News analysis: How GST on statutory regulators will burden businesses, hurt industry growth

The recent order of the Delhi High Court quashing show cause notices (SCNs) issued by the Directorate General of GST Intelligence (DGGI) against statutory bodies such as CERC and DERC, and ruling that regulatory functions do not constitute ‘business’ under GST law, raises a crucial question about the legitimacy and impact of such taxation. The government’s insistence on levying GST on statutory regulators is not just a legal overreach; it also poses serious risks to India’s business ecosystem and undermines the ease of doing business.

The imposition of Goods and Services Tax (GST) on regulatory bodies such as CERC, SEBI, RBI, IRDAI, CCI, and FSSAI is deeply problematic. These institutions are not commercial entities but statutory regulators entrusted with oversight functions in their respective sectors. Yet, by categorizing their statutory fees as taxable services, the government is artificially inflating compliance costs for businesses. This move will stifle industry growth, increase financial burdens on enterprises, and weaken India’s competitive standing in the global market.

Increased regulatory costs will be passed on to businesses

Regulatory bodies charge fees for approvals, compliance filings, and oversight activities within their respective domains. These fees are not commercial charges but rather statutory levies meant to ensure compliance with laws and protect industry standards.

If GST is imposed on these fees, regulators will have no option but to increase the charges businesses must pay for approvals. This will raise transaction costs for companies seeking to expand, restructure, or enter new markets, making business operations unnecessarily expensive. The cost of financial services, stock market activities, and telecom services will also rise due to additional GST burdens on regulators.

• Also read: Delhi HC quashes GST levy on licence fees collected by Electricity Regulatory Commissions

Small and medium enterprises (SMEs) will suffer the most

While large corporations may absorb additional compliance costs, SMEs and startups will be disproportionately affected. Many startups rely on venture capital funding and acquisitions to scale, but higher regulatory costs will make strategic deals more expensive and complicated.

For small businesses, even a 10-15 per cent increase in compliance costs can be a dealbreaker. Industries such as technology, pharmaceuticals, and manufacturing, where mergers, acquisitions, and partnerships are frequent, will find regulatory costs prohibitively high.

This move contradicts the government’s Make in India and Startup India initiatives, which aim to reduce bureaucratic hurdles for businesses. By taxing regulatory approvals, the government is actively discouraging small businesses from growing—an anti-industry policy that weakens entrepreneurship and investment confidence.

India’s ease of doing business ranking will take a hit

India has consistently worked to improve its global business environment, but unnecessary taxation on regulators directly contradicts this goal.

Businesses looking to invest in India already face bureaucratic challenges. Additional regulatory costs and compliance burdens will make India a less attractive investment destination. Countries like Singapore, the UAE, and the U.K. have simpler and more transparent regulatory frameworks. If India’s regulatory costs continue to rise, investors may shift their capital elsewhere, leading to reduced foreign direct investment (FDI) and slower economic growth.

Multinational corporations prefer stability in tax policies. Arbitrary and unpredictable taxation, such as GST on statutory regulators, sends a negative signal to global investors. The government must recognize that over-complicating India’s tax framework discourages foreign investments and slows down industrial expansion.

• Also read: Non-liable businesses can now get temporary identity under GST, notifies CBIC

Judicial precedents prove this taxation is wrong

The Delhi High Court, in its judgment issued on 15 January, ruled that regulatory fees collected by statutory bodies are not ‘consideration’ for a service and thus do not attract GST. The court explicitly rejected the tax authorities’ claim that regulators are engaged in ‘business’ under GST law, making the imposition of GST illegal.

Past judicial rulings have also reinforced that regulatory bodies perform public functions, not commercial activities. Despite these clear legal precedents, tax authorities continue to disregard judicial rulings and impose arbitrary tax demands.

If such misguided taxation policies persist, it will lead to continuous litigation, delayed regulatory decisions, and financial burdens on businesses, further disrupting industrial activity.

Way forward

The government must take immediate steps to prevent further damage to the business ecosystem.

The GST Council must issue a formal notification explicitly exempting statutory regulators from GST. This will eliminate legal uncertainty and provide a stable taxation framework for businesses, ensuring that regulatory fees remain outside the scope of GST.

The focus should be on fostering economic growth, not imposing unnecessary financial burdens. The government must prioritize regulatory efficiency over revenue collection through arbitrary taxation.

Conclusion

The imposition of GST on statutory regulators is not just a tax—it’s a direct attack on industry growth and economic stability. The government must recognize the serious economic damage this will cause and swiftly reverse this levy.

If regulators are taxed, businesses will ultimately bear the cost. This means higher compliance expenses, legal disputes, regulatory delays, and declining investment confidence—outcomes that India’s economy cannot afford.

It is time to stop taxing governance and start supporting business growth. The government must act decisively to revoke this unjust tax demand, or risk eroding investor trust and slowing India’s economic momentum.