Skip to main Communities My dashboard Log in Sign up Journal of Scholastic Engineering Science and Management Published April 15, 2026 | Version v1 Journal article Restricted Transformation of Informal Sector in Karnataka Through GST Authors/Creators Dr. Hema Naik (Researcher) 1 Show affiliations 1.
Associate Professor, Dept. of Sociology,Govt. First Grade College, Harohalli Description Abstract The informal sector plays a vital role in Karnataka’s economy by providing employment and supporting livelihoods for a large segment of the population. However, its unregulated nature, low productivity, and limited integration with formal systems have historically constrained its growth. The introduction of the Goods and Services Tax (GST) in 2017 marked a significant shift in India’s indirect tax structure, aiming to enhance transparency, streamline taxation, and promote economic formalization. This paper examines the transformation of the informal sector in Karnataka in the post-GST era. GST has encouraged many informal enterprises to register under the tax system due to provisions such as input tax credit and compliance requirements, thereby fostering formalization. This transition has improved tax compliance, increased government revenue, and enabled small businesses to access institutional finance and broader markets. At the same time, the shift has posed challenges, including increased compliance costs, the need for digital literacy, and operational adjustments for small traders and micro-enterprises. In Karnataka, where small-scale industries and service providers form a significant part of the economy, these changes have led to both opportunities for growth and short-term disruptions. The study highlights that while GST has been instrumental in integrating the informal sector into the formal economy, its success depends on supportive measures such as simplified procedures, digital awareness, and policy assistance. Overall, GST represents a transformative reform that has reshaped the structure and functioning of the informal sector in Karnataka, though its long-term impact continues to evolve. Keywords: Informal Sector, GST, Formalization, Karnataka Economy, Small Enterprises 1.Introduction The informal sector has long been a cornerstone of India’s economy, particularly in states like Karnataka, where a significant portion of the workforce is engaged in small-scale, unregistered, and cash-driven economic activities. This sector includes street vendors, small traders, artisans, construction workers, and micro-enterprises that often operate outside formal regulatory frameworks. While the informal economy provides employment to a large segment of the population and contributes substantially to output, it is typically characterized by low productivity, lack of social security, limited access to institutional finance, and minimal tax compliance. The introduction of the Goods and Services Tax (GST) on 1st July 2017 marked a major structural reform in India’s taxation system. GST replaced multiple indirect taxes with a unified, destination-based tax system aimed at enhancing transparency, improving compliance, and creating a common national market. As a technology-driven and comprehensive tax regime, GST requires businesses to register, file returns online, and maintain systematic records of transactions. This shift has had profound implications for the informal sector, particularly in states like Karnataka with a vibrant base of micro, small, and medium enterprises (MSMEs). One of the most significant transformations triggered by GST is the gradual formalization of the informal economy. By mandating registration for businesses crossing specified turnover thresholds and enabling input tax credit (ITC) only through registered entities, GST has incentivized informal businesses to enter the formal system. This has increased the number of registered taxpayers and improved tax compliance across sectors. In Karnataka, industrial clusters such as Bengaluru and Peenya have witnessed increased formal participation as firms adapt to GST requirements to remain competitive and integrated within supply chains. However, this transition has not been without challenges. The informal sector, traditionally reliant on cash transactions and simple accounting practices, has faced difficulties in adapting to GST’s compliance requirements. The need for digital literacy, regular return filing, and maintenance of records has increased the cost of doing business for small enterprises. Many small traders and service providers in Karnataka have had to rely on tax consultants or adopt new technologies, which has added to their operational burden. Furthermore, disruptions in cash-based transactions and initial confusion regarding tax rules have impacted business continuity and employment in certain segments. Despite these challenges, GST has also created opportunities for growth and integration. Formalization enables businesses to access institutional credit, participate in organized markets, and expand beyond local boundaries. It also enhances transparency and accountability, reducing tax evasion and promoting fair competition. Over time, GST is expected to improve productivity and efficiency in the informal sector by encouraging better business practices and technological adoption. In the context of Karnataka, recent developments highlight both the progress and tensions associated with GST-driven transformation. Increased use of digital payment systems such as UPI has made transactions more traceable, thereby bringing informal businesses under the tax net. While