Why GST Needs A Factory Reset

In the early 20th century, Henry Ford revolutionised manufacturing with a simple idea: standardise the Model T, make it black, and reduce moving parts. But over time, in an attempt to customise and diversify, carmakers worldwide added endless variants, engine types, gearboxes, dashboard controls, until even basic repairs became so complicated that they required proprietary software and expensive diagnostics.

Eventually, some firms had to go back to basics, re-engineering models from scratch just to keep things functional and affordable. This simplicity, now rebranded as “minimalism,” is sold to us at twice the price.

India’s Goods and Services Tax (GST) has followed a somewhat similar arc, except, we are still looking for minimalism.

Launched in 2017 with the bold promise of “One Nation, One Tax,” GST was designed to simplify the country’s fragmented indirect tax regime. It subsumed a maze of central and state levies into a unified, destination-based system.

The aim was to reduce tax cascading, improve compliance, and create a seamless national market.

But over eight years, complexity has crept back in, through multiple rate slabs, procedural burdens, and patchy dispute resolution. What began as a simplification project now risks being strangled by its own administrative sprawl.

Let’s start with the good news. Monthly GST collections now consistently exceed ₹1.6 lakh crore, with a record ₹2.01 lakh crore collected in May 2025. The number of registered taxpayers has more than doubled since launch, from 65 lakh to over 1.4 crore. E-invoicing, data analytics, and AI-based return scrutiny have made enforcement smarter and more targeted. The GST Network (GSTN), once notorious for technical glitches, is far more stable.

Yet, as we celebrate this buoyancy, one must ask whether it is prudent to treat tax collection figures as a monthly achievement. After all, high collections are not inherently virtuous, they are a function of what citizens and businesses have paid. Framing them as trophies risks appearing tone-deaf to the pressures faced by honest taxpayers who are already navigating a complex and compliance-heavy system.

Unfortunately, the GST's revenue productivity has plateaued at around 6.7% of GDP. Litigation over rate classifications continues to rise. Refund delays persist. And despite all the digitisation, compliance remains uneven, particularly for MSMEs and rural businesses.

A Revolution That Remained A Patchwork

Ultimately, GST has been a federal compromise. It is more a negotiated settlement than a clean-slate reform. To secure buy-in from states, several key sectors like petroleum, alcohol, and electricity were kept outside its purview, fragmenting the tax base and diluting the promise of a unified indirect tax regime.

Instead of a single rate, India adopted a complex multi-rate structure: 0%, 5%, 12%, 18%, and 28%, with additional cesses on sin and luxury goods.

While this was intended to balance equity concerns across socio-economic groups, it significantly increased administrative complexity. Studies have shown that India’s GST is among the most complicated globally, with high compliance costs due to numerous exemptions, frequent return filings, and burdensome invoice-matching protocols.

The digital infrastructure meant to streamline operations, particularly the GSTN, initially faced severe technical glitches, disproportionately affecting MSMEs. The input tax credit (ITC) mechanism, a core efficiency feature, also ran into implementation hurdles: mismatches, delayed filings, and cash flow disruptions became common.

Though GST has expanded the tax base and improved interstate trade, these gains are offset by design flaws born out of political necessity. What India created was not a singular tax revolution but a layered structure still in search of simplification and coherence.

It's Time For GST 2.0

There are several avenues for reforms but below are seven key areas which need immediate intervention.

1. Rationalise the Rate Structure: The current five-rate structure, plus cess, is indefensible. It invites classification disputes, fuels litigation, and makes compliance unpredictable.

GST 2.0 must move to two rates. A low rate (10–12%) for essentials and a standard rate (16–18%) for everything else. Luxury or sin goods can be taxed separately under non-GST levies like a surcharge.

2. End the Exclusion of Core Inputs: Keeping petrol, diesel, ATF, and electricity outside the GST net fractures the input tax credit chain, distorts prices, and violates the foundational principle of GST as a comprehensive value-added tax.

Businesses consuming fuel or power as inputs are denied credit, leading to cascading taxes and inflated costs. Their exclusion also creates compliance friction, classification ambiguities, and undermines the vision of a unified national market.

However, states’ concerns over revenue loss are valid. These sectors account for a significant share of state revenues. To address this, a phased inclusion roadmap can be adopted, beginning with ATF and natural gas, followed by diesel, petrol, and electricity, backed by constitutionally guaranteed transitional grants for a fixed period.

In parallel, a formula-based revenue assurance mechanism, designed and reviewed by the GST Council, can ensure that no state is worse off post-inclusion. States must also be given greater flexibility in setting floor rates within a band, to retain a measure of fiscal autonomy.

But the broader imperative remains, i.e., GST cannot deliver on its economic potential while quarantining the most vital inputs of the modern economy. If we aspire for a seamless, investment-friendly tax system, these exclusions can no longer be defended.

3. Operationalise the GST Appellate Tribunal: The persistent non-operationalisation of the GST Appellate Tribunal (GSTAT), despite its statutory basis under the Central Goods and Services Tax Act, 2017, has created a significant void in India’s indirect tax adjudication framework.

In the absence of a dedicated appellate mechanism, taxpayers are compelled to approach high courts for resolution of disputes that would ordinarily be addressed at the tribunal level.

As per available data, over 14,000 GST-related writ petitions are currently pending across various high courts, resulting in substantial judicial backlog, delayed relief, and heightened compliance uncertainty.

Moreover, the decentralised interpretation of GST provisions by state-level authorities has led to jurisdictional inconsistencies and an erosion of uniformity in tax administration.

To address this, it is imperative that the GSTAT be made functional with immediate effect and be designed to function as an authoritative and binding appellate forum. Its rulings must be uniformly applicable across all states to ensure coherence in jurisprudence.

