GST 2.0

On 15 August 2025, Prime Minister Narendra Modi, in his Independence Day address, announced a blueprint for what he termed “Next-Generation GST reforms.” Framed as a Diwali gift to the nation, the proposal seeks to simplify the tax architecture and restore confidence in India’s indirect tax regime. The reforms rest on three pillars— structural correction of inverted duty structures and classification disputes, rate rationalisation into two broad slabs with limited exceptions, and ease-of-living measures such as pre-filled returns, technology-driven refunds, and simplified registration.

The announcement has generated optimism among businesses and consumers alike. Analysts project a potential consumption boost of nearly ₹2 lakh crore¹, with positive spillovers to GDP growth, inflation, and stock market sentiment. International rating agencies have also hailed the move, viewing it as a step toward broadening compliance and reducing the shadow economy.

THE IMPLEMENTATION DEFICIT – DISPROPORTIONATE DEMANDS

Way back in 1926, on the 150^th anniversary of the American Declaration of Independence, U.S. President Calvin Coolidge² observed “It is not the enactment, but the observance of laws, that creates the character of a nation”. Almost a century later, this insight resonates powerfully with India’s GST journey. The Prime Minister’s Independence Day announcement of far-reaching reforms may indeed promise a cleaner, simpler, and more predictable tax system. But the real test lies not in the policy announcements or framing of provisions, but in how faithfully and fairly they are observed in daily administration by the administrators. A recurring theme in GST administration is the disconnect between legislative intent and operational practice. Several illustrative examples highlight how misaligned or overzealous enforcement dilutes the credibility of GST as a “Good and Simple Tax.”

1 https://economictimes.indiatimes.com/news/economy/indicators/gst-rate-rejigto-
give-rs-1-98-lakh-cr-consumption-boost-yearly-revenue-loss-seen-at-rs-
85000-cr-report/articleshow/123391183.cms
2 Speech at Philadelphia, 5 July 1926 https://millercenter.org/the-presidency/
presidential-speeches/july-5-1926-declaration-independence-anniversarycommemoration

In June 2024, CBIC issued Circular No. 210/4/2024, clarifying that services from overseas branches, where full Input Tax Credit (ITC) is available, may be treated as nil-valued and exempt from GST. Despite this, Infosys was served pre-Show Cause Notice (SCN) aggregating to  ₹32,403 crore by State GST authorities and the DGGI, alleging unpaid IGST on services rendered by overseas branches, in utter disregard to the Circular. Clearly, this was a case of an administrator not following the law laid down by the Parliament as clarified by the apex executive body CBIC.

Such disproportionate demands, often in utter disregard to settled legal understanding and defying logic, are commonplace in GST. Several insurers have faced notices alleging non-receipt of services for marketing expenses incurred by them, purportedly on the ground that such expenses exceeded the limits prescribed by IRDA. Extensive submissions by the insurers to the investigating authorities explaining the facts fell on deaf ears, resulting in disproportionate demands on entities, such as New India Assurance Company Limited (₹ 2,298 crores) Life Insurance Corporation of India (₹ 1,084 crores) and HDFC Life Insurance (₹ 2,422 crore), to name a few.

The extent of disproportionality in the notice can also be gauged on a comparison of the demands with the profits or the revenue of the noticee. For instance, First Games Technology Private Limited (a PayTM subsidiary) was served with a SCN of ₹ 5,712 crore. The consolidated revenue of the entire group for FY 2024-2025 was ₹ 6,900 crore.

These are just a few examples (taken from the regulatory disclosure filed by such companies with the stock exchanges) out of an ocean of show cause notices issued by the administrators. On going through the disclosures and the SCNs, two important facets strike one’s attention – notices for FY 2018-2019 are issued as late as in June 2025 and invariably, all these notices allege fraud or active suppression with an intent to evade payment of tax. Interestingly, allegations of fraud or active suppression also find place in notices issued to Government companies. Something is clearly amiss!

CURRENT FRAMEWORK OF DISPUTE RESOLUTION PROCESS

To give due credit to the GST law, there is a layered dispute resolution process. The SCN has to be adjudicated after considering the submissions of the taxpayer. Such adjudication may result in either confirmation or withdrawal of the proposed demand, though it is commonplace that the demand is generally confirmed, either without considering the submissions of the taxpayer or dismissing them summarily without cogent reasons.

