GST at Eight: A Good Idea Still Waiting for Its Final Draft

The Goods and Services Tax was sold to India in 2017 as "one nation, one tax," a slogan that captured the genuine ambition of the reform, replacing a bewildering thicket of central excise duty, state value-added taxes, octroi, entry tax and a dozen other levies with a single unified indirect tax regime spanning the entire country. Eight years on, the achievement is real but partial, and the gap between the slogan and the surviving structure has become one of the more instructive case studies in what happens when sound economic design meets the practical necessity of building political consensus among 28 states and several union territories, each unwilling to cede fiscal autonomy without a fight.

The core accomplishment should not be understated. GST collections have grown substantially since implementation, crossing roughly 1.8 lakh crore rupees in several recent months, and the input tax credit mechanism, whatever its administrative frustrations, has genuinely reduced the cascading "tax on tax" effect that plagued the earlier regime, where a good could be taxed multiple times as it moved through different stages of production and distribution across state lines. The GST Network's digital backbone, whatever its early glitches, created the first comprehensive electronic trail of business transactions at this scale in Indian history, which has had genuine spillover benefits for income tax compliance and formalisation more broadly.

The slab problem nobody designed on purpose

What GST was never supposed to become was a five-slab system, with rates at 0, 5, 12, 18 and 28 percent plus a compensation cess on top for certain goods, alongside a long list of exempted items. The original design, discussed in the years before implementation, envisioned something closer to two or three rates, following the model of most VAT systems internationally which typically use a single standard rate with perhaps one lower rate for essentials. What emerged instead was the product of the GST Council's necessary but costly consensus-building process, where every state and virtually every industry lobby sought a rate favourable to its specific goods, producing a slab structure riddled with classification disputes that continue to generate litigation years later.

The paratha-versus-roti classification dispute, in which Karnataka's Authority for Advance Rulings determined that frozen parathas should attract 18 percent GST while plain roti attracts 5 percent on the grounds that parathas require additional processing, became a national punchline, but it illustrates a structural problem rather than a one-off absurdity. When five different rates exist, businesses and tax authorities are perpetually forced into fine-grained, often arbitrary distinctions between similar products, generating compliance uncertainty and litigation costs that a simpler rate structure would have avoided almost entirely.

The compensation cess and its overstay

The compensation cess, levied on top of GST for items like automobiles, tobacco and aerated drinks, was originally designed as a five-year, time-bound mechanism to compensate states for revenue losses during the transition, funded through borrowing when the pandemic blew a hole in projected collections. Its extension well past its original 2022 sunset, now repurposed partly to repay the loans taken to fund the compensation itself, illustrates how a temporary fiscal bridge in India has a tendency to become a permanent feature once the revenue stream it generates proves politically convenient to retain.

Small business compliance and the informal sector squeeze

For India's smaller enterprises, GST compliance has proven a genuinely mixed experience. The composition scheme, offering simplified quarterly filing and lower rates for businesses below a turnover threshold, has helped many small traders, but the broader e-invoicing and reconciliation requirements, increasingly mandatory even for mid-sized firms, have imposed real accounting and technology costs on businesses that previously operated with minimal paperwork. Traders' associations across states have periodically protested GST's compliance burden, and while some of this reflects predictable resistance to any formalisation of previously informal commerce, independent surveys of small enterprise owners have also documented genuine difficulty navigating monthly return filing requirements, multiple registration obligations across states of operation, and the working capital strain of input tax credit refunds that are frequently delayed by overburdened tax administration.

Recent rationalisation and its limits

The GST Council's move toward rate rationalisation in 2024 and 2025, consolidating some items and reducing the number of effective slabs for a subset of goods, represents a belated acknowledgment of the structural problem, and finance ministry officials have periodically floated the idea of eventually moving toward a genuine two-rate structure. The political obstacle remains what it always was: any rationalisation that raises rates on some currently low-taxed items, even while lowering them on others, generates concentrated, vocal opposition from the specific industries affected, while the diffuse benefit of a simpler system to the broader economy has no equivalently organised lobby pushing for it in the Council's deliberations.

What eight years suggests about reform sequencing

The fair assessment of GST at this point is neither the triumphalism sometimes offered by the government nor the wholesale dismissal occasionally offered by critics who point to its early implementation stumbles as proof of failure. It is a reform that achieved a genuinely difficult political feat, bringing India's states into a single indirect tax framework despite deep and legitimate concerns about ceding fiscal autonomy, and that has demonstrably widened the formal tax net and improved collections over time. But it also stands as a reminder that reforms built through extensive political negotiation tend to accumulate the scars of that negotiation into their permanent structure, unless a deliberate, sustained second phase of simplification follows the initial rollout. Eight years is long enough for that second phase to have happened already. That it has only just begun, tentatively, in the 2024-25 rationalisation exercise, says something about how difficult it remains to simplify a tax system once every slab has its own constituency defending it.