Before July 2017, a manufacturer in Gujarat selling goods to a retailer in Maharashtra navigated seventeen different indirect taxes: central excise duty, service tax, value added tax, octroi, entry tax, entertainment tax, luxury tax, and a dozen more, each with its own registration, return schedule, audit regime, and rate structure. The cumulative administrative burden of compliance with this system was estimated to consume somewhere between 5 and 14 percent of total transaction value in larger businesses, and represented an effective barrier to scale for the hundreds of millions of enterprises in the informal sector for whom the compliance cost was simply prohibitive. The GST, introduced on July 1, 2017, replaced all of them with a single, nationally unified indirect tax. It was described at its launch as the most significant economic reform since liberalisation in 1991. Eight years of data now allow an assessment of whether that characterisation was accurate. On the numbers, it understates the case.
Gross GST collections in FY25 reached ₹22.08 lakh crore, a record that is nearly double the ₹11.37 lakh crore collected in FY21. The compound annual growth rate of collections over four years was 18%. Average monthly collections have risen from ₹82,000 crore at launch in FY18 to ₹1.84 lakh crore in FY25, crossing ₹2 lakh crore per month as an average in the most recent fiscal year. The April 2025 monthly collection of ₹2.36 lakh crore was a single-month record, growing 12.6% year-on-year. The number of active GST registrations reached 15.1 million by April 2025, up from 6.65 million at launch, a 127% expansion in eight years.1
These are not simply reflections of economic growth. They are evidence of structural formalisation, the migration of economic activity from the informal, unrecorded, untaxed sector into the formal, registered, compliance-tracked sector. And the investment consequences of that migration, flowing through credit access, productivity improvement, competitive dynamics, and fiscal capacity, are larger and more durable than the headline collection numbers suggest.
What formalisation actually means
India's informal sector has historically accounted for an estimated 45-50% of total employment and a substantial share of economic output. The businesses in this sector, street vendors, small manufacturers, traders, service providers, operated outside the tax net for structural rather than primarily evasive reasons. The compliance cost of the pre-GST indirect tax system, with its multiple registrations, state-specific rate schedules, and filing obligations, was genuinely prohibitive for a business with two employees and ₹50 lakh (approximately $60,000) in annual turnover. It was rational to remain informal not because you were trying to evade taxes but because the system was designed in a way that made formality more expensive than the benefits it offered.
GST changed this calculus in two specific ways. First, it simplified compliance to a single registration, a unified return structure, and a nationally consistent rate schedule, reducing the administrative overhead of being formal to a level that is manageable for businesses that previously could not afford it. The 2025 GST 2.0 reforms further simplified the rate structure to a two-slab system (5% and 18%) from the previous four-slab arrangement, reducing decision complexity and rate classification disputes that had been a persistent compliance friction for small businesses.2
Second, and more consequentially, GST created an incentive to be formal through the input tax credit mechanism. A business that purchases inputs from a GST-registered supplier can claim credit for the tax paid on those inputs against its own GST liability. A business that purchases from an unregistered informal supplier cannot. This means that formal businesses have a structural cost advantage when buying from registered suppliers, and informal businesses face a competitive disadvantage when selling to registered customers who cannot claim ITC on their purchases. The input tax credit chain has become the most powerful structural incentive for formalisation in the Indian economy. Under this mechanism, a business can offset the GST it paid on its inputs against the GST it collects on its sales, paying only the net difference to the government. The financial benefit is meaningful and immediate, creating a compounding incentive: every formal business in the supply chain wants its suppliers to be registered, so it can claim the credit. The result is a self-enforcing compliance network that spreads formalisation through commercial relationships rather than through regulatory pressure alone.
The input tax credit chain has created the most powerful formalisation incentive in Indian economic history, not through regulatory compulsion but through financial arithmetic. Informal suppliers are structurally more expensive for their formal customers. The economic pressure is relentless and cumulative.
The UPI-GST feedback loop
The most important amplifier of GST-driven formalisation is the parallel explosion of digital payments through the Unified Payments Interface. UPI transaction volumes have grown from 92 crore transactions in FY18 to 18,587 crore in FY25, a compound annual growth rate of 41%. By August 2025, UPI processed over 20 billion transactions per month with a value of ₹24.85 lakh crore (approximately $296 billion), processing more transactions than Visa globally.3 India accounted for 49% of all global real-time transactions in 2023.