The taxpayer thereafter has a remedy of filing an appeal before the appellate authority, who may either confirm or drop the confirmed demand. However, a mandatory pre-deposit of 10% is required for filing the appeal. More often than not, the appellate authority (being a revenue officer himself), confirms rather than drops the demand. Further, an appeal can thereafter be filed before the Tribunal with an additional pre-deposit of 10%. Since the Tribunal is still not functional, the taxpayer is required to wait before he could file an appeal, though a clarification issued by the CBIC still requires him to make the additional pre-deposit. Substantial amounts of business funds are lying locked up in such pre-deposits, while the Government takes its own time in making the Tribunal operational.

In the absence of an effective dispute resolution process, taxpayers are forced to knock at the doors of the Courts, thus clogging the judicial system. It is not just the arbitrary and disproportionate show cause notices that clog the judicial system, but even simple matters like cancellation of GST registration or detention of goods while in transit, due to a minor defect in e-way bill generation.

WHY IMPLEMENTATION MATTERS MORE THAN POLICY

The examples above reveal that the real challenge for GST lies not in rate design but in ground-level administration. When clarifications are ignored, trivial defects block registrations and companies face SCNs larger than their profits, confidence in the system erodes. For businesses, the unpredictability of enforcement is often more damaging than the tax burden itself. Certainty, fairness, and proportionality are prerequisites for a successful GST.

RECOMMENDATIONS FOR ADMINISTRATIVE SIMPLIFICATION

Accountability

Bring in accountability for adversarial actions undertaken by administrators, if ultimately such actions are overturned by the judiciary. Maybe, imposition of a monetary fine or penalty to be paid by the concerned official from his personal funds is a wish possible only in Ram Rajya. What is possible is a small step towards sensitising the officials on the ramifications of their actions. A presidential award of appreciation certificate and medal is granted to CBIC officials with specially distinguished record of service. The recommendations are based on multiple criteria, including significant contributions to GST revenue mobilisations through recovery drives and plugging leakages and success in anti-evasion operations. Being a revenue officer, targets, recovery and anti-evasion may be KRAs. However, when the ‘salesman’ goes over-board, the employer has to bring in checks and balances, else it would amount to mis-selling of products, which is detrimental to the long term interests. Another manner of bringing accountability at an institutional level could be to require an equivalent refundable pre-deposit payment by the Government (as a party to the dispute) into the Consumer Welfare Fund. While this would be an inter-governmental transfer, it would bring a level playing field and would ensure that the Government also has ‘skin in the game’, bringing in some control on high pitched adjudications. Needless to say, the entire pre-deposit may be refunded back to the Government on final resolution of the dispute, either in favour of the taxpayer or the Government.

Duality of Administration

The dual nature of GST (State and Central Administration) presents an opportunity to address the issue of disproportionate SCN head on. The current framework permits an investigating or enforcement authority to issue a SCN proposing a demand, with an adjudicating authority confirming the demand. Since both the authorities serve the same Tax Department, the adjudicating authority has a direct or indirect authority bias in favour of confirmation of demands. The framework can be changed whereby the investigating or enforcement authority of a particular administration (say Centre) merely prepares a case based on investigation or enforcement and sends it to the other administration (State, in this case), who then issues a SCN, after application of mind. It is likely that due to duality of administration, the authority bias can be eliminated or reduced. This will also permit the taxpayer multiple forums before the proposition of large demands.

Consent of the CBIC for High-pitched Demands

SCN for any high-pitched demand above a particular threshold, say ₹ 100 crore should be allowed only after a pre-consultation meeting is held with officials at CBIC, who can go into the merits of the case before hand.

REFORM MUST MEAN RELIEF

The Prime Minister’s announcement has rekindled hope of a simpler, more predictable GST. However, the difference between REFORM and RHETORIC is INTEGRITY of IMPLEMENTATION. GST 2.0 must therefore go beyond slab restructuring. Its true measure will be whether the administration becomes predictable, proportionate, and harmonised. Only then will GST finally earn its intended moniker: a Good and Simple Tax!