R. Suryamurthy
Prime Minister Narendra Modi’s Independence Day pledge to roll out sweeping Goods and Services Tax (GST) reforms by Diwali is colliding with sobering fiscal data and structural weaknesses that could temper public expectations.
From the ramparts of the Red Fort, Modi announced plans centred on rate rationalisation, structural changes, and “ease of living” measures, including potential cuts on mass-consumption goods, correction of inverted duty structures, and simplified compliance. Items under review range from FMCG sachets and EV battery parts to cement, tractors, and air conditioners. Oil Minister Hardeep Singh Puri renewed calls to bring natural gas under GST, while the Centre considers reducing the current five-rate structure to two tiers plus exceptions.
But official data show the reform push comes amid uneven economic undercurrents. GST collections in July rose 7.5% year-on-year to ₹1.96 trillion, driven largely by import-linked revenue, which grew 9.7%, outpacing domestic GST growth of 6.7%. Net domestic GST revenue fell year-on-year for the first time since the pandemic.
“This degrowth shows that the consumption sentiment in the country is not very positive,” said Vivek Jalan of Tax Connect Advisory Services.
Refund outflows surged 66.8% in July, with domestic refunds jumping 117.6%, reflecting the cost of inverted duty structures such as lithium-ion batteries, taxed at 18% while components attract 28%. Analysts warn the distortions are locking up working capital and slowing industrial output.
The picture is further complicated by wide inter-state disparities. Growth was as low as 2% in Delhi and 3% in Gujarat, while Madhya Pradesh and Andhra Pradesh grew 18% and 14% respectively. Several states, including Manipur and Mizoram, posted sharp declines.
A working paper by the National Institute of Public Finance and Policy warns India lacks granular GST data needed to model the fiscal impact of major rate changes. The Finance Ministry admitted last year it cannot break down collections by rate slab due to return-filing limitations.
“The absence of granular, rate-wise tax collection data and wide inter-state variation in consumption patterns means any attempt to restructure GST rates is fiscally blind,” said the paper’s author, Professor Sacchidananda Mukherjee.
Since the end of GST compensation to states in 2022, poorer states face sharper revenue risks if reforms dent collections. Flattening rates, Mukherjee warned, could shift the tax burden towards less urbanised regions.
The GST Council is expected to meet soon to discuss the Group of Ministers’ proposals. Deloitte India’s M.S. Mani said moving to a two-rate structure would reduce classification disputes and align India with advanced economies, but businesses would need time to adjust pricing, logistics, and IT systems.
While the government sees rate cuts as a boost to consumption and competitiveness, analysts say reforms without safeguards could deepen regional imbalances and strain fiscal federalism.