'A well-designed GST can boost GDP growth by 2%'

The GST will bring about a qualitative change in the tax system by redistributing the burden of taxation equitably between manufacturing and services. The Finance Commission had commissioned a study by NCAER to assess its impact on GDP growth and exports. The study explores the impact of GST on growth through direct cost reduction as well as cost reduction of capital inputs. Preliminary results indicate that the growth in GDP can be between 2-2.5% with the implementation of a well-designed GST. The increase in exports can be between 10-14%. It is indeed a staggering impact and demands an energetic action to usher in a welldesigned GST at an early date.

There appears to be agreement that the best option would be a bare minimum number of rates—at best two, preferably one. A single rate will ensure low compliance costs, obviate classification disputes, and ensure uniformity of approach amongst all players. But to be attractive, a single rate cannot be too high. At the same time, the rate must be high enough to address the concerns of states on revenue neutrality.

For GST to be successful, all states and the Centre should implement it in a similar fashion. Only then will it bring about the national common market. The GST will perhaps be the single most important reform stimulus since 1991-92. A flawless GST and the New Direct Taxes Code will put India’s fiscal system on the cutting edge of the world market economies. Even a 2% reduction in costs increases profits by over 20%. This will attract investments. As tax cascading disappears, the industry will move to the lagging regions because of lower costs and thus bring these into the growth dynamics.

Vijay Kelkar is the chairman of the 13th Finance Commission. This is an excerpt from his address to the Ficci National Executive in October 2009.