Nine years of GST: How one tax reshaped India's indirect tax system

Nine years after replacing a maze of indirect taxes, GST has unified India's tax system, expanded the taxpayer base and digitised compliance, even as key reforms remain unfinished

As the clock struck midnight on July 1, 2017, India embarked on one of its most ambitious economic reforms since Independence. The Parliament passed the Goods and Services Tax (GST) after years of negotiations between the Centre and states. 

The GST replaced a fragmented network of Central and state indirect taxes with a unified system, fulfilling the government's vision of "one nation, one tax". It sought to simplify compliance, reduce tax cascading, and promote economic integration by creating a common national market from Kashmir to Kanyakumari. 

As the reform enters its 10th year on July 1, 2026, the taxpayer base has surged from 6.65 million at launch to about 16 million this year, reflecting increased formalisation of the economy.

The midnight tax reform

 

Before GST, India's indirect tax regime was divided between the Centre and states, each levying separate taxes at different stages of production and sale. 

The Centre imposed taxes such as Central Excise Duty, Service Tax, Additional Excise Duty and Countervailing Duty, while states levied Value Added Tax (VAT), Central Sales Tax (CST), Entry Tax, Octroi, Luxury Tax, Purchase Tax and Entertainment Tax. Businesses operating across states often had to comply with multiple tax laws, maintain separate registrations and navigate overlapping tax jurisdictions. 

The system also led to the cascading effect of taxes, commonly known as "tax on tax," where businesses paid tax on amounts that already included previous taxes, increasing costs for consumers. GST was introduced to subsume most indirect taxes into a single framework. 

To enable the introduction of GST, the Constitution (101st Amendment) Act was passed in 2016, empowering the Centre and states to levy GST. The Act directed the creation of the GST Council, a constitutional body chaired by the Union Finance Minister to recommend tax rates, exemptions and policy changes. 

GST came into force on July 1, 2017, subsuming most indirect taxes into a single framework.  READ | GST at 9: Why easier return filing has not meant simpler compliance

Building a national market

 

One of GST's biggest structural achievements has been the creation of a unified domestic market. Before the GST was introduced, there were significant inter-state tax and non-tax barriers to trade within the country. 

It was common to witness long lines of trucks waiting at state check posts for tax collection and document verification. This increased both transport time and compliance costs. Warehousing decisions were often decided more by state tax structures than by business efficiency.   

GST removed most of these tax barriers, allowing companies to redesign their logistics networks around operational efficiency rather than tax planning. 

The GST e-way bill system, introduced in April 2018, helped traders move goods between states without any barriers. The invoice details, vehicle information, and transporter data were linked through a digital document generated on the e-way bill portal. 

Businesses transporting goods valued above ₹50,000 were required to generate the document through the e-way bill portal to facilitate digital verification of shipments.

From tax reform to digital compliance

GST did more than merge multiple indirect taxes into one. It also changed how taxes are reported, monitored and collected by moving much of the system online. This was one of the key reforms implemented under the new system, which increased transparency and boosted the taxpayer base. 

Businesses file returns electronically, upload invoices and reconcile transactions through a common portal. The introduction of e-invoicing in 2020 for large taxpayers, later expanded to smaller businesses in phases, created a standardised electronic invoice system that automatically feeds into GST returns. 

Together with e-way bills and invoice matching, these systems created a digital audit trail for transactions across the supply chain.  READ | GST's credit challenge: Why input tax credit remains the biggest challenge

Revenue gains and federal challenges

GST revenues have risen steadily over the years, driven by economic growth, a larger taxpayer base and better compliance. The digital system has also made it harder for businesses to hide transactions or claim fake tax credits, helping improve tax collection. 

But GST also changed how the Centre and states share tax revenue. 

The new tax system took away the freedom of states to levy several indirect taxes, such as VAT and entry tax. With GST replacing these taxes, both the Centre and states began collecting tax under a common system and sharing the revenue. 

To address concerns that states might lose income after giving up their taxation powers, the Centre promised to compensate them for any revenue shortfall during the first five years of GST. 

That arrangement came under strain during the Covid-19 pandemic. As economic activity slowed, GST collections fell sharply, and several states demanded compensation for their losses. The Centre argued that the pandemic had severely affected revenues, leading to prolonged disagreements over how the compensation should be funded. 

Although GST collections have since recovered to record levels, debates continue over revenue sharing, compensation and the balance of financial powers between the Centre and the states. The experience showed that while GST has unified India's indirect tax system, managing a common tax across a federal country remains one of its biggest challenges.

GST 2.0: The next phase of reform

In September 2025, the GST Council overhauled the GST structure under ‘GST 2.0’ reforms. 

The reforms simplified the tax regime by consolidating the previous four slabs (5 per cent, 12 per cent, 18 per cent, 28 per cent) into two primary slabs (5 per cent and 18 per cent) and introducing a special 40 per cent demerit rate.

 

The 12 per cent slab was moved to 5 per cent, imposed on daily essentials and processed foods like toothpaste, shampoos, hair oil, namkeen, bhujia, pasta, sauces, and instant noodles. Medical essentials like glucometers, thermometers, and corrective spectacles were also moved to this slab.

 

GST 2.0 also eliminated the 28 per cent slab, with many goods under this category moved to the 18 per cent slab, giving relief to middle-class consumers.

 

It, however, added a new, higher 40 per cent "Demerit” or “Sin" slab, to consolidate taxes on luxury and harmful goods.

 

The government said the rationalisation was intended to make GST simpler, improve compliance and support consumption while protecting revenue. Alongside rate changes, the Council approved measures to strengthen the GST Appellate Tribunal framework, simplify refund procedures and further digitise compliance.

 

The changes marked the beginning of what policymakers described as the next phase of GST reforms, shifting the focus from implementation to simplification.