The connection to formalisation is direct. Every UPI transaction creates a permanent, auditable digital record. A street vendor who accepts UPI payments, and the economics of zero merchant discount rate make this rational for even the smallest businesses, is generating a transaction history that serves as a credit record, an income verification, and an implicit GST reporting trail. The government's National Bank for Financing Infrastructure and Development, commercial banks, and non-banking financial companies have all moved to use UPI transaction histories as a primary input into credit assessments for businesses that have no collateral and no formal income records. The Account Aggregator framework, which allows financial institutions to access a customer's financial data with their consent, had enabled over 100 million credit assessments by August 2024.4
This is the structural mechanism that connects formalisation to credit access. An informal business that begins accepting UPI payments, generates a two-year transaction history, registers for GST to capture ITC benefits, and files regular returns has, in that sequence of decisions, transformed itself from an enterprise with no formal credit access into one that can borrow from the formal financial system. The GST registration creates a verifiable income trail. The UPI transaction history creates a cash flow record. Together they unlock credit that was previously inaccessible, enabling investment in productivity improvement, technology adoption, and scale, all of which compound into higher output and further formalisation of the enterprises that supply and buy from the now-formal business.
The competitive dynamics and what they mean for large companies
Formalisation does not benefit all businesses equally. For India's large listed companies, the organised sector players in retail, manufacturing, financial services, and consumer goods, GST-driven formalisation has had a measurable and sustained positive impact on competitive position. Before GST, the informal sector operated with a structural tax advantage: it did not pay indirect taxes, which allowed it to price below formal competitors on identical goods while maintaining comparable margins. In categories dominated by informal production, apparel, footwear, processed foods, home furnishings, unbranded consumer goods, formal companies faced competition from operators whose effective cost structure was 10-30% lower simply because they were outside the tax net.
GST closed this advantage systematically. As the ITC chain expanded and informal operators faced increasing pressure to formalise or lose customers, organised sector companies gained market share in category after category. The branded apparel market grew at a CAGR of over 15% between 2017 and 2024, significantly outpacing overall consumer spending growth, with the formal sector expanding at the expense of unbranded informal players. Similar dynamics played out in footwear, FMCG, financial services, and building materials, wherever the formal-informal price differential had previously been the primary barrier to organised sector penetration.
Public listed companies, which constitute 0.62% of the total GST taxpayer base, contribute approximately 35.29% of total GST revenues, a concentration that reflects both the scale of formal sector businesses and the degree to which formalisation has restructured which businesses dominate their categories.5
The fiscal dividend and its compounding consequences
The fiscal dimension of formalisation is the least appreciated investment implication and arguably the most important over a long horizon. An economy in which a larger share of activity is formal and tax-compliant has a fundamentally different fiscal capacity than one in which 50% of economic activity is off the books. Higher GST collections, combined with improved direct tax compliance driven by the same digital trail that drives indirect tax formalisation, give the Indian government the fiscal resources to sustain the infrastructure capital expenditure programme described in the previous essay without compromising fiscal consolidation targets.
India's fiscal deficit is on a trajectory from 5.8% of GDP in FY23 toward the government's 4.5% target, while simultaneously running the largest infrastructure capex programme in the country's history. This combination, falling fiscal deficit, rising productive investment, is only possible because the revenue base is expanding through formalisation faster than expenditure is rising. The 18% CAGR in GST collections over four years, against nominal GDP growth of approximately 10-11%, means the GST revenue share of GDP is structurally rising. That rising revenue share finances the investment supercycle without generating the kind of debt accumulation that would eventually constrain it.6
The November 2025 labour code reforms, described by the Lowy Institute as India's most significant structural reform since 1991, exceeding even GST in scope, accelerate this dynamic further. By reducing 1,436 compliance rules to 351 and 181 forms to 73, the four labour codes make formal employment structurally cheaper for the 62 million informal enterprises that currently employ workers informally specifically because the regulatory burden of formal employment is prohibitive. As these enterprises formalise their workforce, more workers enter the formal social security and tax system, broadening the direct tax base and further strengthening fiscal capacity.
The compounding arithmetic of formalisation, more formal businesses generating more tax revenue funding more public investment creating better infrastructure enabling more private investment generating more formal business activity, is the structural mechanism that differentiates India's current growth from prior episodes of Indian growth that were more volatile, more dependent on external conditions, and more prone to reversal. It is the mechanism that justifies the narrative of a structural rather than cyclical growth story. And for investors trying to understand which companies and sectors are best positioned to capture its benefits, the most reliable filter is not sector or size but the degree to which a business is directly in the path of organised sector market share gains at the expense of its informal competitors.