In today’s Finshots, we tell you what’s up with all the talks around changes in GST.

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The Story

Eight years ago, the government pulled off something many believed was impossible. It stitched together a wildly fragmented indirect tax system across 29 states, 7 union territories, and countless local quirks into one common framework: the Goods and Services Tax or GST. No more VAT here, service tax there, octroi at the borders, or a jumble of entry taxes. Just one system. One framework. One nation, one tax.

And for the most part, it delivered.

Gross GST collection has doubled in the last five years from ₹11 lakh crore in FY21 to ₹22 lakh crore in FY25. Active GST taxpayers now number over 1.5 crore. Even small firms to corporations say it’s helped simplify tax administration and improve ease of doing business. Interstate trade flows more smoothly. And compliance has gone digital. So, India’s grand consumption-based tax reform seemed to be on the right track.

But there still remain a few troubling signs. GST collection growth hasn’t kept up with GDP growth. That’s a worrying sign for a system that was supposed to scale with the economy. And the concerns run deeper than just the numbers. Businesses, policy experts and even state governments increasingly feel that GST, in its current form, is beginning to feel more like a drag than a driver. Which is why all eyes are now on the 56th GST Council meeting scheduled for this month, where a long overdue overhaul may finally be on the cards.

So what’s broken, you ask?

Well, for starters, GST was never going to be easy. It was a compromise between the Centre and the states, held together by a common promise: every state would give up its individual tax powers in exchange for a unified, fairer and more efficient system. The Centre even offered compensation for states that lost out: a guaranteed revenue growth every year for five years. And to fund this, it levied a compensation cess on so-called sin goods like tobacco, aerated drinks and luxury cars.

But COVID broke that arrangement. Revenues tanked, compensation fell short and the Centre borrowed to make up the gap. And while the compensation agreement officially ended in 2022, the cess didn’t as the government confirmed to keep it till March 2026. It’s still being collected, but now the funds go to the Centre to repay its loans, not to the states.

This hasn’t gone down well. The trust that held GST together is now showing signs of strain. And without consensus from the GST Council, where states get to vote, reforms simply stall. And many are stalling already.

After the expiry of compensation cess, the Centre is proposing to replace it with two new levies (a Health Cess on tobacco and other harmful substances and a Clean Energy Cess on coal and automobiles). But the major concern here is how will the proceeds be distributed from these cesses. Will they go to states or the Centre? And the answer to that requires co-operative federalism.

Then you can also look at rate rationalisation. Today, GST has four main slabs: 5%, 12%, 18% and 28%, plus a range of exemptions and cesses. It’s a confusing structure, and worse, a regressive one. Many essentials like toothpaste, soap and umbrellas are taxed at 12% or 18%, while some luxury items fall in the same bracket.

So the Centre is now pushing a big idea to scrap the 12% slab entirely. Shift key goods down to 5% and nudge a few others up to 18%. Yes, this is said to cost the exchequer ₹40,000 to ₹50,000 crore in the short run. But the hope is that lower prices will boost consumption, broaden the tax base and make up the losses over time.

But the problem is that not all states agree. Punjab, Kerala, Madhya Pradesh, and West Bengal have already raised objections. Still, the reform seems urgent because it’s not just coming from policymakers. The industry wants it too. Rajiv Memani, President of the Confederation of Indian Industry (CII), puts it plainly in a recent MoneyControl interview…  

“I think it’s time to do the 2.0 version of reform. More simplification particularly in the course of audits, more simplification in compliance.”

That’s not an exaggeration.

You see, one of GST’s biggest promises was that businesses could claim credit on taxes paid on raw materials. But in practice, this chain breaks down constantly. If your vendor files late, you lose credit. If there’s an invoice mismatch, your refund gets stuck. Frequent rule changes only add to the confusion. And capital-heavy sectors end up with crores in limbo. We wrote about the mess this system created and how GST officials unearthed a fake credit invoice racket worth ₹11,500 crores back in 2021.

Then there’s the audit mess.

GST treats each state registration as a separate entity. So a company operating in five states faces multiple audits, and no coordination. All of which can make the entire process cumbersome. As Memani puts it…

“If you're operating in five states, it doesn't mean you need to have five audits. You can have one audit and all the states can rely on that audit.“

And let’s not forget the sectors still outside GST like fuel and alcohol. These are massive revenue contributors, but states rely on them for independent revenue and they’re reluctant to let go. But this exclusion breaks the input tax credit chain and distorts pricing. A logistics firm pays GST on truck maintenance, but not on fuel. That’s not how a unified system is supposed to work. The Centre could solve this by offering a higher share in central taxes. But that offer hasn’t come and that has only made the cooperation more strangled.

So sure, GST lived up to many things. But now, the system feels busy in implementation or patching issues instead of bringing in reforms that are the need of the hour.

And that’s why GST 2.0 is now a necessity.

The government knows this too. A few months ago, the Public Accounts Committee of Parliament called for a massive overhaul. And the demand is growing louder.

There’s already a wish list doing the rounds: move to a three-rate structure (say 5%, 15% and 28%) with cesses only on sin goods. Bring insurance and fuel under GST, even if gradually. Remove the compensation cess now that its job is done. And above all, rebuild the Centre–State partnership that made GST possible in the first place.

None of this will be easy. The politics is tricky, the costs are real and consensus will take work. But the alternative – patchwork reforms, constant tinkering and growing fatigue, is far worse.

That’s why this upcoming GST Council meeting matters. It isn’t just another policy review but a moment where India decides whether GST is just a tax, or still a transformative idea.

After all, GST wasn’t just a fiscal fix. It was meant to be a symbol of unity and reform. And a tax that was meant to unite India shouldn’t feel like a burden eight years in, yeah?

Until then…

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