GST fails its biggest promise: Formalisation of economy

The report, however, noted that over the long-term, GST will lead to more formalisation of the economy.

Published: 22nd June 2018 05:28 PM  |   Last Updated: 22nd June 2018 05:28 PM   |  A+A-

GST.

By PTI

MUMBAI: A year into implementation, goods and services tax (GST) has not delivered on the promised formalisation of the economy as yet, while the glitches in the one-nation-one-tax regime has increased the demand for cash, says a foreign brokerage report.

"The GST regime was originally associated with formality. But so far, in our view, it has not been able to live up to that promise. nor has it brought down the demand for cash which has in fact only gone up," British brokerage HSBC said in a report today.

The report, however, noted that over the long-term, GST will lead to more formalisation of the economy.

The GST was implemented from July 1, 2017 and since then it has undergone multiple changes including lowering of tax rates of many items and an increase in the numbers of cesses and the levy rate, which was supposed to be done away with under this tax regime.

In the short-run, the glitches in the framework, including delays in tax refunds, teething issues with the new IT network and higher tax rates for services have led to an increase in the cash-based activity, the report said, adding which is one of the factors for the rise cash circulation.

"Cash in circulation is rising above trend, but not because rural India is faring better, rather it is due to a revival in the 'informal' sectors, thanks to the continued remonetisation," the report said.

In April, finance minister Arun Jaitley had claimed that GST and note-ban had led to increased formalisation of the economy and also cited that one crore new income tax returns were filed in FY18.

Citing corporate sales data, the report said the level of formalisation of the economy has gone back to the prenote-ban levels.

"Any semblance of increased formalisation of the economy following demonetisation, if at all, has for now, reverted to pre-demonetisation levels," the report said.

The report said usually rural wages are the key driver of cash demand, but that relationship is broken for now.

"As much as 70 per cent of rural India, whose main source of income is wages, may not be doing too well at present. As such, growing of cash in circulation should be tempered. But, instead, the cash-to-GDP ratio has shot up since mid-FY18," the report said.

The report, however, said once GST settles down, the e-way bill system matures and refunds are expedited with improvement in IT systems, tax evasions will fall and the recent rise in informality will diminish gradually.

Rural wages will rise on higher inflation, stronger construction growth, normal rains and minimum support price increases which can put pressure on cash in circulation growth, the report said.

Stay up to date on all the latest Business news with The New Indian Express App. Download now
(Get the news that matters from New Indian Express on WhatsApp. Click this link and hit 'Click to Subscribe'. Follow the instructions after that.)

Comments(1)

Disclaimer : We respect your thoughts and views! But we need to be judicious while moderating your comments. All the comments will be moderated by the newindianexpress.com editorial. Abstain from posting comments that are obscene, defamatory or inflammatory, and do not indulge in personal attacks. Try to avoid outside hyperlinks inside the comment. Help us delete comments that do not follow these guidelines.

The views expressed in comments published on newindianexpress.com are those of the comment writers alone. They do not represent the views or opinions of newindianexpress.com or its staff, nor do they represent the views or opinions of The New Indian Express Group, or any entity of, or affiliated with, The New Indian Express Group. newindianexpress.com reserves the right to take any or all comments down at any time.

  • SRIDHARAN TKR

    This is a load of crap. Our business men are first cheats and then business men true to Chankya neethi adage " Every business men is a thief" They do not want to pay taxes honestly. Even now established businesses cheat clients and governments(State and Centre) by issuing only Estimate as invoice and do back door accounting to evade GST.
    10 months ago reply
flipboard facebook twitter whatsapp