9 months on, GST next-gen reforms: Lower rates, larger base, higher revenue

The authors argue GST rate rationalisation has broadened the tax base, improved compliance and refunds, and boosted consumption, though its full impact will take longer to assess

The September 2025 restructuring of the Goods and Services Tax (GST) was the most significant change to the system since 2017. Nine months on, there is some data to work with, but there is still some more distance to cover. Therefore, we need to take a pause and read it carefully. 

For years, the criticism of the GST was that it had too many slabs, that classification disputes clogged the appellate system, and that its structure had drifted far from the single-rate ideal its architects imagined. Rationalisation was the demand. In September 2025, it was delivered. It says something about the attention the reform commands that its results were being assessed within months of the change. A structure that took eight years of argument to change should not be assessed on quarterly returns, as though a reform of this scale ought to prove itself within two collection cycles. That seems to be the theme of the article, ‘GST re-labelling misleads and obscures the true revenue picture’, published in these pages on July 16. 

This matters because rate rationalisation was never a revenue exercise, and evaluating it as one misses most of what it was intended for. There were several objectives of the rate rationalisation. Fewer slabs mean fewer classification disputes. A simpler structure lowers the cost of compliance for the smallest taxpayers, who are least equipped to bear it. Most significant was that the lower rates on mass-consumption goods would be a direct transfer to households, which would, in turn, support more consumption. These are the returns the reform was designed to produce. 

What shows up in the numbers is reassuring. Net GST revenue, excluding cess, rose to ₹19.34 trillion in 2025-26 from ₹18.07 trillion, a growth of 7.1 per cent in a year in which reduced rates were operative for half the period. Gross revenues grew 8.3 per cent. Growth in the six-month period post-rate rationalisation was 9 per cent. 

 Net collections in the current year stand at ₹5.40 trillion net through June, registering a growth of 7.1 per cent.  

A system that has absorbed a substantial rate cut and has continued to expand is remarkable in itself. States have fared no worse. It has been suggested that the new arrangement leaves them with less. However, states’ revenues grew 6 per cent in FY 2025-26. These are the numbers on which the reform should be fairly judged. 

 Beneath the aggregate number lies another interesting movement. In the six months following rationalisation, average monthly taxable supply stood at ₹51.7 trillion, up from ₹40.1 trillion in the same period a year earlier, representing nearly 29 per cent growth. April 2026 held the pattern, at 27 per cent over April 2025.  

The growth is broad-based rather than concentrated in a sector or two. The mechanism is familiar enough. A lower rate narrows the gap between the taxed and the untaxed, which improves compliance over time. It is also that with lower rates, consumption improved. For example, passenger vehicle sales had fallen by 1.4 per cent in the first half of 2025-26, and the industry’s own forecast for the year was growth of 1 to 2 percentage points. In the months following the rate cut, they rose 15.8 per cent in October, 18.1 per cent in November and 29 per cent in December, and February 2026 recorded the highest sales ever for that month. 

It was nobody’s case that the rate cut would pay for itself. It did not, nor was it supposed to. Any reduction in rates would result in revenue losses.  

The rate rationalisation in GST was structured so that the benefit would be passed on to consumers, thereby kickstarting a virtuous cycle. The figures show that the reduction has recovered a good part of its cost through the larger base or supply that followed. Notably, it continues to do so long after the initial revenue effect has passed. Changes of this order work through prices, then through behaviour, then through the base, and each stage takes longer than the last. 

The September 2025 reform was not only about rates. Registration was simplified and its timelines compressed, a direct ease of doing business measure, especially for small businesses.  

Refund processing was also reworked so that risk-based automated clearance replaced manual scrutiny of every claim. Refunds disbursed rose from ₹2.49 trillion to ₹2.93 trillion, excluding cess, an increase of about 18 per cent. Faster refund releases free up working capital for exporters and those with an inverted duty structure. 

The restructuring of the compensation cess also needs to be understood in the proper context. The cess was a transitional instrument. It was created to provide guaranteed revenue to the states during the five-year transition period until June 2022. When the pandemic disrupted collections, the Centre took a loan and extended it to states in a back-to-back arrangement. The compensation cess continued, as originally agreed, thus protecting the States’ revenue during the pandemic. 

What is always missed is that after 2022, the cess benefited neither the Centre nor the states fiscally. Every rupee of it was committed to loan repayment. It was not revenue available to either partner. It was a fiscally neutral item. In 2017, Centre brought its constitutional right to tax tobacco into the compensation pool. It was not a permanent arrangement. So, when the need for compensation ended in 2025-26, the Centre re-enacted the levy.  

Even then, the additional excise duty on tobacco forms part of the divisible pool and is shared with the states under the Finance Commission’s award. 

With the cess levy ending substantially in September 2025 and fully in early 2026, prudence required that it no longer be included in any period-on-period revenue comparison.  

A fiscally neutral item belongs on neither side of a revenue comparison.  Comparability is a matter of presentation, not of performance.  

A change in accounting is not a change in outcome or performance. The system today undeniably collects more, from a larger base or supply, at lower rates and with faster refunds.  

Whether the full return has arrived is a question that nine months cannot answer, and that is the honest position. A reform of this scale settles over several cycles, and the evidence so far is that it is settling well.

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The authors are respectively the Chief Economic Advisor and Joint Secretary, Department of Revenue, Ministry of Finance, Government of India. Views are personal.