Evolution of Indirect Tax Reforms in India: From Pre-Independence to GST Era

Abstract India’s indirect tax system has undergone a profound transformation over the past century, evolving from fragmented provincial levies during colonial rule to a unified, destination-based Goods and Services Tax (GST) regime introduced in 2017. This paper traces the chronological evolution of indirect taxation in India—from pre-independence fiscal structures, post-independence expansion of excise and sales taxes, liberalization-led reforms such as MODVAT and service tax, to the eventual consolidation under GST through the 101st Constitutional Amendment. The study highlights how GST subsumed multiple indirect taxes, improved efficiency, enhanced tax buoyancy, and facilitated economic integration. Using recent fiscal data up to FY 2025–26, the paper evaluates revenue trends, compliance challenges, and federal dynamics. While GST has significantly reduced cascading effects and improved transparency, issues such as compliance burden, inverted duty structures, and federal tensions persist. The paper concludes with policy recommendations aimed at strengthening India’s indirect tax system in its journey toward a 5 trillion economy. Keywords: Indirect Taxes, MODVAT, CENVAT, VAT, GST, Tax Reform, Federalism, Tax Buoyancy 1. Introduction Indirect taxes have historically constituted a major share of India’s fiscal revenue, contributing nearly 45–50% of total tax collections. These taxes, levied on goods and services, play a crucial role in shaping consumption patterns, influencing production efficiency, and generating government revenue for public expenditure. However, prior to the introduction of GST, India’s indirect tax system was highly fragmented, involving multiple levies such as central excise duty, value-added tax (VAT), central sales tax (CST), and service tax. This multiplicity of taxes resulted in a cascading “tax-on-tax” effect, significantly increasing the cost of goods and services and reducing competitiveness. It also created barriers to inter-state trade and encouraged tax evasion. The introduction of GST on July 1, 2017 marked a landmark reform that unified the indirect tax structure into a single, destination-based system. By FY 2025, GST collections had reached approximately ₹20 lakh crore annually, reflecting improved compliance and efficiency. This paper aims to examine the evolution of indirect tax reforms in India, highlighting key milestones, economic impacts, and ongoing challenges. 2. Review of Literature The evolution of indirect taxation in India has attracted considerable academic attention. Early studies, including the Taxation Enquiry Commission (1953–54), emphasized the inefficiencies of multi-point taxation and recommended a value-added tax system to eliminate cascading effects. Similarly, the Jha Committee in the 1970s highlighted the inflationary impact of indirect taxes and reiterated the need for structural reforms. Post-liberalization literature recognizes the introduction of MODVAT as a significant milestone in reducing tax cascading and improving industrial efficiency. Scholars such as Chelliah (1993) and Panagariya (2008) link tax reforms to broader economic liberalization policies initiated in 1991. Recent studies focus on GST as a transformative reform. While many researchers highlight improvements in tax buoyancy and compliance, others point to challenges such as increased compliance costs for small businesses and concerns over fiscal federalism. Overall, the literature suggests that GST represents a significant step toward tax integration, though its implementation remains a work in progress. Pre-Independence Foundations (1858–1947) a. Colonial Tax Structure During British rule, indirect taxes were primarily designed to maximize revenue rather than promote economic efficiency or equity. The major sources of revenue included customs duties, salt tax, and excise duties. These taxes were often regressive, placing a disproportionate burden on lower-income groups. The salt tax, in particular, became a symbol of colonial exploitation and resistance. b. Provincial Sales Taxes The Government of India Act, 1935 marked a significant shift by decentralizing fiscal powers and allowing provinces to levy sales taxes. The first modern sales tax was introduced in Madras in 1939, followed by other provinces. However, these taxes were imposed at multiple stages of production and distribution, lacked input tax credit mechanisms, and resulted in cascading effects, leading to inefficiencies and increased tax burden. Post-Independence Fragmentation (1947–1985) a. Expansion of Tax Structure Following independence, India adopted a planned economic model that led to the expansion of indirect taxes. The central government imposed excise duties on manufactured goods, while state governments levied sales taxes. Additionally, the Central Sales Tax (CST) was introduced to regulate inter-state trade, further complicating the tax