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GST & Demonetisation Impact on Indian Financial Stability

Abstract

If technology and data analytics has delivered results around demonetisation and direct taxes, the GST goes one step ahead on the GST and indirect taxes front, through the linkages of databases – big and small – that is wired into the Goods and Services Tax Network. The governor in his financial stability report published by RBI said that the withdrawal of specified bank notes will impart far reaching changes going forward. Raising concerns about stress in the banking sector, he said “While the domestic banking sector continues to face significant levels of stress partly reflecting legacy issues, on balance, enhanced transparency has helped to reinforce the stability of India’s financial system.

RBI on Thursday said GST and demonetisation have the potential to transform the economy, ‘notwithstanding some inconvenience to public and momentary adverse impact on growth’, even as it flagged elevated risks due to continuous deterioration in banks’ asset quality.

Keywords: Demonetisation, Goods and Service Tax (GST), Financial Stability

Introduction

The Indian economy is heading towards a unique trajectory — bitter over the next two quarters till end-2017, sweet beyond that — that will capture the following.

One, growth of gross domestic product (GDP) will decrease in the short term and make up in the medium to long term. Two, growth of tax collections, both direct and indirect, will increase in the short term and consolidate itself to a new nor006Dal in the medium and long term. Three, as a result of the above, the tax-GDP ratio will jump in the short term and show a consistent but slower rise beyond that.

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Four, by FY 2019 – around the time India will go for general elections — the government will be acting from a position of a full treasury. Five, that growing treasury will give the government a fiscal flexibility that no other government would have seen. These are consequences of two disruptive policy actions – demonetisation and the introduction of the goods and services tax (GST) – both of which lead the economy in the same direction.

Call it disruption or structural reform, demonetisation (or note ban) did have dampening effects on the economy. However, even as its negative impact was fading by the time 2017-18 began, the announcement of another reforms or “disruption” – the goods and services tax (GST), which was to be implemented by July 1, 2017, shock the economy and businesses. The result of these two reforms was evident as the gross domestic product (GDP) growth came crashing down to a three-year low of 5.7 % in the first quarter of 2017-18. It was largely because of pre – GST jitters and lingering effects of demonetisation. The economy did recover thereafter to 6.5 % in the second quarter and to 7.2 % in the 3rd quarter. Overall, the economy is now projected to grow 6.6 per cent in 2017-18 by the second advance estimates, a bit higher than 6.5 %, pegged by the first advance estimates.

Impact of Demonetisation & Goods & Service Tax (GST)

Demonetization has resulted in a temporary cash crunch across India, rural India being worst affected. This situation is yet to ease. Shrinkage of demand has resulted in reduction of industrial production; tiny and small scale units depending entirely on cash transactions have closed down. It is expected that GDP growth would fall by a half to one percent. In its first projection on India post-demonetization, the World Bank has lowered the country’s GDP growth estimate for this fiscal year to 7 %, from its earlier estimate of 7.6 %, made in June last year. Presumably, the state’s tax revenues will be hit: however, on the other hand, demonetization has also shown a temporary buoyancy in tax revenue, as many traders outside the tax net are forced to account for their actual turnover to account for cash deposits in banks. The real impact of demonetization on states’ tax revenue is yet to be computed.

Empirical evidence suggests that the rollout of GST would also disrupt the economy in the short run. The concerns of some states were voiced by Amit Mitra, chairman of the Empowered Committee of Ministers on GST, who stated that GST needs to be deferred so the economy is not hit by another disruption after demonetization. States also raised the demand for higher compensation for loss of revenue. However, the Modi Government is in no mood to defer the rollout of GST, as it may wipe out the gains of demonetization. The government worked very hard with all stakeholders to bring in workable changes in the Model GST Law that was announced in July this year (First Draft): the revised GST law was released on November 26, 2016 (Second Draft) for vetting by the GST Council.

The Second Draft has incorporated a number of suggestions made by the industry and commerce: significant among them are provisions related to scope of supply, input tax credit, and place and time of supply. Doubts regarding ab initio exemption on exports and supply to special economic zones have been put to rest.

One of the contentious proposals in the Second Draft relates to anti-profiteering measures. The provision has given power to the authorities to examine and identify if the implementation of GST has resulted in reduction of the price of goods or services supplied by the assesses due to the availability of input tax credit or reduction in the tax rate, and if so, whether this advantage has been passed on to the ultimate consumer. If assesses are not compliant, the authorities have the power to penalize the uncooperative businesses. Prima facie, the provision has been introduced with the noblest of intentions to ensure a reduction in prices, but it may lead to hardship and harassment for business. In a market economy, market dynamics decide the price of goods and services. At best, anti-profiteering could be a temporary measure with clear rules and regulations.

