By R. Suryamurthy
By pledging a sweeping Goods and Services Tax (GST) reform as a “Diwali gift” from the ramparts of the Red Fort in his Independence Day address, Prime Minister Narendra Modi has set a high-stakes deadline — and a high bar. The promise was designed to thrill households, soothe small businesses, and project a government in command of the economic narrative.
But beneath the Independence Day spectacle lies a far less festive reality. July’s GST data shows cracks that no amount of rhetorical plaster can hide. Imports are propping up the tax system, domestic consumption is sagging, refunds are ballooning, and the GST’s uneven performance across states could turn a “simplification” drive into a redistribution of fiscal pain.
In short, what is being sold as a gift could just as easily be a fiscal hangover waiting to happen. Modi’s reform blueprint — now with the GST Council’s Group of Ministers — centres on three pillars: structural change, rate rationalisation, and “ease of living.” It is an appealing list of consumer-friendly moves: cut rates on mass-consumption goods, fix inverted duty structures, and simplify compliance for businesses.
The government is floating rate cuts on items ranging from FMCG sachets and cement to tractors, drones, autism centres, EV battery parts, and even air conditioners. Oil Minister Hardeep Puri has revived the push to bring natural gas under GST, while bureaucrats weigh collapsing the current five slabs into a cleaner two-tier system, with some exceptions.
On the surface, it’s an economic sweet box — every constituency gets a taste. The problem is that the sweet box may be hiding a hollow centre. July 2025’s GST collections rose 7.5% year-on-year to ₹1,95,735 crore. A casual glance might see this as vindication of the GST model. But peel back the layers, and the picture is worrying.
Import-based GST revenue jumped 9.7%, while domestic GST grew just 6.7%. More troubling: net domestic GST — after adjusting refunds — actually contracted year-on-year for the first time since the pandemic. This means India’s supposedly self-reliant economy is increasingly dependent on imported goods to keep GST collections looking healthy. The “Atmanirbhar Bharat” slogan is ringing hollow when foreign shipments are paying the bills and homegrown demand is stuck in low gear. July’s GST refunds soared 66.8%, with domestic refunds alone rocketing 117.6% compared to last year. Government spin says this boosts liquidity for business. The truth is it exposes deep inefficiencies in the tax structure.
The culprit is inverted duty structures — when tax on inputs exceeds that on the final product. Lithium-ion batteries are the classic example: components taxed at 28%, batteries at 18%. Manufacturers are forced into a refund cycle that ties up capital for months.
It’s more than an accounting problem — it’s an industrial competitiveness problem. Firms stuck in refund limbo can’t reinvest in production, hire more workers, or innovate quickly enough. The result: slower output, higher costs, and eroded competitiveness in global and domestic markets.
The state-level picture is a fiscal map of inequality. Economic heavyweights — Delhi (2%), Gujarat (3%), Rajasthan (4%), Maharashtra (6%), Karnataka (7%), Tamil Nadu (8%) — are crawling. Smaller or mid-tier states are thriving: Madhya Pradesh (18%), Andhra Pradesh (14%), West Bengal (12%), Punjab and Haryana (12%).
At the other end, Manipur has collapsed by 36%, Mizoram by 21%, with Jharkhand, Chhattisgarh, and Jammu & Kashmir also in the red. Why does this matter for reform? Because GST rate rationalisation will not affect all states equally. Richer, urbanised states — with greater consumption in mid- and high-rate categories — will benefit disproportionately. Poorer, consumption-light states risk losing a chunk of their fiscal muscle. That’s not just unfair; it could gut welfare programmes and derail infrastructure plans in the states that need them most.
A new working paper by Professor Sacchidananda Mukherjee of the National Institute of Public Finance and Policy is a sobering reality check. Neither the Union nor the states have granular, rate-wise GST data that would allow them to simulate the fiscal impact of proposed rate changes.
The Finance Ministry itself admitted in 2024 that it’s “currently not possible” to break down collections by slab because GST returns don’t capture that detail. Without such data, reform is not just a gamble — it’s fiscal roulette. And this comes at a dangerous time: since the GST compensation guarantee to states expired in 2022, there is no fallback if reforms dent revenues. That’s a recipe for political battles and fiscal instability.
Flattening GST rates sounds neat on paper, but without compensatory mechanisms, it risks shifting the tax burden in ways that deepen inequality. Mukherjee’s research shows that affluent states like Goa spend far more on goods in mid- and high-rate categories. Poorer states’ consumption patterns lean towards low-tax essentials. Rationalisation without safeguards could see richer states collect more, and poorer states left to slash budgets.
The government is exploring a “post-2026 additional GST” on goods with environmental or health costs, but this would be yet another layer on a system already cluttered with cesses and surcharges. Complexity would creep back into a reform meant to simplify.
If Prime Minister wants this Diwali pledge to be remembered as a masterstroke rather than a misstep, four actions should be non-negotiable: Reignite Domestic Demand – Middle-income households and MSMEs need targeted stimulus — tax relief, credit guarantees, or direct transfers — to boost consumption sustainably. Fix Inverted Duty Structures -Reducing refund burdens will free up working capital, quicken production cycles, and make Indian industry more competitive.
In order to remove regional disparities, the Modi Government should Introduce performance-linked transfers or special packages for underperforming states to prevent fiscal hollowing. Apart implement robust, rate-wise GST data collection to support evidence-based policymaking. Reform without data is a fiscal leap in the dark. The GST Council — dormant for eight months — is expected to meet soon to consider the Group of Ministers’ recommendations. The temptation will be to push through a headline-grabbing reform in time for the festival season.
But the council faces a bigger test: preserving the fragile Centre–state consensus that has kept GST afloat through eight turbulent years. Push too fast, and that consensus could fracture, triggering disputes over revenue shares and compensation. GST rationalisation has the potential to be Modi’s next big economic signature — or his next big policy headache. Done right, it could streamline compliance, cut consumer prices, and make Indian industry leaner. Done wrong, it could erode revenues, deepen state inequalities, and trap the economy in a slower-growth cycle.
In its current form, the July data makes one thing clear: GST reform is less about “ease of living” and more about testing the resilience of India’s fiscal federalism. The price of getting it wrong won’t just be paid in political embarrassment — it will be measured in stunted growth, widened inequality, and a breakdown of the trust that underpins one of India’s most ambitious tax experiments. (IPA Service)
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