structure. b. Structural Issues The indirect tax system during this period was characterized by cascading effects, multiple tax rates, and barriers to inter-state trade. These issues reduced economic efficiency and competitiveness. Despite recommendations from various committees, comprehensive reforms were delayed, resulting in a complex and inefficient tax system. Liberalization Era Reforms (1986–2000) a. Introduction of MODVAT The introduction of MODVAT in 1986 marked a turning point in India’s indirect tax reforms. By allowing manufacturers to claim input tax credit on raw materials, MODVAT reduced the cascading effect of taxes and improved cost efficiency in production. b. Introduction of Service Tax In 1994, service tax was introduced with limited coverage, initially applying to a few services. Over time, its scope expanded significantly, reflecting the growing importance of the service sector in the Indian economy. This marked a shift toward a more comprehensive tax system. VAT and CENVAT Reforms (2001–2010) a. State-Level VAT The introduction of VAT at the state level in 2005 replaced the earlier sales tax system. VAT enabled input tax credit and reduced cascading effects, thereby improving transparency and efficiency in the tax system. b. Central Reforms At the central level, CENVAT was introduced to unify excise and service tax credits. This reform further streamlined the tax structure and reduced the overall tax burden on production. c. Move Toward GST Efforts to introduce GST gained momentum during this period. The formation of the Empowered Committee of State Finance Ministers and the development of a dual GST model laid the groundwork for future reforms. GST Era (2011–2026) a. Constitutional and Legislative Framework GST was implemented through the 101st Constitutional Amendment, which introduced a dual GST model consisting of central and state components. The establishment of the GST Council ensured cooperative federalism and coordinated decision-making between the Centre and states. b. Key Features GST is a destination-based tax system that allows seamless input tax credit across goods and services. It relies on a digital compliance framework, enhancing transparency and reducing tax evasion. c. Post-Implementation Developments Since its introduction, GST has undergone several refinements, including the implementation of e-invoicing, e-way bills, simplified return filing systems, and the use of advanced technologies such as artificial intelligence for compliance monitoring. Economic Impact of GST a. Revenue Growth GST collections have shown consistent growth, increasing from ₹11. 7 lakh crore in FY18 to ₹20. 18 lakh crore in FY25. This reflects improved compliance, better tax administration, and economic expansion. b. Efficiency Gains GST has reduced logistics costs, improved inter-state trade, and facilitated the formalization of businesses. These changes have contributed to overall economic efficiency and competitiveness. c. Federal Cooperation The GST Council has played a crucial role in fostering cooperation between the central and state governments through consensus-based decision-making and periodic rate rationalization. Challenges and Critiques a. Compliance Burden Despite its benefits, GST has increased compliance requirements, particularly for small and medium enterprises. Multiple return filings and digital infrastructure requirements have raised compliance costs. b. Federal Issues Delays in compensation to states and concerns over reduced fiscal autonomy have created tensions between the Centre and states, raising questions about the balance of fiscal federalism. c. Structural Issues The GST system continues to face challenges such as inverted duty structures, exclusion of petroleum products, and a complex multi-rate system, which limit its effectiveness. Policy Recommendations a. Simplification Simplifying the GST system by introducing a single return mechanism and reducing the number of tax slabs can enhance compliance and efficiency. b. Inclusion Bringing petroleum products under GST and rationalizing exemptions can broaden the tax base and reduce distortions in the economy. c. Technological Improvements The use of advanced technologies such as artificial intelligence and blockchain can improve compliance, reduce fraud, and enhance system efficiency. d. Equity Measures Reducing the tax burden on essential goods and providing support to small businesses can improve equity and inclusiveness in the tax system. Conclusion The evolution of indirect tax reforms in India reflects a gradual transition from fragmentation to integration. GST represents a landmark reform that has unified the domestic market, reduced cascading effects, and improved efficiency. However, challenges related to compliance, federal relations, and structural complexities remain. Addressing these issues through targeted reforms will be essential for maximizing the benefits of GST and supporting India’s long-term economic