Cease the cess: On the GST and reforms

The eighth anniversary of the Goods and Services Tax (GST) in India, on July 1, coincided with the poorest tax collections the indirect tax system has seen in some time, highlighting the need for structural changes in the system. The latest GST collections stood at ₹1.85 lakh crore in June 2025, the lowest in four months. This amount was just 6.2% higher than the collections in June 2024, the slowest growth rate in four years. Looking past the gross collections, the data show that once refunds are accounted for, the growth in the government’s actual collections was just 3.3%. Further, the revenue from domestic transactions, excluding imports, was an anaemic 4.6% higher than in June last year — barely faster than the average rate of inflation since then. Being a consumption tax, a dip in GST collections reflects a dip in economic activity. But it also reflects inefficiencies in the system, which must now suitably be addressed eight years on. A common demand is for fuel to be included in GST. There is, however, strong resistance to this from State governments, since fuel and alcohol are the few sources of revenue States have with them that are independent of the Centre. However, this cannot be reason enough to perpetually keep these items excluded. It is ‘one nation, one tax’ after all, and it is high time that the goal was achieved in full. As for the revenue hit to States, the Centre must accede to their request for a higher share in central taxes. The Centre must also stop increasingly relying on non-shareable cesses for its revenue. For their part, States must resist the temptation to use this higher amount on election-oriented untargeted freebies. Trust goes two ways.

The other popular reform is a reduction in the number of GST rates. This, too, is overdue, and the GST Council’s fitment and rate-setting committees are examining the issue. Connected to this is the question of what is to be done with the GST Compensation Cess, which is levied over and above the 28% slab. It was originally intended to compensate States for any losses arising out of GST implementation for a period of five years. It was then extended until March 2026 to repay the loan taken by the Centre to pay this compensation since the COVID-19 pandemic had disrupted revenues. The Centre should avoid the temptation to subsume this cess into the broader GST rates. Instead, with its job done, the cess must be removed. Taxation is not just a covenant between the Centre and the States. It is also one with the people. Removing a cess that is no longer needed will not only garner public praise but could also spur some sorely needed urban consumption.