“Can GST Drive India’s Development Dreams? Simplifying GST, embracing advanced digitisation, and rethinking fiscal priorities can unlock India’s immense growth potential. With bold reforms, innovative governance, and equitable policies, India can achieve its aspiration of becoming a developed nation by 2047. Discover how GST can empower inclusive, sustainable, and technology-driven economic transformation for brighter future.”

M Govinda Rao
Economist and Member, 14th Finance Commission

Nobody likes paying taxes, yet everyone wants to enjoy public services. This paradox is particularly pronounced with indirect taxes like Goods and Services Tax (GST), which have faced significant criticism and misunderstanding. I aim to shed light on the role of GST in driving inclusive growth, as well as the broader fiscal reforms necessary to meet India’s ambitious developmental goals.

Developmental Aspiration
India has set its sight on becoming a developed nation by the centenary year of independence, i.e., 2047. According to the World Bank, this requires achieving a per capita income of $14,205. Presently, India’s per capita income is only $2,600. To bridge this gap, we must multiply our income fivefold in the next 23 years, which necessitates an annual growth rate of 9%. While this is aspirational, it is not unattainable. China has demonstrated such growth before. However, for India to achieve this, sweeping reforms are essential. Over the next two decades, the government must act as an engine of growth, investing in public infrastructure, empowering people through education and skill development and ensuring inclusivity in the workforce.

Fiscal Challenge
India’s fiscal deficit—when combining central and state levels—stands at 7.5% of GDP, while household savings amount to just 5.3% of GDP. This lack of fiscal space severely restricts the government’s ability to invest in critical sectors like education, healthcare and infrastructure. To address this, we must raise the tax-to-GDP ratio from the current 16.5% to at least 19-20%, which is the standard for countries at similar developmental stages. At present, both centre and state government expenditure accounts for roughly 30% of GDP, but only 1.2% is spent on healthcare and 3.3% on education. Meanwhile, subsidies (centre and states) consume 2.5% of GDP. Redirecting resources from subsidies toward investments in human capital and infrastructure is crucial for achieving sustainable and inclusive growth.

Role of GST
Globally, GST is regarded as a “money machine,” implemented in 136 countries. India, however, has struggled to realise its full potential due to the system’s complexity. An ideal tax system is broad- based, low-rate, and simple, with minimal differentiation. Unfortunately, India’s GST has multiple rates, including lower rates, compounded rates and cess charges, making compliance challenging. Globally, most countries with GST have a single rate. Even among the few multi-level GST systems—Canada, the European Union and Brazil— India’s model is uniquely complicated. Canada, often cited as the gold standard, allows provinces to opt into the GST regime, maintaining a uniform structure while respecting federalism. In contrast, India’s system involves separate state acts and interpretations,leading to inconsistencies and inefficiencies.

Digitisation: The Path to Simplification
True digitisation, not mere computerisation, is critical for improving GST compliance and administration. Digitization involves embedding intelligence into the system, enabling real- time tracking, reducing evasion, and enhancing efficiency. GST’s self-enforcing nature—where sellers must report purchases to claim input tax credit—creates a wealth of data. Leveraging this data through artificial intelligence can improve tax compliance while minimising the burden on honest taxpayers. However, our fragmented legislative framework hampers these efforts. Each state has its own GST Act, leading to inconsistent tribunal decisions and interpretations. A uniform approach, supported by robust digitisation, is essential for addressing these challenges.

Equity and Inclusivity in Tax Policy
India’s tax policy often focuses excessively on equity, resulting in over-complication. While progressive taxation is important, reducing the incomes of the wealthy will not necessarily alleviate poverty. Instead, the focus should be on expenditure— investing in education, healthcare and skill development to empower marginalised communities. Take, for instance, the 28% tax on construction materials like cement and steel. While intended to target luxury, these materials are vital for labor-intensive industries that generate jobs. Similarly, high taxes on automobiles impact downstream industries, affecting employment. A balanced approach that considers backward and forward linkages is essential.

Improving GST Framework
Simplifying GST is paramount. Reducing the number of rates to two or three and broadening the tax base can significantly improve efficiency. Misclassification and excessive differentiation, such as taxing catering services at 18% and non-star restaurant services at 5%, encourage dishonesty and litigation. Bringing petroleum products under GST could also complete the tax loop, enabling better data collection and compliance. GST is inherently self-enforcing, generating valuable information that can be leveraged for policy decisions. With proper digitisation and enforcement, tax compliance can improve without increasing the burden on honest taxpayers.

Learning from Global Best Practices
India can draw valuable lessons from other countries. Canada’s GST system, for instance, balances federal and provincial autonomy while maintaining uniformity. In European Union only Norway has a single rate. All other countries in EU, despite its complexity, have limited it to two rates. Brazil, on the other hand, exemplifies what not to do. Its tax GDP ratio of 36% comes at the cost of severe economic distortions. India must avoid such pitfalls by simplifying its system while leveraging technology for efficient administration.

Digital Future of Taxation
Digitisation extends beyond GST to broader governance. From artificial intelligence to blockchain, digital tools can transform public service delivery, enhance accountability and drive inclusive growth. By integrating AI into tax administration, we can identify evasion patterns, streamline processes and ensure fair compliance. GST is not just a tax reform— it is a tool for empowerment, equity, and economic transformation. With the right policies and innovations, India can lead the way in redefining growth for the 21st century.

Conclusion
The journey to becoming a developed nation requires bold reforms, efficient governance and inclusive policies. GST is a critical part of this journey, but its success depends on simplification, digitisation and a focus on equitable development. India’s potential is immense and with the right strategies, we can achieve our aspirations and set a global benchmark for growth and governance.