Evolution of GST in India and the Journey to GST 2.0

Introduction

Few reforms in independent India have been as ambitious, disruptive, and debated as the Goods and Services Tax (GST). Hailed as the “Good and Simple Tax” at its launch in July 2017, it sought to dismantle a century-old maze of indirect taxes and build a common market across the country. Eight years later, in September 2025, India unveiled GST 2.0, signalling a new chapter of simplification and maturity in this reform’s long journey.

The Pre-GST Era: A Tax Jungle

To understand GST’s importance, we must revisit India’s taxation landscape before 2017. A truck moving from Tamil Nadu to Delhi paid multiple levies—excise at the factory gate, service tax on transport, state VAT, entry tax at borders, octroi in cities. Each tax applied on the previous tax, creating the infamous “cascading effect”. Logistics delays meant India’s supply chain costs were among the highest in the world. Businesses often joked that crossing a state border was tougher than exporting abroad.

This inefficiency was not just economic but political—each state guarded its fiscal turf. Reform was necessary, but consensus was elusive.

The Long Road to Consensus

The idea of GST first took institutional shape in 2000, when Prime Minister Vajpayee formed an Empowered Committee of State Finance Ministers. Successive governments tried to move the needle—P. Chidambaram in 2006 promised rollout by 2010, and the first Discussion Paper came in 2009. But states feared a loss of autonomy: “If GST comes, will we still control our revenues?” was their constant refrain.

The political breakthrough came only in 2016, when the 101st Constitutional Amendment Act was passed. It gave both Parliament and States the power to legislate on GST (Article 246A), created a mechanism for inter-state trade (Article 269A), and institutionalised the GST Council (Article 279A)—a unique federal body to set rates and rules.

The Midnight Launch: July 2017

In a grand midnight session of Parliament, GST was unveiled as India’s tryst with a new tax era. The system was designed as a dual GST:

• The Centre levied CGST,
  
• The States levied SGST,
  
• And inter-state trade attracted IGST.
  

The promise was bold: “One Nation, One Tax, One Market.” But the architecture was complicated—multiple rate slabs (5, 12, 18, 28%), a separate compensation cess, and hundreds of exemptions.

Early Years: Triumphs and Troubles

The initial years were turbulent. Businesses faced compliance nightmares with multiple return forms, a glitch-ridden GSTN portal, and constant rule changes. Exporters suffered refund delays, and small traders called it a “tax for big corporates.”

Yet, GST also delivered visible gains. The E-way Bill (2018) cut border delays, trucks moved faster, and check-post queues disappeared. E-invoicing (2020 onwards) strengthened compliance and widened the formal tax base. Revenues gradually stabilised, and GST collections began crossing ₹1.5 lakh crore monthly by 2022–23.

But cracks in federal trust surfaced during Covid-19. With revenues collapsing, states accused the Centre of delaying compensation payments. The Centre had to borrow and extend the compensation cess beyond 2022 to restore confidence.

Judicial Intervention: Cooperative Federalism Reaffirmed

In Union of India v. Mohit Minerals (2022), the Supreme Court struck down IGST on ocean freight and declared that GST Council recommendations are not binding. This was a landmark reminder that GST rests on cooperative federalism: the Centre cannot dictate; consensus is essential.

Course Corrections Before GST 2.0

Learning from experience, the government introduced reforms:

• Decriminalisation (2022–23): raised thresholds for prosecution, removed minor offences.
  
• GST Appellate Tribunal (2025): set up to reduce litigation backlog.
  
• Simplification of returns: efforts began to merge forms and reduce compliance for MSMEs.
  

But the biggest criticism remained: too many slabs, too much confusion. Litigation over whether a snack is taxed at 12% or 18% became common. Industry demanded simplification.

GST 2.0: The 2025 Overhaul

On 22 September 2025, India launched GST 2.0, a landmark reform aimed at simplification:

1. Rationalised rate structure
   
   • Essentials at 5%,
     
   • Most goods and services at 18%,
     
   • A new 40% “sin slab” for tobacco, alcohol, online betting, luxury vices.
     → Nearly 200 items shifted down to lower slabs.
     
2. Compensation Cess removed
   
   • Instead of a separate cess, the burden was folded into the sin slab—simplifying tax architecture.
     
3. Compliance made easier
   
   • A single, simpler annual return.
     
   • Businesses with ₹10 crore+ turnover must upload invoices to the Invoice Registration Portal within 30 days, improving discipline without overburdening small firms.
     
   • GSTAT benches across states finally provided a uniform appellate mechanism.
     
4. Impact
   
   • Mass consumption goods and small vehicles became cheaper.
     
   • Sin goods became costlier.
     
   • States expressed worry about short-term revenue loss, but the reform was hailed as a step towards stability.
     

Achievements of GST

• Unified national market replacing fragmented tax regimes.
  
• Digital administration through GSTN, e-invoicing, e-way bills.
  
• Widened tax base and formalisation of economy.
  
• Revenue buoyancy visible in consistent growth.
  
• Logistics efficiency and cost reduction.
  

Challenges and Limitations

1. Structural: Petroleum, electricity, and real estate remain outside GST, weakening the promise of universality. Exemptions still distort credits.
   
2. Federal trust: States remain dependent on compensation, and disputes over revenue-sharing persist.
   
3. Compliance burden: Especially for MSMEs, with frequent changes and complex ITC rules.
   
4. Litigation: Classification disputes and inconsistent Advance Ruling decisions.
   
5. Equity concerns: GST, like all indirect taxes, is regressive and can hurt the poor disproportionately.
   

Way Forward

• Widen the base by including petroleum, electricity, and real estate.
  
• Strengthen Centre–State trust with transparent revenue-sharing and transitional support.
  
• Ease compliance with pre-filled returns and reduced filing frequency for small taxpayers.
  
• Institutionalise dispute resolution through a strong, uniform GSTAT and a National Advance Ruling Authority.
  
• Ensure stability by avoiding frequent rate tinkering; gradually move to a two-rate structure.
  
• Balance efficiency with equity by keeping essentials cheap and using GST revenue to fund welfare.
  

Conclusion

The story of GST is the story of India’s democracy and federalism. From the chaos of multiple levies to the simplification of GST 2.0, it reflects how India reforms—not in one big bang, but through negotiation, adaptation, and persistence.

GST 2.0 may not be the final word. The true success of GST will come when it covers all sectors, achieves simplicity and stability, and balances growth with fairness. Until then, it remains a work in progress—an unfinished but transformative chapter in India’s economic journey.