Additionally, the tribunal should be mandated to dispose of appeals within a stipulated timeframe, preferably six months, to enhance procedural efficiency.

The credibility, predictability, and effectiveness of the GST regime are contingent upon the establishment of a professionally competent, independent, and expeditious appellate mechanism. In the absence of such an institution, GST 2.0 cannot achieve the levels of legal certainty and administrative rationality necessary for a modern indirect tax system.

4. Reform State-Level Tax Administration: A critical but often overlooked determinant of the success of the Goods and Services Tax (GST) lies not in the tax code itself, but in the administrative ecosystem that operationalises it, particularly at the subnational level.

While GST was structurally designed as a dual levy in alignment with India’s federal polity, the underlying provincial revenue administration has not undergone a commensurate transformation.

Most state tax departments continue to operate within a legacy framework shaped by colonial land revenue priorities, with limited domain expertise in modern indirect taxation.

This institutional lag manifests in uneven enforcement, weak taxpayer support, jurisdictional overlaps, and fragmented compliance processes across state GST (SGST), excise, stamps, and transport taxation. The result is that even well-intentioned GST policies often fail to deliver uniformly due to administrative asymmetries between and within states.

For GST 2.0 to be effective, particularly with respect to rate rationalisation, improved input tax credit reconciliation, and base expansion, the foundational architecture of state revenue systems must be modernised.

Reform in this space must begin with the professionalisation and unification of provincial tax services. The creation of a composite State Revenue Service, combining SGST, excise, stamps, motor vehicle tax, and local tax functions, would bring coherence to enforcement and reduce redundant silos.

This unified cadre should be equipped with specialised training in digital compliance, data analytics, and taxpayer facilitation. Additionally, reporting hierarchies must be standardised across tax departments to enable coordinated audits, assessments, and recovery procedures.

The office of the District Collector, historically oriented around land revenue, should be repositioned with technical support to oversee modern tax functions, possibly through a designated Additional Collector (Revenue) with domain expertise.

States must also establish interoperable digital systems that integrate licensing, registration, valuation, and transaction data across municipal and provincial bodies.

GST cannot function as a seamless value-added tax if provincial tax administration continues to operate in functional isolation. Institutional convergence, not just policy alignment, is the missing link in India’s GST reform story.

5. Enact a Statutory Taxpayer Bill of Rights: India currently lacks a legally enforceable National Taxpayer Charter specifically embedded within the GST framework, despite the Central Board of Indirect Taxes and Customs (CBIC) having adopted a non-binding Taxpayers’ Charter in 2020.

In practice, GST enforcement continues to reflect an adversarial orientation, where coercive demands and show-cause notices are often issued for procedural lapses, even in the absence of fraudulent intent. This undermines the principle of trust-based compliance that underpins modern indirect tax systems.

To rectify this, GST 2.0 must include a statutorily backed Taxpayer Bill of Rights within the CGST and SGST Acts, explicitly guaranteeing protection against arbitrary action, prescribing binding timelines for refunds, audits, and adjudication, and imposing penalties for misuse of enforcement powers.

Features such as pre-filled returns, real-time taxpayer dashboards, and 15-day time-bound grievance redressal must be institutionalised as statutory entitlements, not discretionary features.

Embedding such rights in law, rather than leaving them to administrative circulars or mission statements, would restore confidence in tax administration, especially for MSMEs and first-time taxpayers, and align India’s indirect tax system with global best practices.

6. Fix the Advance Ruling Mechanism: There is a pressing need to reform India’s Authority for Advance Rulings (AAR), which was originally designed to provide certainty and reduce disputes under GST but has instead become a source of inconsistency, delay, and distrust.

State-level AARs frequently issue contradictory rulings on identical issues, such as GST rates on solar equipment or food products, due to the absence of a centralised authority and the inherent bias of tax officers who serve as adjudicators.

These rulings are not treated as binding precedents, lack nationwide applicability, and often face long delays, defeating their purpose.

To address this, India should establish a centralised National AAR with judicial or expert members, ensure rulings are precedent-setting and digitally accessible, and introduce fixed timelines for decisions.

7. Deploy AI for Dispute Resolution: One of the most radical yet increasingly feasible reforms to India’s GST framework is the introduction of an AI-driven dispute resolution mechanism with zero human interface.

Currently, the GST system is plagued by classification disputes, such as whether a snack is taxed as a “roti” or a “paratha”, which not only delay refunds but also create opportunities for rent-seeking and corruption.

India could train large language models and machine learning algorithms on a comprehensive corpus of historical rulings, tribunal orders, advance rulings, and GST Council circulars.

The resulting system would offer automated, transparent, and time-bound adjudication of disputes, using explainable AI to justify decisions. Importantly, it could still allow for a secondary layer of human review to uphold due process.

This idea is not without precedent. Estonia has piloted AI judges in small claims courts; China has deployed AI in its “Internet Courts” for routine commercial disputes; and the UK’s HMRC uses machine learning to detect VAT fraud and flag high-risk transactions.

Applying this model to GST disputes in India could not only dramatically reduce litigation backlogs but also improve taxpayer trust by eliminating discretionary bias and ensuring consistency in interpretations across jurisdictions.

Back to the Drawing Board

The evolution of GST mirrors a common institutional failure, i.e., reforms meant to simplify often grow more complex over time. In trying to balance competing interests, GST has accumulated structural and procedural burdens that now undermine its effectiveness.

GST 2.0 must be a fundamental reset, not a patchwork fix. The focus should return to simplicity, neutrality, and coherence, using technology and federal coordination to support these aims. In taxation, as in design, real progress lies in removing what no longer works, not in endlessly adding more.