India’s Goods and Services Tax (GST) underwent its most reform in September 2025. The overhaul reduced tax slabs from four to two main rates with a special higher rate for luxury goods. This change simplifies compliance and enhances transparency. It reflects a matured federal cooperation and signals a new phase in India’s economic reforms.
Background of Tax Reform in India
India’s tax system was long seen as complex and inefficient. Direct taxes improved over time, but indirect taxes remained complicated. The idea of GST was first proposed in 1985. Early efforts like MODVAT and partial VAT reforms in the 1990s failed to unify the system. Political and federal challenges delayed progress for decades.
Challenges in Implementing GST
States feared losing revenue and autonomy. The federal nature of India meant taxes were controlled by both Centre and states. Previous attempts faced political gridlock. The Kelkar Task Force in 2002 laid groundwork but could not overcome resistance. Trust between Centre and states was essential for success.
GST Launch and Growth
GST was launched in July 2017, merging 17 taxes and 13 cesses. The taxpayer base more than doubled from 66 lakh to over 1.5 crore. Collections rose sharply from Rs 45 lakh crore to Rs 173 lakh crore in a decade. The GST Council, with representatives from Centre and states, managed continuous reforms and improved compliance.
The 2025 GST Reforms
The latest reform compressed four tax slabs into two – 5% and 18%, with 40% on luxury and sin goods. Life and health insurance premiums were exempted. Fewer slabs ease classification and reduce disputes. This benefits consumers by lowering costs on essentials and aids businesses with predictability.
Significance of Federal Consensus
The unanimous approval by all state finance ministers is historic. The GST Council is a unique federal institution pooling sovereignty. It allows both Centre and states to jointly manage fiscal policy for the common good. This model is rare globally and praised as a path for cooperative federalism.
Economic Impact and Future Prospects
Though a short-term revenue dip is expected, simpler tax structure boosts compliance and growth. Doubling of GST collections in five years shows buoyancy matters more than rates. The reform enhances India’s image as a stable and reform-friendly economy. It may inspire cooperation in other sectors like land and labour reforms.
Unfinished Agenda and Institutional Role
Challenges remain in extending benefits to small businesses and consumers. Proposals include sharing GST revenue with urban local bodies to support governance amid rapid urbanisation. The GST Council could serve as a model for pooled decision-making in broader economic reforms.
Political Will and Historical Context
Earlier governments struggled to implement GST due to political and federal concerns. The current reforms reflect stronger political will and execution. Critics who dismiss reforms as crisis-driven overlook the foresight and consensus-building involved. The real beneficiaries are India’s citizens and economy.
Questions for UPSC:
- Critically analyse the role of cooperative federalism in India’s GST implementation and its implications for fiscal federalism.
- Explain the impact of tax simplification on economic growth and compliance with examples from India’s GST reforms.
- What are the challenges in balancing state autonomy and national economic integration in a federal structure? How can institutions like the GST Council address these challenges?
- With suitable examples, comment on the significance of institutional reforms in promoting economic development in emerging economies like India.
