Everyone loves a good GST: Politicians understand the flaws in system

India's GST needs urgent reform as structural flaws-multiple rates, exemptions, and broken credit chains-continue to hurt growth, investment, and exports

Goods and services tax (GST) today is a drag on Indian success. The way GST works hinders investment, exports, and productivity. Faced with a fresh wave of economic stress through protectionism in the United States (US) and the war in Iran, there is a crying need for a better functioning economic-policy machinery in India. The time has come to complete GST reform. 

The long journey to GST began when some of us built the Vijay Kelkar report on FRBM (Fiscal Responsibility and Budget Management) implementation in 2004, showing a fully articulated design of GST and its importance for economic strategy. As with all important ideas, this began as novel ideas, gained acceptance in the expert community, and then got broadly accepted in the policy community. Once the policy consensus shifted, the idea was ripe for implementation. 

However, in the effort to build a consensus, early compromises on design diluted the core principles of a value-added tax. All political parties signed off on these compromises, so there is plenty of blame to go around. The nice thing about standing in 2026 is that everyone sees these mistakes with crystal clarity. 

Everyone now sees the value of a good and simple tax: A single low rate, a comprehensive base, complete input tax credit, removal of all traditional indirect taxes such as various kinds of cess, zero rating of exports, and GST on imports at the border. There is now broad agreement in Indian politics that GST needs to be reformed in these directions. 

Prime Minister Narendra Modi on July 1, 2017, in the Central Hall of Parliament, described GST as “a good and simple tax” Multiple rates, cesses, GST exemptions, and cholesterol in input tax credit have fragmented the base and reintroduced cascading, undermining both simplicity and efficiency. 

Union Finance Minister Nirmala Sitharaman, in recent GST Council briefings, emphasised that “GST revenues are strong and the system is stabilising”, Revenue buoyancy, however, is not a measure of design quality. The real adverse impact that should worry the Ministry of Finance is on economic growth. 

Former Union finance minister P Chidambaram has argued that “GST is too complex and should move to fewer rates”. This diagnosis is directionally correct but incomplete. The weaknesses of GST run beyond rate multiplicity. For example, a simplified rate structure cannot deliver efficiency if the credit chain remains broken. 

Rahul Gandhi has repeatedly described GST as “a Gabbar Singh Tax” in the context of micro, small, and medium enterprises during campaign speeches between 2017 and 2019. The burden on small businesses is real, but it reflects the weaknesses of the present Indian GST design and not the GST when done right. Threshold effects, compliance complexities, and broken credit chains increase informality instead of reducing it. 

M K Stalin (of the Dravida Munnetra Kazhagam) has argued that “GST undermines the fiscal autonomy of states”. The concern is overstated. States receive a substantial share (71 per cent) of GST revenues and retain full control over major non-GST tax bases such as alcohol, fuel, and property. A key difficulty lies in how states have utilised their role in the GST Council to reflect their interests. 

Raghav Chadha (of the Aam Aadmi Party), in the Rajya Sabha in 2024, criticised “multiple GST rates on everyday items like popcorn”. Such anomalies are symptoms of a fragmented system. These structures are approved within the GST Council. The gap between endorsement in policy forums and criticism in public reflects a deeper accountability deficit. 

Abhishek Banerjee (of the Trinamool Congress) has argued that “GST has hurt state finances and burdened consumers”. The burden on consumers, however, stems largely from cascading caused by exemptions and restrictions on input tax credit. Fiscal stress is linked to the flaws of GST as implemented. 

Akhilesh Yadav (of the Samajwadi Party) has stated that “GST has complicated compliance and hurt traders”. Compliance challenges arise from structural design rather than from GST itself. Multiple rates, threshold discontinuities, and credit restrictions increase complexity. Simplification requires restoring a clean credit chain rather than merely lowering rates. 

Mamata Banerjee (Trinamool) has argued that “GST has eroded state fiscal autonomy”. States collectively hold two-thirds of the voting powers in the GST Council and have endorsed all its major decisions.  They also have significant powers in shaping GST. The issue is, therefore, not loss of autonomy but sophisticated public-finance policy in states, and their exercise of their powers in the GST Council. 

Y S Jagan Mohan Reddy (YSR Congress) has stated that “GST has increased dependence on the Centre”. Revenue uncertainty reflects a fragmented base design and exemptions. Strengthening the integrity of the tax by restoring input tax credit would improve both stability and fiscal capacity. 

The Telugu Desam Party and the Biju Janata Dal have both raised concerns that “GST has created revenue uncertainty for states”. Yet states governed by these parties have participated in and endorsed GST-Council decisions that fragmented the base through exemptions and rate dispersion. The resulting pressures, therefore, reflect collective policy choices as much as institutional constraints. 

The Left Democratic Front in Kerala has characterised GST as “regressive”. Regressivity arises primarily from hidden cascading caused by exemptions and denial of credit. A clean GST with full input tax credit, a broad base, and targeted direct cash transfer would be more progressive than the current structure. 

All parts of the Indian political system want a rational GST that comprises six elements: (a) A single low rate such as 8-12 per cent, (b) a comprehensive base, (c) complete input tax credit (see Modi & Shah 2025, https://bit.ly/41tTRRS), (d) removal of all traditional indirect taxes such as cesses, (e) zero rating of exports, and (f) GST on imports at the border. 

What is needed is not another round of incremental adjustment but a fresh political discussion. A dedicated, full-day discussion in Parliament — focused exclusively on GST design, its structural distortions, and the role of the GST Council — would help all political formations to translate their angst into a shared agreement on reforms. 

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The authors are, respectively, a researcher at the XKDR Forum, and affiliated with the Pune International Centre and XKDR Forum