Streamlining GST: Eight Years of Evolution and Expectation

In a recent enforcement drive, the Karnataka State Commercial Taxes Department employed UPI transaction data sourced through platforms such as PhonePe, Google Pay, Paytm, and BHIM, to cross-reference financial inflows against Goods and Services Tax (GST) registration records. This data-led initiative culminated in show-cause notices being issued to nearly 13,000 small taxpayers, mostly street vendors and micro-enterprises, for alleged non-compliance with GST obligations. In the wake of this crackdown, a growing number of small vendors, many of whom haven’t even received notices, are now reluctant to accept UPI payments altogether, spurred by heightened anxiety over regulatory scrutiny. This episode illustrates the broader systemic strain faced by small businesses, who continue to grapple with frequent filings, procedural complexities, and limited digital literacy in navigating the GST landscape.

July marks eight years since the rollout of the GST, a landmark fiscal reform that replaced a fragmented patchwork of state and central levies with a unified, nationwide system. Its bifurcated structure, comprising CGST, SGST, and IGST for intra-and-interstate transactions was designed to streamline taxation and enhance the ease of doing business across the country. In FY25, average monthly GST revenues surged past Rs 2 lakh crore, while annual gross collections climbed to Rs 22.08 lakh crore, nearly double the Rs 11.7 lakh crore recorded in 2018–19. In its debut year, GST clocked just nine months of revenue. April 2025 set a new benchmark, with collection reaching an unprecedented Rs 2.37 lakh crore, underscoring the tax’s increasingly robust buoyancy.

Rate rationalisation

Despite these impressive gains, several persistent challenges such as the rationalisation of tax slabs, recurring technical disruptions, and heavy compliance burdens particularly for MSMEs, continue to underscore the need for targeted refinements and policy clarity. The next GST Council meeting, potentially slated for August, is expected to actively take up these issues. 

Rate rationalisation remains a key concern. Although the number of goods taxed at the highest 28% slab has dropped significantly from 227 to just 35, calls for further simplification and structural recalibration persist. The mounting litigation load underscores the pressing need for a fully operational Appellate Tribunal system, particularly as compliance-related disputes become more frequent and complex. Additionally, exporters and MSMEs repeatedly raise concerns over delays in input tax credit refunds.

It is expected that the long-awaited rate rationalisation exercise, delayed several times since 2021, will be an active consideration for the forthcoming GST Council meeting. The current GST framework functions through four principal tax slabs – 5%, 12%, 18%, and 28%, alongside special rates applicable to select goods and services. Industry players and policy experts alike have called for a merger of the existing slabs to resolve the persistent issue of inverted duty anomalies.

Rate rationalisation isn’t just an exercise in fiscal policy, it touches lives in tangible ways. Products and services that were once considered luxuries, such as mobile phones, health insurance, and refrigerators, now populate the 18% slab despite becoming everyday necessities. From a consumer perspective, there is a persuasive case for reevaluating the prevailing GST rate structure to better reflect the essential nature and accessibility of these goods and services. The steep 28% rate, originally earmarked for luxury and sin goods, still burdens items like scooters and air conditioners, essential tools of mobility and comfort for a broad swath of the population. Likewise, items like solar-powered lighting systems and basic packaged foods attract a 12% tax, even as sustainability and food security climb the national priority ladder. Rethinking their classification, perhaps shifting them to the 5% category, could help align tax policy with socio-economic aspirations. 

Uncertainties and compliance

There is broad consensus that the GST regime continues to evolve with steady gains in ‘operational efficiency and compliance.’ Emerging proposals to include untaxed items such as natural gas within its ambit reflect the framework’s growing maturity and its readiness to adapt to a broader, more inclusive fiscal architecture. But a convoluted rate structure, frequent regulatory revisions, and lingering uncertainties surrounding input tax credit and refund mechanisms continue to burden stakeholders across sectors.

In a telling example of the interpretational ambiguities within the GST regime, the Directorate General of GST Intelligence last year demanded Rs 120 crore from IIT-Delhi on research grants received between 2017 and 2022. This move not only cast uncertainty over the taxability of academic funding but also raised broader concerns about the implications for publicly funded research and the future of higher education in India.

The real estate sector, too, has raised red flags. Credai, the industry’s apex body, has vocally opposed the imposition of 18% GST on floor space index (FSI) charges paid to local authorities, warning that such levies would inflate housing costs and deter urban development. 

Last month, the Calcutta high court curtailed GST enforcement by ruling that issuing penalty notices under Section 122, without first establishing liability under Sections 73 or 74 violates statutory protocol. The judgement emphasises that penalties must be grounded in due legal process, not deployed as expedient enforcement tools.

On July 25, the Supreme Court continued final hearings in the high-stakes Gameskraft case, which will determine whether online gaming platforms must pay 28% GST on the full face value of bets—retrospectively from 2017. With tax demands already crossing Rs 1.5 lakh crore, the verdict holds profound implications for the future of India’s digital gaming industry.

These disparate instances converge around a common theme, an urgent need to simplify the GST framework. 

A recent report by State Bank of India (SBI) Research calls for a more empathetic and balanced approach to the implementation of the GST regime. While acknowledging GST’s pivotal role in fostering accountability and enhancing revenue generation, the report cautions that its long-term success hinges on empowering stakeholders, especially small and micro enterprises, rather than burdening them. While the goal of curbing evasion and expanding the tax base is valid, the report advocates for a judicious use of data analytics that informs rather than dictates tax policy. Spearheaded by Soumya Kanti Ghosh, group chief economic advisor at the SBI, the study urges tax authorities to adopt segmentation-based thresholds and exercise restraint in applying blanket enforcement measures, more so when digital transactions blur the boundary between personal and business use.

Discussions around GST simplification have stretched over the past year, yet a decisive breakthrough remains out of reach. The group of ministers (GoM) tasked with rationalisation and insurance-related reforms has so far offered only modest tweaks, falling short of the comprehensive overhaul that many believe is long overdue. Nonetheless, anticipation builds ahead of the upcoming GST Council meeting, widely seen as a potential inflection point. Streamlining GST in agriculture, healthcare, and transportation domains is not merely a fiscal adjustment but a strategic imperative to ensure inclusive growth and long-term economic well-being.

Vaishali Basu Sharma is a strategic and economic affairs analyst.

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