this has strengthened compliance, it has also raised concerns among small traders regarding tax burdens and regulatory complexity, sometimes even pushing them back towards cash-based transactions. These dynamics underscore the need for balanced policy measures, including awareness programs, simplified compliance procedures, and support mechanisms for small businesses. GST has acted as a catalyst for transforming the informal sector in Karnataka by promoting formalization, enhancing transparency, and integrating businesses into the broader economic system. At the same time, the transition poses significant challenges that require careful policy intervention to ensure that the benefits of formalization are inclusive and sustainable. The evolution of the informal sector under GST thus represents a complex interplay between reform-driven modernization and the realities of grassroots economic structures. 2.Review of Literature A number of studies have examined the impact of the Goods and Services Tax (GST) on India’s informal sector, with particular attention to issues of formalization, compliance, and economic transformation. The literature reveals a mix of positive outcomes and significant challenges, especially for micro and small enterprises that dominate the informal economy. Madhav Anand (2022) conducted a critical evaluation of GST’s impact on the informal sector and found that the reform has contributed to increased formalization and higher taxpayer registration. However, the study also highlights that GST imposed higher compliance costs and disrupted traditional cash-based transactions, particularly affecting sectors such as retail, construction, and textiles. The research concludes that while GST improves transparency and tax compliance, it creates transitional difficulties for informal businesses. Shikha Mogra (2025), in a case study of MSMEs in Indore, examined how small enterprises have adapted to GST. The study emphasizes that GST has encouraged businesses to adopt formal accounting systems and comply with tax regulations. At the same time, it identifies challenges such as lack of awareness, technological barriers, and increased administrative burden, which affect the sustainability of small informal firms. Singh and Singh (2024) analyzed compliance costs and coping strategies in the unorganized sector. Their findings indicate that GST represents a major overhaul of the indirect tax system, benefiting organized firms more than informal ones. The study points out that informal enterprises face difficulties in meeting compliance requirements, including return filing and digital record maintenance, thereby increasing operational costs and complexity. Vinod Kumar (2025) examined GST from a broader economic perspective and noted that the reform has improved industrial efficiency by eliminating cascading taxes and promoting ease of doing business. The study suggests that GST has created a more transparent and unified tax structure, which indirectly encourages the informal sector to integrate into the formal economy. At the regional level, Harshith Kumar Shetty (2024) analyzed the implementation of GST in Karnataka and highlighted its technology-driven nature. The study notes that GST requires online registration, return filing, and compliance, which has accelerated digitization and improved administrative efficiency. However, it also implies that such requirements can be challenging for small and informal businesses lacking digital literacy. Further, Harishankar and Manoj (2021) studied the impact of GST on small-scale industries in the Peenya industrial area of Bengaluru. Their findings reveal mixed responses, with some firms benefiting from tax simplification and input tax credit, while others struggle with compliance and increased operational costs. The study underscores that GST has significantly altered the functioning of small enterprises in Karnataka. Overall, the existing literature suggests that GST has acted as a catalyst for formalization and structural transformation of the informal sector. However, it has also introduced compliance challenges, increased costs, and required technological adaptation. The studies collectively highlight the need for supportive policies, awareness programs, and simplified procedures to ensure that the informal sector in Karnataka can fully benefit from GST reforms. 3.Objective: To examine the impact of the Goods and Services Tax (GST) on the formalization and transformation of the informal sector in Karnataka. 4.Methodology This study on the transformation of the informal sector through the Goods and Services Tax (GST) in Karnataka is based exclusively on secondary sources of data. The research adopts a descriptive and analytical design to examine trends, patterns, and impacts associated with GST implementation on informal economic activities. Secondary data for the study are collected from a wide range of reliable and published sources. These include government reports such as those from the Ministry of Finance, Government of India, GST Council publications, and Karnataka state economic surveys. In addition, data are gathered from reports of institutions like the Reserve Bank of India (RBI), National Sample Survey Office (NSSO), and Ministry of Micro, Small and Medium Enterprises (MSME). Academic journals, research articles, dissertations, and working papers related to GST and the informal sector are also extensively reviewed. Furthermore, relevant information is obtained from credible online databases, newspapers, and official websites to capture recent developments and policy changes. The collected data are analyzed using qualitative and comparative techniques. The study compares pre-GST and post-GST scenarios to understand changes in registration, compliance, digital transactions, and business practices within the informal sector in Karnataka. The analysis focuses on identifying key trends such as formalization, challenges faced by small enterprises, and opportunities created by GST reforms. To ensure validity and reliability, data are cross-verified from multiple sources. Only authentic and up-to-date publications are considered for analysis. The study is limited to available secondary data and does not include primary field surveys, which may restrict the depth of ground-level insights. 