Abstract The introduction of the Goods and Services Tax (GST) on 1 July 2017 marked one of the most far-reaching indirect tax reforms in India’s post-independence economic history. Although GST has strengthened revenue mobilisation and expanded the taxpayer base, its implications for rural and informal enterprises remain unevenly understood. This paper develops the GST-Induced Formalisation and Equity (GIFE) framework to examine whether GST has produced inclusive formalisation or induced a capability–compliance mismatch for rural micro and small enterprises. Using an observed dataset of 120 enterprises from milk, silk, and granite-linked clusters in Kanakapura, Karnataka, the paper analyses employment change, compliance burdens, liquidity stress, and forced formalisation pressures. The findings show a statistically significant decline in average employment after GST across the full sample and within each sector. Working-capital blockage emerges as the most cluster-sensitive channel of distress, while compliance-cost strain and forced formalisation pressure remain high across all sectors. A supplementary structural model, treated only as an illustrative rather than field-estimated layer, further supports the proposition that GST institutional pressure affects socio-economic outcomes directly and indirectly through compliance burden. The paper contributes to debates on tax reform, informality, and inclusive transition by showing that formalisation under GST may be institutionally deepening while remaining socially uneven. Keywords: Gst, Informal Sector, Formalisation, Rural Livelihoods, Social Equity, Compliance Burden, Kanakapura, India 1. Introduction The Goods and Services Tax (GST) was introduced in India to replace a fragmented system of central and state levies with a unified destination-based tax architecture. From a public finance perspective, GST was expected to simplify taxation, reduce cascading effects, improve inter-state market efficiency, and deepen compliance through digitised reporting and invoice-based verification. Official data indicate that gross GST collections reached ₹22.08 lakh crore in FY 2024–25 and that active registrations expanded from 66.5 lakh in 2017 to about 1.51 crore in 2025, reinforcing the dominant policy narrative that GST has strengthened compliance and accelerated formalisation (Ministry of Finance, 2025). However, macro-fiscal success does not automatically establish that the transition has been socially inclusive. India’s informal and unincorporated economy remains deeply embedded in the country’s employment and production structure. The Ministry of Statistics and Programme Implementation (MoSPI, 2025a, 2025b) reported that the informal sector contributed about 45% of GDP in FY 2022–23 and that the unincorporated non-agricultural sector employed more than 12 crore workers in 2023–24. These figures indicate that formalisation in India remains a live developmental transition rather than a completed administrative outcome. The distinction is especially important for small and rural enterprises. Roy and Khan (2021) argue that digitised tax systems in developing countries can produce premature formalisation when low-capability firms are drawn into compliance systems before they possess the organisational, financial, or digital readiness needed to absorb them. Their core insight is that formal registration and digital visibility should not be conflated with substantive developmental inclusion. Indian evidence also points in this direction. In an enterprise-level study of MSMEs, Ghosh (2022) found that 81.5% of surveyed firms identified compliance and paperwork as a major burden, 58.6% reported blocked working capital, and average employment per firm fell from 20 to 16.6 workers in the post-GST period. These findings show that GST can affect firms not only through accounting obligations but also through liquidity compression, business reorganisation, and labour adjustment. Theoretically, this problem may be understood through the literature on tax thresholds, informality, and compliance partitions. Kanbur and Keen (2014) demonstrate that tax design can create non-linear compliance costs that affect smaller firms disproportionately. Complementing this perspective, the International Labour Organization’s Recommendation No. 204 emphasises that transition from the informal to the formal economy should improve rights, security, and productive opportunity rather than merely expand administrative control (International Labour Organization ILO, 2015). Against this backdrop, the present paper asks whether GST has produced inclusive formalisation for rural enterprise clusters or induced formalisation under conditions of capability deficit. The paper focuses on Kanakapura Taluk in Karnataka and examines three sectoral clusters—silk, dairy, and granite-linked enterprises—because they differ in labour intensity, perishability, documentation dependence, and market hierarchy. By shifting the analytical lens from macro-fiscal outcomes to the enterprise-level process of formalisation, the paper contributes a cluster-sensitive model of induced formalisation under capability constraints. 2. Statement of the problem The central problem examined in this study is the possibility that GST has generated a capability–compliance mismatch for rural informal and semi-formal enterprises. The design of GST presumes regular digital filing, invoice matching, documentary discipline, and sufficient liquidity to withstand lags in tax adjustment and payment cycles. Yet many small enterprises continue to operate through delayed settlements, relationship-based credit, family labour, local intermediation, and low-cost bookkeeping. When such enterprises are drawn into compliance-intensive supply chains through input tax credit dependency or buyer pressure, the transition may be experienced less as enabling formalisation and more as administrative and financial strain (Ghosh, 2022; Roy MoSPI, 2025a, 2025b). A second gap is conceptual. Existing scholarship has identified themes such as premature formalisation, compliance burden, and tax threshold effects, but relatively few studies have integrated GST institutional pressure, formalisation stress, organisational capability, livelihood outcomes, and social equity into one coherent framework. Ghosh (2022) and Roy and Khan (2021) provide the foundation, but cluster-based empirical work in rural Indian settings remains limited. A third gap concerns the distinction between consumption-side distribution and production-side inclusion. Even if GST may appear progressive or manageable from a household-consumption perspective, that does not settle whether production-side formalisation has been equitable for small rural enterprises. The present study addresses this gap by examining enterprise survival, employment, and market access within rural clusters. 4. Objectives of the study • To examine how GST institutional mechanisms create formalisation pressure for rural informal and semi-formal enterprises. • To analyse the mediating role of compliance burden, working-capital stress, and supply-chain restructuring in the GST-induced formalisation process. • To assess how organisational capability, particularly digital literacy and enterprise size, moderates enterprise adjustment to GST. • To evaluate the consequences of GST-induced formalisation for rural livelihoods, including employment, wage pressure, and enterprise stability. • To examine whether GST-driven formalisation produces unequal socio-economic outcomes across rural enterprise clusters and socially vulnerable groups. 5. Scope of the study The topical scope of this paper is limited to GST-induced formalisation and its implications for rural livelihoods and social equity. The geographical scope is Kanakapura Taluk in Karnataka, treated as a rural-cluster setting suitable for examining enterprise adaptation under GST. The sectoral scope covers silk, dairy, and granite-linked enterprise activity, chosen because these clusters embody different combinations of labour intensity, perishability, documentation dependence, and market structure. The analytical scope is enterprise-centred but livelihood-sensitive, examining business-level variables such as compliance burden and working-capital stress alongside socio-economic outcomes such as employment contraction, wage pressure, and market inclusion. 6. Literature review and theoretical foundation The theoretical foundation of the paper rests on three interlinked streams of scholarship. The first is the literature on tax thresholds, informality, and compliance design. Kanbur and Keen (2014) show that tax systems generate behavioural partitions and that the cost of compliance can become disproportionately burdensome for firms operating near threshold boundaries. This perspective is important because it frames tax architecture as a determinant of enterprise behaviour rather than treating compliance as a purely moral or administrative choice. The second is the literature o
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