GST will help increase employment: Kelkar

The Goods and Services Tax (GST), which is proposed to be implemented from April 1, 2010, will help increase employment in the manufacturing sector and also reduce prices of manufactured products, said Finance Commission Chairman Vijay Kelkar.

“Flawless GST reforms will remove the historic tax-induced bias against the manufacturing sector and would dramatically increase growth in the manufacturing output, exports and blue collar employment,” he said.

Talking to reporters here today, Kelkar said even a 2 per cent reduction in the costs of the manufacturing sector will help increase profits by more than 20 per cent. This will also attract more investments in the manufacturing sector. The only way of reducing prices is by passing on the benefits of reduced costs to the consumer, he said.

“What is perhaps most attractive is the very favourable impact of a “flawless” GST on the lagging regions of India. As “tax cascading” disappears, the industry will move to the lagging regions because of the likely lower costs and thus bringing the lagging regions into the growth dynamics.

For all these reasons, a flawless GST is a must and industry bodies like the Federation of Indian Chambers of Commerce and Industry, or Ficci, should undertake all possible steps to ensure this happens at an early date,” he said.

Earlier, addressing the national executive committee meeting of Ficci, here, Kelkar said the launching of GST would perhaps be the single-most important reform stimulus since the 1991-92 economic reforms launched by the then prime minister Narasimha Rao and finance minister Manmohan Singh.

“Flawless GST and the new Direct Taxes Code will put India’s fiscal system at the cutting edge of the world’s market economies,” he said.

According to a study done by the National Council of Applied Economic Research, which was commissioned by the finance commission to assess the impact on growth in GDP and exports, Kelkar said the growth in GDP could be between 2 and 2.5 per cent with the implementation of a well-designed GST. The increase in exports can be between 10 and 14 per cent. “If we use 3 per cent as a discount rate, and lower estimate of the GDP increase of 2 per cent accruing year after year, the net present value of the GST reform exceeds half a trillion dollars,” he said.

He said using data from about 2 million business entities for the year 2007-08, the GST task force of the Finance Commission has generated very interesting data relating to the GST rate, which will maintain the same level of income for the Centre and states, respectively, in a minimal exemption regime. Their preliminary calculations suggest that Revenue Neutral Rate will be substantially below the present combined central and state rates. The report of the task force will be published on the Finance Commission’s website shortly, he said.

“For GST to be successful, all states and the Centre should implement it in a similar fashion. Only this will bring about the national common market, which is one of its goals. This will be possible when there is be a common law, common exemptions, a common assessment procedure and perhaps even a common return,” Kelkar added.