The cat, a remarkable and resilient creature, is said to have nine lives. In the first three, it ‘plays’ growing into a healthy and joyous existence. In the next three, it ‘strays’, losing focus and vitality. Finally, in the last three lives, it ‘stays’ normal, having learnt its lessons.
When Prime Minister Narendra Modi converted a tax (the Goods and Services Tax or GST is the consumption with the widest tax base touching almost everyone) into a ‘gift’, the GST cat strayed into a midlife crisis. He has made the government a partner of millions of sellers hawking their goods during the festive Navratri and Diwali season.
Has India’s GST strayed even before it played in its growth? What course will it adopt now on?
GST Plays/Grows
India, like most of the world earlier, had a horrible indirect tax system until the 1990s. The Government of India levied excise duties, using an incipient, modified value-added taxation (MODVAT) system, on all goods ‘manufactured’ in India, and the equivalent counter-veiling duties on imported goods. The service tax had been initiated on select services, using residuary powers of the Constitution, to the discomfort of states.
The Government of India also levied cesses on numerous goods. The finance ministers would fill pages of budget speeches with details on what goods, excise duties would go up and where the government would reduce excise duties to please consumers.
The states had the power to levy sales tax on all goods sold in their jurisdiction on top of the excise duties/MODVAT, institutionalising the cascading indirect tax system. They will also indulge in cut-throat competition to reduce sales tax on cars and other goods in melas and use the central sales tax (CST) to undercut the neighbouring states. Retail sales without an invoice were quite rampant to avoid paying sales tax.
The path to GST began in this all-around madness in the late 1990s.
Yashwant Sinha’s gamble in handing over the leadership of transition towards the system of value added taxation or VAT (GST’s predecessor) in states to a state finance minister (Asim Dasgupta of West Bengal) proved to be a game-changer.
The states agreed first to a minimum sales tax rate regime (no state would levy sales tax at a rate less than the agreed minimum), which brought a uniform tax floor on most goods. Thereafter, the states actually formulated a common VAT law (an unthinkable goal in 1990s).
The states agreed first to a minimum sales tax rate regime (no state would levy sales tax at a rate less than the agreed minimum), which brought a uniform tax floor on most goods. Thereafter, the states actually formulated a common VAT law (an unthinkable goal in 1990s). This was the first of the three lives of the GST cat in the play/growth phase.
P Chidambaram, in Manmohan Singh’s UPA government, took over from where Atal Bihari Vajpayee’s NDA and state VAT coordination committee work was left in 2004 and very quickly brought almost all the states (barring a few BJP states like Gujarat and Rajasthan) to agree to shift to a common VAT law from 1 April 2005. Gujarat and Rajasthan joined a year later. India made a massive shift in modernising the indirect tax system at the state level in 2005.
The GST cat was quickly coming to life.
Movement to a full-fledged GST was the next logical step in its path to adulthood. The UPA government tried but did not succeed. It was Arun Jaitley who used all his persuasive and legal acumen to bring around all the states together with the Centre to agree on a national GST system with the least possible compromises. India had its wow moment. The GST brought all the major indirect taxes and many cesses into its single fold. India had a One Nation One Indirect Tax moment on 1 July 2017.
GST Strays
The second phase of the three lives of the GST cat—wherein it strays—has unfortunately commenced even before the cat blossomed fully.
It was expected that once the GST starts settling down, its birth defects would be addressed. Important goods remaining outside of the GST purview - petroleum products, electricity, etc. - would be brought within the GST system. Too many rates and adjustments (five slabs with about 45 specific rates) would be reduced to at least three. Businesses remaining outside the GST system (exemptions, compositions, etc.) would also be brought in.
None of this happened. Yet, the Modi government began straying from the path of streamlining and strengthening GST. PM Modi announced a humongous gift of about Rs 2 lakh crore of GST giveaways to the people on 15 August 2025 from the ramparts of Red Fort as part of his Independence Day address, couching this as ‘reform’.
The Prime Minister had no legal authority to do so. He does not have a formal position in the GST Council, which decides and makes recommendations about GST slabs and rates.
The GST Council was completely emasculated by his public announcement from the Red Fort about the big Diwali Double Bonanza of GST gift. The GST Council and the states were left with no choice but to rubber-stamp it a month after PM Modi's public announcement.
The GST revenues, as a ratio to the GDP, were still less than pre-GST years, when PM Modi made this gift announcement. If reforms in GST slabs were the real intention, there was no need to announce it as a big Diwali gift. The slab reforms could have been done by revising the new slabs in such a way (say 10 percent, 20 percent, and 40 percent instead of 5 percent, 18 percent, and 40 percent), which would have protected the GST revenues.
The real objective was to give this big Diwali gift to the people to nudge them towards voting for him—and the BJP. The GST strayed into populist ploy.
It is strange to see the government making so much publicity for a tax giveaway. The newspapers have been bombarded with government advertisements attributing the GST gift to PM Modi.
The government ‘nudged’ the businesses to issue advertisements and display the reduced rates with 'Thank You Modi ji' messages all over the country.
PM Modi termed the GST sacrifice as a ‘Bachat Utsav’ (festival of savings) for the people. A government celebrating tax sacrifices as a festival is quite difficult to stomach.
All this gave an unmistakable impression that it was the government that was offering all the discounts in the festival season, which otherwise the businesses do, promoting their sales at government cost! Quite a bizarre scenario.
The high-handed manner in which the GST revenues have been sacrificed at their cost has made many states quite wary. This will certainly weaken the movement towards a complete and simple GST.
The states are quite unlikely to agree to lose their taxation sovereignty further. The possibility of petroleum products and electricity duties in the GST pool is as good as gone. Some opposition states may start moving away from the GST Council and disengage their GST from the Central GST.There is clearly a reversal of the forward movement of GST, at least for the time being.
GST Will Come Back on Course
However painful it might be for the states, I don’t see that the nation has any option to turn its back on GST.
The revenue setback caused by the 15 August 2025 announcement will hurt the Central government as well and make it realise that sacrificing revenues for populism is not in the real national interest.
The Central government will have to again take up the task of putting the GST system on a healthier growth path. It will have to rebuild bridges with the states. The individual’s oneupmanship would have to be given up.
I am sure the nation will be sagacious enough to go back to the drawing board, build a right and full-fledged GST with all goods and services included in it, and with a maximum of three rates (no adjustments/price-based rates or otherwise).
The GST cat will live a good, healthy, and long life thereafter.
(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)