Launched amid much fanfare in July 2017, India’s Goods and Services Tax (GST) was marketed as the country’s most significant indirect tax reform—promising “One Nation, One Tax.”
Eight years on, however, the reality has diverged starkly from the vision. Despite increased tax buoyancy and widened formalization, the GST regime continues to be plagued by structural flaws, technical inefficiencies, legal ambiguities, and inconsistent policy decisions.
This deep dive dissects the key lacunae within the Indian GST ecosystem, drawing on recent developments, real-world case studies, and expert perspectives.
1. Multiplicity of Tax Rates: A Far Cry from Simplification
The promise of a simplified tax structure has been diluted by the existence of seven different tax slabs—0%, 0.25%, 3%, 5%, 12%, 18%, and 28%—and frequent rate changes.
Example:
A classic illustration is the taxation of popcorn. Non-branded salted popcorn attracts 5% GST, pre-packaged variants are taxed at 12%, while caramel popcorn is at 18%. In December 2024, a viral post by a food startup founder highlighted the absurdity of this regime, sparking a nationwide social media outrage.
Solution:
The GST Council must rationalize slabs into 2-3 categories and eliminate the need for classification litigation. A single standard rate, with one lower rate for essentials and one higher rate for luxuries, could restore predictability and coherence.
2. Compliance Overload: SMEs Bear the Brunt
GST’s complex return filing mechanism—GSTR-1, GSTR-3B, annual returns, and audits—has increased compliance costs, particularly for micro, small, and medium enterprises (MSMEs).
Example:
An Ahmedabad-based textile manufacturer revealed they spend over ₹1.5 lakh annually just on compliance consultancy, in addition to recurring portal glitches and reconciliation headaches.
Solution:
The merging of returns into a single monthly filing, automation of reconciliation, and simplified compliance norms for MSMEs are essential reforms. Moreover, the government should prioritize training programs and AI-driven helpdesks.
3. Inverted Duty Structure: A Threat to Sectoral Viability
An inverted duty structure arises when the input GST is higher than output GST, leading to accumulation of unutilized Input Tax Credit (ITC).
Example:
In the footwear and textile sectors, raw materials like PU leather or synthetic yarn are taxed at 18%, while the final products are taxed at 5% or 12%. As a result, working capital is stuck in ITC claims.
Solution:
The realignment of input-output rates, along with faster refunds and industry-specific harmonization, is necessary to restore financial equilibrium.
4. Anti-Profiteering Provisions: Arbitrary and Opaque
The anti-profiteering mechanism under Section 171 of the CGST Act was introduced to ensure that businesses pass on benefits of tax cuts to consumers. But in the absence of clear methodology, businesses often face arbitrary investigations.
Example:
In 2023, a multinational FMCG company was penalized for not passing on GST rate reductions despite maintaining that price hikes were due to input cost inflation. The lack of quantifiable benchmarks makes compliance speculative.
Solution:
India needs a transparent, rules-based anti-profiteering framework, possibly modeled on Australia’s ACCC or Canada’s Competition Bureau. The mechanism should include a sunset clause and a clear formula for determining “undue profit.”
5. Delayed Setting up of GST Appellate Tribunal (GSTAT)
Even six years after GST’s inception, India lacks a fully functional appellate mechanism, forcing taxpayers to approach High Courts for every dispute.
Example:
A Pune-based engineering firm has been waiting over three years for a refund denied under GSTR-3B. With no tribunal, the case languishes in the Bombay High Court, escalating both cost and uncertainty.
Solution:
With the GSTAT Bill passed in 2023 but yet to be implemented in full, fast-tracking appointments and regional benches is non-negotiable. Specialized tax benches can alleviate the burden on High Courts and ensure speedy redressal.
6. GSTN Portal Glitches and Technological Failures
GSTN, the IT backbone of GST, has repeatedly suffered technical breakdowns, especially around deadlines. Even routine filings get disrupted, impacting small traders and large corporations alike.
Example:
In October 2024, a critical update crashed the GSTR-1 submission module just before the deadline, affecting over 1 lakh businesses. Social media was flooded with screenshots of error messages and unresolved helpdesk tickets.
Solution:
The GSTN must undertake real-time stress testing, upgrade infrastructure, and engage third-party auditors. Transparency in uptime/downtime metrics, like SEBI-mandated disclosure norms, can build taxpayer trust.
7. Exclusion of Key Fuels and Sectors: Fragmentation Remains
Petroleum products like ATF, diesel, and petrol, as well as real estate, remain outside the GST ambit. This leads to cascading taxes and deters input credit optimization.
Example:
Airlines have repeatedly petitioned for ATF to be brought under GST, citing rising jet fuel costs as the biggest contributor to fare hikes. The GST Council rejected this in December 2024, citing revenue dependency of states.
Solution:
Bringing ATF and real estate under GST, with a revenue-sharing mechanism between Centre and states, could finally fulfill the promise of a truly unified tax system.
8. Frequent Policy Changes: Uncertainty and Compliance Risk
The GST regime has seen over 1,500 notifications, circulars, and clarifications since 2017. This constant churn creates regulatory fatigue and increases litigation.
Example:
The last-minute deferral of e-invoicing thresholds in April 2024 disrupted ERP systems of mid-sized exporters, who had already invested in software upgrades.
Solution:
A stable tax calendar, mandatory pre-consultation with industry, and a 90-day notice period before major changes would improve policy predictability and business confidence.
Conclusion: A Work in Progress, But Time for Course Correction
While GST has undoubtedly formalized large parts of the economy, its current implementation suffers from over-engineering, legal opacity, and tech fragility. As India targets a $5 trillion economy, a second-generation GST reform is urgently needed—one that harmonizes federal goals with enterprise ease.
The GST Council must now move beyond firefighting and embrace visionary structural reform, lest GST becomes a cautionary tale of a well-intentioned idea bogged down in bureaucratic complexity.
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