GST reforms aim to boost compliance by removing fear, widening tax base

A year ago, GST Council lowered rates and moved to a simpler structure with two main rates. It expected that lower rates would bring more economic activity into the tax base, and that a wider base would support revenue over time.

Figures for the year since Sept 2025 bear this out. Gross GST collection grew by 11.6% in H1 2026, and growth rose to 15% in Q2 2026-27. Average monthly taxable supply between Oct 2025 and Aug 2026 grew 25.6%. Effective tax rate on domestic taxable supply, including exempt supply, fell from 11.74% to 10.84%.

Taxable supply growing by a quarter in one year is well ahead of growth in nominal terms. Part of it is higher activity. Part of it is likely to be earlier existing activity that wasn't reported. A business decides how much of its sales to report on two counts: rate of tax, and expected cost of being visible to the tax administration. Rate rationalisation dealt with the first. The latest GST Council decisions attempt to deal with the second.


The council recommended that power of arrest be removed from GST law. Its presence weighed on genuine businesses, and kept some small traders away from GST altogether. Small traders can now register and grow within the system without that fear. This should bring many more of them into the GST base.

Removing fear doesn't mean ignoring fraud, which, because it can't be eliminated, must have effective deterrence. Fraud must be kept small enough not to compromise the system's integrity. Focus now will be on fewer cases, stronger evidence and faster trials. This gives honest businesses assurance that the law will be enforced fairly, without unnecessary hardship on compliant taxpayers.

Technologically, India is better placed for this today than in 2017. Invoices a seller reports can now be matched against credit a buyer claims. e-Invoices and e-way bills track movement of goods, and analytics can flag a cluster of registrations issuing invoices without any real purchases. Changes to returns now approved by the council will tighten this further.

Sales to consumers (B2C) are the next area of focus. Consumers don't claim input tax credit (ITC). So, when a retail sale is not reported, it doesn't show up in invoice matching. A trader may sell goods to consumers without a bill and then issue invoices for the same goods to other businesses that never received them.

In this way, a B2C sale is shown as a B2B sale, and the fake ITC passes to a business not entitled to it. Reported B2C supply rose from ₹45.91 lakh cr in 2022-23 to ₹86.55 lakh cr in 2025-26. Better B2C reporting compliance will widen the tax base and reduce the scope for fraud. e-Invoicing for B2C supplies is expected to be ready for roll-out by Apr 2027.

Nirmala Sitharaman also announced that GoI will move CGST administration for taxpayers spread across several jurisdictions to a centralised, faceless platform. This will make compliance easier for medium and large businesses with a presence in several states. For example, a mid-sized company with units in 5 states may have to deal with 5 different commissionerates. This results in multiplicity of proceedings.

Under the proposed centralised and faceless administration, each issue will be examined once, rather than separately by several offices. Similar cases will be decided in the same way. That consistency is one of the main benefits of a faceless system. I-T and customs already run faceless processes. Their experience shows what works and what needs care. The CGST design will draw on those lessons.

The council's other decisions follow a single approach - moving toward trust-based administration. These include automatic registration amendments, a threshold for notices, correction of return errors, faster refunds and limits on vehicle interception. Trust extended in this way places obligations on both sides. The administration must keep its detection capacity sharper, act on evidence and decide cases on time. Businesses must use the room now given to them responsibly.

If fraud were to rise, the case for harsher tools would return. The reform will last only if both sides keep their part of the bargain.

Significant changes to ITC rules would free up working capital for many firms, especially those facing an inverted duty structure and those exporting. The decision to allow refund of ITC on capital goods would also encourage investment.

Rate rationalisation showed that a lower rate yields more revenue as the base widens, and process reforms rest on the same principle. A business that doesn't fear the tax office is more likely to register, report its full sales and grow within the system.