5.Key Aspects of Transformation The following are some key aspects that highlight the transformation of the unorganized sector in Karnataka through GST. The introduction of GST has brought many small and informal businesses into the formal economy by making registration mandatory beyond a certain turnover limit. It has improved transparency in transactions and reduced tax evasion. Digital compliance, such as online filing and e-invoicing, has encouraged modernization among small traders. Additionally, access to input tax credit has reduced the overall tax burden, making businesses more competitive. Overall, GST has played a significant role in organizing and streamlining the previously unstructured sector. 1. Formalization of Businesses: One of the most significant transformations brought by GST in Karnataka is the gradual formalization of informal enterprises. GST mandates registration for businesses above a certain turnover threshold, which has encouraged many small traders, vendors, and service providers to enter the formal tax system. This shift has increased the number of registered businesses, especially in urban centers like Bengaluru, integrating previously unorganized units into the mainstream economy. 2. Improved Tax Compliance and Transparency: ST has introduced a structured and transparent tax system that requires proper invoicing, record-keeping, and regular filing of returns. Informal businesses, which earlier operated largely outside the tax net, are now required to maintain financial records. This has reduced tax evasion and improved overall compliance, thereby strengthening government revenue and accountability in Karnataka. 3. Digitalization of Business Operations: The implementation of GST is technology-driven, requiring online registration, return filing, and payments. As a result, many informal sector participants in Karnataka have adopted digital tools such as accounting software and online payment systems. This digital transformation has enhanced efficiency and brought small businesses closer to modern economic practices, although it has also posed challenges for those lacking digital literacy. 4. Access to Input Tax Credit (ITC): GST allows businesses to claim input tax credit only if they are registered and compliant. This has incentivized informal firms to formalize their operations in order to reduce their tax burden. In Karnataka’s manufacturing and trading sectors, especially in clusters like Peenya, businesses have increasingly participated in formal supply chains to avail ITC benefits. 5. Integration into Organized Supply Chains: GST has created a unified national market, making it easier for businesses to operate across state boundaries without multiple taxes. Informal enterprises in Karnataka are now more integrated into formal supply chains, working with larger firms that require GST compliance. This has expanded market access and improved growth opportunities for small enterprises. 6. Increased Compliance Burden: Despite its benefits, GST has also imposed significant compliance requirements on small informal businesses. Regular filing of returns, maintaining digital records, and understanding tax regulations have increased operational complexity. Many small traders in Karnataka face difficulties in adapting to these requirements, often depending on intermediaries such as accountants. 7. Rise in Operational Costs: The cost of compliance, including hiring tax professionals, purchasing software, and managing documentation, has increased for informal sector units. For micro-enterprises with limited financial resources, these additional expenses can be burdensome and sometimes discourage full participation in the formal system. 8. Shift from Cash to Digital Transactions: GST, along with the broader push towards digital payments, has reduced reliance on cash transactions in the informal sector. In Karnataka, the growing use of UPI and other digital platforms has made transactions more traceable, thereby improving tax monitoring. However, some small businesses still prefer cash transactions to avoid compliance complexities. 9. Enhanced Access to Credit and Finance: Formalization under GST has enabled many small businesses to build financial records, which helps them access institutional credit from banks and financial institutions. In Karnataka, this has opened new opportunities for growth and expansion among small enterprises that were previously excluded from formal financing systems. 10. Sectoral Impact and Adjustment Challenges: The impact of GST varies across sectors within the informal economy. While manufacturing and trade sectors have shown better adaptation due to supply chain integration, small service providers and daily wage-based activities have faced greater difficulties. The transition period has caused short-term disruptions in employment and business operations in some parts of Karnataka. 