By Dr Samar Verma*
Services Fuel India: GST Must Support, Not Tax, Growth
India’s Goods and Services Tax (GST) 2.0 has tidied up a wide basket of goods- simpler slabs, cleaner rate lines, and some well-aimed cuts. Good. It is time to focus on services- ‘S’ of the GST. Modern India is a services-first economy. Services produce the majority of value added, power our exports, steady the balance of payments, and absorb most new jobs- from coders and creators to drivers, designers and consultants. If the lodestars of GST reform are neutrality, simplicity, and growth, the next- and urgent- leg must reduce and rationalise GST on services.
Start with the arithmetic of the economy. Official national accounts show services now account for nearly 60% of GDP. Within services, “financial, real estate & professional services” alone make up about 23% of value added, higher than 14% for manufacturing in 2024–25; an x-ray of where India actually produces value today. In the external account, provisional data peg services exports in FY2024-25 at about US$387.5 billion, contributing a services trade surplus of ~US$188.6 billion that repeatedly cushioned the current account; in Q4 FY25 India posted a current-account surplus of US$13.5 billion (1.3% of GDP), with strong net services receipts doing the heavy lifting. This is what “macro-critical” looks like.
Jobs and productivity reinforce the same story. The World Bank’s India Country Economic Memorandum highlights that modern market services have among the highest employment elasticities of growth in India—i.e., a 1% rise in output tends to yield a larger-than-average rise in employment—while also sitting near the top of the economy’s efficiency ladder. Complementing this, an IMF study finds labour in manufacturing and services was over 4.5X as productive as in agriculture in 2019/20. Steering workers toward higher-productivity activities is the only route to sustained gains in living standards.
The workforce itself is moving where policy has not yet followed. Gig and platform work engaged ~7.7 million workers in 2020-21 and is projected to reach 23.5 million by 2029–30, according to NITI Aayog. This is where risk is being absorbed as traditional sectors restructure. It is where livelihoods arise when people lose formal jobs elsewhere. Lowering the GST burden on the business-critical services these workers and micro-enterprises buy – payments, compliance tools, accounting, cloud, design, marketing- would be a direct income booster for a large, rising cohort.
Some essential services – such as healthcare and legal – are already relieved. True – and that’s instructive. The policy logic- access, affordability, and administrative practicality – is sound. That logic applies today to a wider set of knowledge-intensive professional services – accounting, audit, tax compliance, management consulting, market/policy research – without which MSMEs and startups struggle to formalise and scale. The right design is not more exemptions (which break the input-credit chain) but lower rates with full input tax credit (ITC) for these “compliance-and-competitiveness” services.
There is also a fairness wrinkle here. Unlike manufacturers – who typically offset output tax with large ITC on raw materials and capital goods – many professional and business-service firms have thin credit pools: salaries (non-GST), laptops and software (creditable), and a long list of blocked credits – such as food and beverages/outdoor catering, club memberships, rent-a-cab, life/health insurance, and employee travel benefits (credit denied except in narrow use-case exceptions). In short, a larger share of consulting receipts is effectively taxed at the full output rate, unlike goods, where ITC meaningfully nets off the burden.
Professional incentives on the income-tax side also interact poorly with GST. Section 44ADA’s presumptive scheme allows specified professionals to pay tax on presumptive income up to ₹50 lakh (extendable to ₹75 lakh where ≥95% receipts are digital). That cliff nudges many sole proprietors to cap billings to stay within the threshold, disincentivising growth. A modest GST rate cut (with full ITC) for compliance – and competitiveness-oriented services would reduce this anti-scale bias while preserving Value Added Tax (VAT) neutrality.
International practice points the way. The Organization for Economic Co-operation and Development (OECD)’s VAT/GST Guidelines put neutrality at the centre: restricting input deduction undermines neutrality and distorts production choices. The EU VAT Directive explicitly permits reduced rates (down to 5%) on a list of goods and services—notably hospitality, local passenger transport, and cultural services—where employment is labour-intensive and price elasticities justify demand support. India can embrace the same principle without sacrificing revenue efficiency, provided we keep full ITC to avoid cascading.
