GST may give $15-bn push to economy

The Goods and Services Tax (GST), proposed to be introduced from April 2010, would benefit the economy by at least $15 billion (about Rs 73,000 crore) per year as the effective tax rate is expected to drop significantly, said Vijay Kelkar, chairman of the 13th Finance Commission.

A fall in tax incidence on goods and services offered would enable producers to sell their products at a lower price, leading to increased demand.

“Economic value of this (referring to $15 billion), at a modest 3 per cent discount rate, would be close to $0.50 trillion (or half a billion dollars) and more importantly, this means an additional employment of 5 million,” said Kelkar while delivering the convocation address of the Indira Gandhi Institute of Development Research.

The aim of the GST is to have one uniform tax and do away with multiple taxes like excise duty, central sales tax and services tax, so that tax administration and payment can be done easily. At present, a few taxes on finished product at the state-level cannot be set off against taxes paid on inputs. This leads to a cascading effect of tax on tax.

“Introducing the GST will do more than redistributing the tax burden from one sector or group in the economy to another. This also brings about a macroeconomic dividend as it reduces the overall incidence of indirect taxation and, therefore, the overall tax burden by removing the many distortionary features of the present sales tax system,” he said.

Under GST, both the Centre and the states will have powers to tax goods and services. At present, states do not have the power to tax services.

Kelkar hoped low GST rates, which could be achieved by introducing the minimum number of rates, would ensure higher compliance and acceptance, so that it would result in revenue gains to all states.

“At present, the combined statutory rate of the value added tax (VAT) is close to 30 per cent, which is applied to a narrow base. As a result, the effective rate is very low. Our preliminary research indicates that the effective revenue neutral rate at which GST can be implemented will be far lower than 30 per cent, indicating a significant reduction in the effective tax burden on our economic agents,” Kelkar said.

“Consequent to alignment with the lower effective rate, we can also expect an upsurge in compliance as has been witnessed in the case of direct taxes,” he added.

In addition, a comprehensive GST structure would also eliminate export taxes and help improve international competitiveness.

“This would considerably help improve the production and export of labour-intensive manufacturers as well as employment in our economy,” Kelkar added.