11. Long-term Structural Transformation: Overall, GST has initiated a long-term structural shift in Karnataka’s informal sector by promoting formalization, transparency, and efficiency. While the transition involves challenges, it is gradually leading to a more organized and competitive economic environment, aligning informal enterprises with national and global market standards. 12. Need for Policy Support: The transformation process highlights the importance of supportive government measures such as simplified compliance procedures, digital literacy programs, and awareness campaigns. In Karnataka, continued policy support is essential to ensure that small and informal businesses can sustainably adapt to the GST regime and fully benefit from its advantages. 6.Results and Discussion: The analysis of secondary data indicates that the implementation of GST has led to a noticeable transformation in the informal sector of Karnataka, with both positive outcomes and transitional challenges. 1. Increase in Formalization and Registration: The findings show a significant rise in the number of businesses registering under GST in Karnataka after its implementation. Many small and unorganized enterprises have entered the formal system to avail benefits such as input tax credit and to remain competitive in the market. This indicates that GST has acted as a key driver in shifting informal businesses toward formalization. 2. Improvement in Tax Compliance and Revenue: GST has enhanced tax compliance among small businesses by introducing a uniform and transparent taxation system. The requirement of regular return filing and proper documentation has reduced tax evasion. As a result, government revenue collection has improved, reflecting better inclusion of the informal sector within the tax framework. 3. Growth in Digital Adoption: The study reveals a substantial increase in the adoption of digital tools and payment systems among informal sector participants in Karnataka. Businesses are increasingly using online platforms for GST filing, invoicing, and financial transactions. This digital shift has improved efficiency and record-keeping but has also required skill development and adaptation. 4.Integration into Formal Supply Chains: GST has facilitated the integration of informal enterprises into organized supply chains. Many larger firms prefer to transact with GST-registered entities, prompting small businesses to formalize. This has expanded market opportunities and strengthened business linkages across sectors such as manufacturing, trade, and services in Karnataka. 5.Increased Compliance Burden and Costs: Despite its benefits, GST has imposed a considerable compliance burden on small businesses. The need for maintaining accounts, filing multiple returns, and understanding tax regulations has increased operational complexity. Many informal sector units face additional costs for hiring accountants or consultants, which can strain their limited resources. 6.Mixed Sectoral Impact: The results suggest that the impact of GST varies across different segments of the informal sector. Manufacturing and trading units have generally adapted better due to their integration into supply chains, whereas small service providers and daily wage-based activities have faced more challenges in compliance and sustainability. 7.Short-term Disruptions and Adjustments: During the initial phase of GST implementation, many informal businesses in Karnataka experienced disruptions, including reduced cash flow and temporary decline in business activity. However, over time, most enterprises have gradually adjusted to the new system, indicating a transition phase rather than a permanent setback. 8.Enhanced Access to Credit and Business Growth: Formalization under GST has enabled businesses to maintain financial records, improving their eligibility for institutional credit. This has opened up opportunities for expansion and modernization among small enterprises in Karnataka, contributing to long-term economic growth. Discussion The overall findings suggest that GST has acted as a transformative reform for the informal sector in Karnataka by promoting formalization, improving transparency, and encouraging digital and financial inclusion. However, the transition has not been uniform, with smaller and less technologically equipped businesses facing greater challenges. The discussion highlights that while GST has laid the foundation for a more organized and efficient economic structure, its success depends on continuous policy support. Simplification of compliance procedures, awareness programs, and digital training initiatives are essential to ensure that the benefits of GST reach all segments of the informal sector. GST has significantly reshaped the informal sector in Karnataka by pushing it towards formalization and modernization. Although the reform has created short-term difficulties, its long-term impact is largely positive, contributing to a more transparent, inclusive, and growth-oriented economy. Conclusion The introduction of the Goods and Services Tax (GST) has brought a significant structural shift in the functioning of the informal sector in Karnataka. As one of the most comprehensive tax reforms in India, GST has played a pivotal role in promoting formalization, enhancing transparency, and integrating previously unregistered businesses into the mainstream economy. The findings of the study indicate that GST has encouraged small and unorganized enterprises to adopt formal practices such as registration, proper accounting, and