Nor is India unfamiliar with well-targeted service-rate choices. The Council has clarified cloud kitchens at 5% without ITC and recommended cutting GST on hotel rooms at or below ₹7,500 to 5% without ITC (from 12% with ITC) to spur domestic tourism—clear examples of rate differentiation already in our toolkit. This logic could be extended to services that raise the system’s compliance and competitiveness- accounting, audit, logistics support, testing/inspection, market research, selected digital business services used by MSMEs, platforms and exporters- perhaps incentivising formalisation of the lion’s share of India’s informal sector.
The start-up and gig argument is decisive in size as well as direction. With 23.5 million gig/platform workers projected by 2029–30, and a policy push to entrepreneurship, service-tax relief directly supports incomes and improves viability for the cohort that is most exposed to job churn in conventional sectors. In effect, lower GST on essential business services is a portable safety net for a new kind of workforce: it reduces fixed costs, lengthens the invoice chain, and nudges participants toward formality.
Tax policy matters, and also for services. Information Technology/Information Technology Enabled Services (IT/ITES) exports are- and must remain- zero-rated, ensuring no domestic tax is embedded in export prices; this is the backbone of India’s competitiveness in tradable services. Earlier income-tax holidays and export-oriented policies accelerated the sector’s early scale-up. Today, Software Technology Parks of India (STPI)-registered units alone report software exports in the ₹10+ lakh-crore range. The lesson is not to copy-paste holidays, but to keep exports zero-rated and reduce domestic frictions for other tradable services where India has an edge.
What, then, should GST 2.0 on services do? One, create a single concessional band (e.g., 12%) with full ITC for “compliance-and-competitiveness” services – accounting, audit, tax compliance, bookkeeping, statutory certification, market research, management and business consulting, testing/inspection, logistics support, and selected digital business services – where pass-through to MSME users is likely and social returns are high. Two, keep exports strictly zero-rated and fix refunds; unblocking working capital for smaller service exporters will multiply growth. Three, where social returns and employment intensity are high (e.g., local public transport, cultural services), consider limited, data-driven reduced rates without breaking ITC – consistent with European Union (EU) practice. And four, align small-supplier reliefs between goods and services. Today’s composition scheme for service providers is 6% up to ₹50 lakh, far below the ₹1.5 crore typical threshold for goods. Harmonisation and e-invoicing-based simplification would lower compliance costs without shrinking the credit chain.
Will this blow a hole in the fisc? Static spreadsheets will show a hit; dynamic arithmetic is kinder. Three offsets are routinely ignored. First, the services base is large and grows faster than GDP; even modest demand and formalisation responses claw back revenue. Second, stronger credit chains reduce evasion: the classic Pomeranz AER experiment showed VAT’s paper-trail self-enforcement at work—when buyers need invoices to claim credits, sellers report more truthfully. Third, faster services-led growth feeds back into both direct and indirect taxes. For context, FY2024-25 saw record gross GST collections of ₹22.08 lakh crore, averaging ~₹1.84 lakh crore/month; a slightly lower rate on a broader, more compliant base can be fiscally neutral over the medium term.
One more reason services deserve priority is equity across producers. A manufacturer with sizable ITC can soften the tax bite; a solo consultant with a laptop cannot—especially when Section 17(5) blocks credits on everyday business outlays like food & beverages/outdoor catering, club memberships, rent-a-cab, life/health insurance, and many employee travel benefits (with only narrow exceptions). The result is that professional, business and management consultants often pay GST on most of their gross receipts, then face a presumptive-tax cliff (44ADA) that discourages scaling beyond ₹50–75 lakh. Rate rationalisation that keeps ITC intact would restore neutrality.
None of this is alien to GST’s design philosophy. EU rules show that reduced rates for labour-intensive services are compatible with a modern VAT, so long as the credit chain is preserved. India can adapt both lessons.
The first phase of GST 2.0 primarily tidied up goods. To finish the job- and to meet India where its growth, jobs, exports and BoP actually are- we should now rationalise service-sector rates. The timing is right; the services economy is expanding, the gig workforce is swelling into the tens of millions, and the world keeps buying what India’s service firms are selling. Time to rationalise taxing the economy’s primary engine as if it were a discretionary indulgence.
*Dr Samar Verma is an economist, public policy professional and an institution-builder, with 28 years of experience in economic policy research, international development, grant management and philanthropic leadership.
