India’s Goods and Services Tax (GST) system, implemented on 1 July 2017, has recently marked its eighth anniversary. 

• This indirect tax system, envisioned as ‘one nation, one tax’, is crucial for the nation’s economic framework. 
• However, recent trends in tax collections highlight an urgent need for significant structural reforms within the system.

Imperative for Structural Reforms

• Recent GST collections indicate a slowdown in economic activity and reveal underlying inefficiencies within the system. 
• In June 2025, GST collections stood at ₹1.85 lakh crore, marking the lowest in four months. 
• This represented a mere 6.2% increase compared to June 2024, the slowest growth rate in four years. 
• When factoring in refunds, the actual growth in government collections was only 3.3%. Furthermore, revenue from domestic transactions, excluding imports, grew by an anaemic 4.6% compared to the previous year, barely outpacing the average inflation rate.
• Since GST is a consumption tax, such a dip in collections directly reflects a slowdown in economic activities. 
• This situation demands immediate attention and suitable reforms.

Key Reform Areas

• Inclusion of Fuel and Alcohol in GST: 
  • Current Situation: Fuel and alcohol remain excluded from the GST framework. 
    • State governments currently hold exclusive rights to levy taxes on these items, providing them with independent revenue streams outside the Centre’s influence.
  • The ‘One Nation, One Tax’ Vision: The continued exclusion of fuel and alcohol undermines the core principle of a unified tax system. 
    • Achieving the full potential of GST necessitates including these items.
  • States’ Resistance and Solutions: States resist this inclusion, fearing loss of independent revenue and delays in receiving their share of central taxes. 
    • To overcome this, the Centre must build trust by ensuring higher and timely devolution of taxes to the States. 
    • Simultaneously, the Centre should reduce its overdependence on non-shareable cesses. 
    • States, in turn, must avoid diverting increased revenues toward untargeted election freebies. 
• Rationalisation of GST Rates and Removal of Compensation Cess
  • Multiple Rate Slabs: India’s GST system currently includes several slabs: 0%, 5%, 12%, 18%, and 28%, along with additional cesses. 
    • Reducing the number of slabs will simplify the system and is already under review by the GST Council’s fitment and rate-setting committees.
  • GST Compensation Cess: This cess was introduced to compensate States for revenue losses post-GST and was initially meant to last five years. 
    • Due to COVID-19 disruptions, it was extended until March 2026 to repay loans raised by the Centre for compensation payouts.
    • Demand for Removal: With its purpose largely fulfilled, the continued levy of this cess is now redundant. It should not be absorbed into the broader GST rates.
    • Benefits of Removal: Removing the cess will boost public sentiment and encourage urban consumption, which is crucial for economic revival. 

Conclusion

As India progresses from ‘India-first’ to ‘India-for-the-world’, strengthening its tax foundation is vital for inclusive and sustainable growth. Importantly, taxation must be seen not just as a fiscal arrangement between the Centre and States, but as a covenant with the people—whose welfare must remain the foremost priority.

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