prudence.

Practice Question:

"The Goods and Services Tax (GST) was envisioned as a unified indirect tax regime to promote cooperative federalism and economic efficiency. In light of recent trends in revenue collection and fiscal dynamics, critically evaluate the need for structural reforms in GST."    (250 words)