Opinion GST 2.0 has potential to trigger a virtuous cycle

I recall much deliberation on the revenue-neutral rate during my period as Revenue Secretary in P Chidambaram’s first tenure as finance minister. The Atal Bihari Vajpayee years saw the Kelkar Task Force of 2002 lay the groundwork for GST, but concerns over state autonomy, revenue loss, and political gridlock stalled progress. It became clear that without the participation and trust of states, GST could not move forward. The decisive moment came under Prime Minister Narendra Modi’s leadership. States were assured by then Finance Minister Arun Jaitley of compensation of 14 per cent annual growth in GST revenues for five years, addressing fears of revenue loss.

The creation of the GST Council under the Union finance minister, with all state finance ministers as members, was unprecedented. Few federal systems in the world offer such pooled sovereignty, where both Parliament and state assemblies circumscribe fiscal powers for the common good. It was no easy decision for legislatures to surrender their autonomy over excise, but consensus carried the day.

When GST was launched in July 2017, it subsumed 17 taxes and 13 cesses into a single system. Gains were immediate. The taxpayer base expanded from 66 lakh in 2017 to over 1.5 crore today. Collections rose sharply, with the tax base itself increasing from Rs 45 lakh crore to Rs 173 lakh crore over the past decade at a CAGR of 14.4 per cent. Successive Council meetings oversaw revisions, widened coverage and improved compliance.

The latest reforms, approved unanimously by the GST Council in September 2025, mark the most far-reaching recalibration since the tax’s inception. Four slabs now compressed to two: 5 per cent and 18 per cent, with a higher rate of 40 per cent for luxury and sin goods. Life and health insurance premiums were exempted. This was more than cosmetic. It addressed the most persistent criticism that complexity weakened compliance and confused both consumers and businesses. Fewer rates mean easier classification, fewer disputes, and smoother administration. For citizens, essentials become cheaper; for businesses, predictability improves; for policymakers, the reform marks a decisive shift from incremental tinkering to bold consolidation.

The Group of Ministers, chaired by Bihar’s Deputy Chief Minister Samrat Choudhary, steered tough negotiations. The 56th GST Council meeting approved the package with all states on board. That the reform was endorsed unanimously is no small achievement and reflects the maturity of our federal compact.

There are three reasons why these changes are transformative.

First, the consensus of all state finance ministers is historic. No other country has created an institution comparable to the GST Council, much less used it to deliver far-reaching changes. Jean-Claude Trichet once remarked that India’s federal entity was unique, and that Europe, in its quest to matter globally, must pursue pooled sovereignty as its path forward.

Second, concerns about revenue loss are overstated. The Revenue Secretary estimated a short-term hit of about Rs 48,000 crore based on 2023-24 consumption, but actual outcomes may vary. Experience shows simpler structures enhance compliance and buoyancy. As consumption rises, revenues recover. The doubling of GST collections in five years proves that buoyancy, driven by growth and trust, matters more than rate design.

Third, GST 2.0 has the potential to trigger a virtuous cycle. It strengthens India’s image as a predictable and reform-oriented economy. This reform signals that India is willing to listen to stakeholders and act decisively. If the Centre and states can cooperate on taxation, why not extend this spirit to other areas of economic reform? Uniform rules, transparency and collaborative approaches to land and labour could complete the unfinished agenda.

The finance minister has acknowledged that unfinished tasks remain. These include ensuring that benefits reach the common consumer, small and medium enterprises, and industry more broadly. One important extension could be allocating a share of GST proceeds to urban local bodies. With India’s rapid urbanisation, empowering municipalities with assured resources would align with the federal spirit and strengthen governance at the grassroots.

Detractors have argued that these reforms were not acts of conviction but responses to Trump’s tariffs. I recall similar snide remarks were made of the 1991 reforms, dismissed as compelled by crisis rather than chosen with foresight. History has shown otherwise. It is the finance minister’s sagacity that freed up private capital in the economy even through the turbulence of the pandemic.

It is worth recalling that during a decade of Congress rule, the GST could not be brought to fruition. Concerns over autonomy, fears of revenue loss, and political hesitation prevented progress. The fact that it has now been achieved through consensus only highlights the contrast in political will and execution.

Looking ahead, there is still a need for a viable institution through which the Centre and states can take decisive action on unfinished reforms, particularly in land, labour, and capital. Could the GST Council become a template for this purpose, fostering purposive dialogue and decision-making for pooled sovereignty?

One cannot help but be somewhat amused at the misplaced criticisms of delay or compulsion. Could this be a case of sour grapes, and equally, perhaps, a case of the winner taking it all? In the end, the real winners are the people of India.

The writer is former chairman, 15th Finance Commission