Why in the News?

On July 1, 2025, India marked eight years since the launch of the Goods and Services Tax (GST), but the occasion came with worrying signs for the economy. GST collections in June dropped to ₹1.85 lakh crore, the lowest in four months, and grew by just 6.2% year-on-year, the slowest growth in four years.

What do low GST collections reveal about the economy and system efficiency?

Sluggish Economic Activity: As GST is a consumption-based tax, low collections indicate reduced demand and consumption, reflecting a slowdown in economic growth.
Tax System Inefficiencies: The marginal growth in net collections (just 3.3% after refunds) points to loopholes in compliance, delayed refunds, and inefficiencies in enforcement and administration.
Weak Revenue Buoyancy: Revenue from domestic transactions rose only 4.6%, barely outpacing inflation, showing limited buoyancy in the tax system despite a stable tax base.

Why is the exclusion of fuel from GST debated?

Revenue Autonomy for States: Fuel taxes are a major independent revenue source for State governments. Including fuel under GST would shift this revenue to the GST pool, which is shared with the Centre, reducing the States’ financial autonomy.
Undermines ‘One Nation, One Tax’ Goal: Excluding key commodities like petrol and diesel creates fragmentation in the GST system, violating the principle of tax uniformity. Eg: A truck transporting goods across states pays different fuel taxes, adding to logistics costs and compliance burden.
Public Demand for Price Rationalisation: Including fuel under GST could reduce retail prices, as GST rates are lower than the combined excise + VAT. This is especially crucial during inflationary periods. Eg: If petrol (currently taxed ~100%) comes under the 28% GST slab, it could make fuel significantly cheaper for consumers.

What does “fewer GST slabs” mean?

It means merging some of these tax rates to move toward a simpler, more uniform GST system, such as: Possibly combining 12% and 18% into a single standard rate.
Current GST Structure: India has multiple GST slabs: 5%, 12%, 18%, 28%. Plus 0% (exempt) and special rates on certain goods/services.

How will fewer GST slabs improve tax efficiency?

Simplifies Compliance for Businesses: Fewer slabs reduce confusion, errors in tax calculation, classification, and filing, especially for small businesses. Eg: A product like packaged snacks currently attracts different GST rates depending on branding, merging slabs avoids such disputes.
Reduces Tax Evasion and Litigation: Multiple slabs create room for misclassification and disputes over applicable rates. Fewer rates lead to clearer guidelines and fewer loopholes. Eg: Footwear priced above ₹1,000 is taxed at 18%, while below ₹1,000 it’s 5%—leading to price manipulation.
Boosts Consumption and Revenue Predictability: A simplified rate structure improves consumer confidence, reduces cascading effects, and encourages spending, improving overall collections. Eg: Countries like Singapore (7%) or New Zealand (15%) with uniform GST systems report higher compliance and stable revenue.

What is the future of the GST Compensation Cess?

Originally meant to compensate States for GST losses for 5 years, extended till March 2026 to repay COVID-related borrowings. With its purpose served, it should be phased out rather than absorbed into GST rates.
Removing the cess will restore trust, reduce tax burden, and may stimulate urban consumption.

Why is fiscal responsibility crucial for GST reforms?

Ensuring fiscal sustainability: Sustainable subsidies and managing the compensation burden are essential for maintaining healthy public finances. Eg: During COVID-19, the Centre had to borrow extensively to compensate States, leading to a rise in debt levels.
Strengthening Centre–State trust: Responsible fiscal conduct by both the Centre and States builds trust, which is critical for cooperative federalism. The GST Council functions best when transparency is ensured and non-shareable cesses are minimized to allow a higher share of central taxes to States.
Enabling long-term tax reforms: Fiscal prudence enables the government to invest in long-term reforms such as rationalising GST slabs, strengthening IT infrastructure, and introducing compliance incentives. These efforts can improve tax buoyancy and offset short-term revenue losses.

How can the Centre–State balance be ensured? (Way forward)

Enhancing States’ Share in Central Taxes: The Centre should increase devolved funds under the Finance Commission framework to compensate for GST-linked revenue losses, especially if fuel and alcohol are brought under GST. Eg: Raising the tax devolution share beyond the current 41% can empower States financially.
Strengthening GST Council’s Cooperative Mechanism: Regular, consensus-based decision-making in the GST Council can improve Centre-State trust and ensure shared ownership of reforms. Eg: Joint committees for rate rationalisation or revenue monitoring can enhance transparency and equity.

Mains PYQ:

[UPSC 2020] Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions?

Linkage: The article explicitly states that the GST Compensation Cess was extended until March 2026 to repay loans taken by the Centre to compensate States, specifically due to COVID-19 having disrupted revenues. The question directly delves into the compensation mechanism, its impact due to the pandemic, and the resulting “federal tensions”, which aligns perfectly with the source’s discussion on the Centre-State fiscal relationship regarding GST.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now