The Impact of GST on the Indian Economy and Informal Sector

The introduction of the Goods and Services Tax (GST) in India in July 2017 was one of the country’s largest indirect tax reforms, intended to simplify the tax system, remove the cascading ‘tax on tax’ effect, and create a single national market. Most existing research on GST looks at its effects on the formal sector and on consumers; comparatively little has been written about its effects on India’s informal sector and the small, unincorporated businesses within it. This paper focuses on that gap.

Using secondary data - government surveys and databases (including the RBI Handbook of Statistics on the Indian Economy and the Ministry of Statistics and Programme Implementation’s Annual Survey of Unincorporated Sector Enterprises, or ASUSE), academic literature, and policy reports - the paper looks descriptively at how GST’s compliance requirements, working-capital effects, and firm-size incentives have played out in the informal sector. Economy-wide trends in indirect tax revenue, GDP, and inflation are reported only as background context, not as separate causal claims.

Between 2015-16 and 2022-23, the number of unincorporated enterprises rose slightly while informal-sector employment fell slightly, alongside literature reporting higher compliance costs, more frequent filing, and delays in input tax credit refunds. Because GST’s introduction coincided with demonetisation and the COVID-19 pandemic, and because this study is descriptive rather than causal, these patterns are treated as associations rather than as evidence that GST caused them. The paper also argues that a rise in unincorporated enterprises is not the same thing as formalisation, and that more informal-sector-specific data is needed before firmer conclusions can be drawn.