digital transactions, thereby improving overall efficiency and accountability. At the same time, the transition has not been without challenges. The informal sector, which traditionally operated with minimal regulation and reliance on cash transactions, has faced difficulties in adapting to GST’s compliance requirements. Increased operational costs, the need for digital literacy, and dependence on tax professionals have created barriers, particularly for micro and small enterprises. The impact has also varied across sectors, with some adapting more easily than others. Despite these challenges, the long-term implications of GST for the informal sector in Karnataka appear to be largely positive. Formalization has opened doors to better access to institutional finance, wider market opportunities, and participation in organized supply chains. Moreover, improved tax compliance contributes to higher government revenue, which can be utilized for economic development and welfare measures. GST has acted as a catalyst for the transformation of the informal sector in Karnataka by driving it towards a more structured, transparent, and growth-oriented framework. However, to ensure inclusive and sustainable development, it is essential for policymakers to provide continuous support through simplified procedures, awareness programs, and capacity-building initiatives. This will help the informal sector fully realize the benefits of GST and contribute more effectively to the state’s economic progress. References Anand, M. (2022). GST and Its Impact on the Informal Sector: A Critical Evaluation. Research Review Journal of Social Science, 2(2), 43–50. Mogra, S. (2025). Impact of GST on the Informal Sector: A Case Study of MSMEs in Indore. Accent Journal of Economics Ecology & Engineering, 10(3), 06–08. Singh, D. K., & Singh, B. P. (2024). Impact of GST on Unorganized Business Sector: Compliance Costs and Coping Strategies. ShodhKosh: Journal of Visual and Performing Arts, 5(4), 2299–2304. Shetty, H. K. (2025). Transformative Journey of GST in Karnataka – A Comparative Analysis of the Past Five Years. ShodhVarta, 4(01). Harishekar, L., & Manoj, G. (2021). GST and its Impact on Small and Medium Scale Enterprises – A Study of Peenya Industrial Area in Bangalore, Karnataka. Studies in Business and Economics, 16(1), 81–94. Barki, G. S. & Ajaraddi, R. B. (2024). Analyzing the Impact of GST on the Service Sector: A Case Study of Haveri District, Karnataka State. ShodhKosh: Journal of Visual and Performing Arts. Shweta Shree, B. (2023). Economic Impact Analysis of GST Implementation on India’s Informal Sector: Empirical Evidence from Difference-in-Differences Approach. International Journal of Research in Finance & Management, 6(2), 334-337. Government of India. (2019). GST Implementation Report. Ministry of Finance, New Delhi. (Official GST policy background & compliance framework) NITI Aayog. (2018). Transforming the Informal Sector in India. NITI Aayog, New Delhi. (Policy perspective on formalisation & GST impacts) Purohit, M. C. (2019). Goods and Services Tax in India: Evolution, Impact and Challenges. Journal of Public Finance and Policy, 2(1), 1–18. (GST theoretical and nationwide implications) Files Restricted The record is publicly accessible, but files are restricted. Log in to check if you have access. 81 Views 1 Downloads Show more details All versions This version Views Total views 81 81 Downloads Total downloads 1 1 Data volume Total data volume 13.9 kB 13.9 kB More info on how stats are collected.... Versions External resources Indexed in OpenAIRE Communities Keywords and subjects Keywords Informal Sector, GST, Formalization, Karnataka Economy, Small Enterprises Details DOI DOI Badge DOI 10.5281/zenodo.19589746 Markdown [](https://doi.org/10.5281/zenodo.19589746) reStructuredText .. image:: https://zenodo.org/badge/DOI/10.5281/zenodo.19589746.svg :target: https://doi.org/10.5281/zenodo.19589746 HTML <a href="https://doi.org/10.5281/zenodo.19589746"><img src="https://zenodo.org/badge/DOI/10.5281/zenodo.19589746.svg" alt="DOI"></a> Image URL https://zenodo.org/badge/DOI/10.5281/zenodo.19589746.svg Target URL https://doi.org/10.5281/zenodo.19589746 Resource type Journal article Publisher Journal of Scholastic Engineering Science and Management (JSESM), A Peer Reviewed Universities Refereed Multidisciplinary & UGC Approved Research Journal Published in Journal of Scholastic Engineering Science and Management (JSESM), A Peer Reviewed Universities Refereed Multidisciplinary & UGC Approved Research Journal, 5(Special Issue 3), 657-665, ISSN: 2583-3294, 2026. Conference ICSSR-SRC Sponsored National Conference (GST Reforms and India's Growth Trajectory: Sectoral Opportunities and Challenges) , Organized by Internal Quality Assurance Cell (IQAC), Government First Grade College Kanakapura,,, 24-03-2026 (Session II, Part II) Languages English Rights License Creative Commons Attribution 4.0 International The Creative Commons Attribution license allows re-distribution and re-use of a licensed work on the condition that the creator is appropriately credited. Read more Copyright Journal of Scholastic Engineering Science and Management (JSESM) Citation Export Technical metadata Created April 15, 2026 Modified April 15, 2026 Jump up About About Policies Infrastructure Principles Projects Roadmap Contact Blog Blog Support Help FAQ Developers REST API OAI-PMH Contribute GitHub Donate Funded by Powered by CERN Data Centre & InvenioRDM Status Privacy policy Cookie policy Terms of Use This site uses cookies. 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