Before demonetization, the GST Council has approved GST rates of 5 percent, 12 percent, 18 percent and 28 percent, in addition to a cess over the peak rate on demerit and luxury goods. The Council also agreed for a corpus of 550 billion rupees to compensate States. Now, discussions are under way to allocate goods and services to a tax slab, and businesses are in overdrive to justify a lower tax rate: the leather, textile, apparel and footwear industry, and the tourism sector are seeking a lower tax rate of 5 %. As a precursor to GST, a large number of existing exemptions are likely to be withdrawn in a phased manner.

Enough has been written about the adverse impact of demonetisation introduced on 8 November 2016, the scintillating short-term evidence of which was the 130 basis point fall in India’s GDP growth to 6.1 % for the January to March 2017 quarter (the first full quarter after demonetisation and enough to assess its impact economically) from 7.4 % in the previous October to December 2016 quarter, and 7.6 % in the same quarter of the previous year. Although a quarter is no indicator of rankings but within the confines of statistics, the quarter also saw India relinquish its position of being the world’s fastest-growing large economy to China, which grew by 6.9 % in the same period.

GST and Demonetisation Will Change Indian Financial Stability

Goods and Services Tax (GST) and Demonetisation move initiated by Prime Minister Narendra Modi led the government as economic game changers.  GST will ensure higher taxation as far as the Centre is concerned and also higher taxation for states. In the wake of the escalating opposition attack on the government, all apprehensions of the Indian economy suffering due to demonetisation was thereby rejected. Prime Minister Modi has created a new normal in the country where there will be less cash and more of digital currency transactions. As far as currency changes are concerned, the size of the GDP as well as tax base will significantly expand in the long run .The demonetisation is a huge step to swap 86 % of currency of the nation. The hidden currency comes out, which also includes fake currency, money which is used to carry out criminal activities, money which is used by terrorist organization. The implementation of Demonetisation reform is a very bold decision take by our Indian Government. This step initiated by the government has strengthened the banks. In this existing scenario, the ability of the banks to support the economy was decreasing. Therefore to strengthen the banks we used to contribute from the budget.

Objectives of the Study

The foremost intent of the study is to scrutinize the impact of GST & Demonetisation on Financial Stability and how it influence monetary amplification. Specific objectives incorporate:

  • To study about Financial Stability on its impact on Goods & Service Tax & Demonetisation,
  • To study the inexplicit opinions in Indian Economy in relation with Demonetisation & Goods and Services Tax (GST),
  • To furnish information for further research work on GST.

Research Methodology

Being an explanatory research it is based on secondary data of journals, articles, newspapers and magazines. In view of the objectives of study descriptive type research design is being adopted to have more precision and scrupulous analysis of research study. The accessible secondary data is intensively used for research study.

Results & Discussion

GST

The GST rate starts at 5% and 18% taxation services such as restaurants; movies etc. are bound to increase prices. GST may fuel inflation for the short term. It will bring transparent and corruption frees the system. The cost of doing business will be lower. It will boost the Indian Economy. Increase in demand and consumption of goods and services.

  • GST is a single taxation system that will reduce the number of indirect taxes. From now, a single taxation term would cover all of those indirect taxes.
  • The Prices of products and services will reduce, thus this system would prove to be beneficial for the people who are fed up of paying high prices.
  • Reduce the burden from the state and the central government. With the introduction of GST, all indirect taxes would come under a single roof.
  • GST would not be charged at every point of sale like other indirect taxes, market would be developed.
  • Corruption-free taxation system.
  • ·GST will boost Indian economy in comparison to the other developing countries.

Demonetisation

It may be a great achievement for the Government but the actual sufferers are the lower income or middle income individuals of the society. The problem of corruption cannot be controlled unless work is done at the ground level. The roots of our country are so corrupt that until and unless the common man becomes aware about this problem nothing can be done. Restoration of the corruption free society is possible only if the roots are clear of corruption. Such steps shall be taken keeping into minds the economic condition of the general people in the society.

If technology and data analytics has delivered results, both financial and moral, around demonetisation and direct taxes, the GST goes one step ahead on the GST and indirect taxes front. Here, the linkages of databases, big and small, through technology that is wired into the Goods and Services Tax Network (GSTN) is embedded into the very conceptualisation, construction and execution of the policy. The entire system is electronic. Incentives have been created to ensure compliance – one entity cannot get tax credits if the previous entity does not pass it. Although the hard and almost unrelenting compliance could be harsh on the technologically – challenged, the Indian entrepreneur is smart enough to learn. Other issues like electricity or broadband availability is being addressed through GST Suvidha Providers. It is a clean system, the benefits of which will show up in the last quarter of FY 2018. Those who said that GST System will collapse under the weight of transactions as it comes to life on 1st July, have been proved wrong beyond doubt.

The GST takes India to a more efficient, cleaner and less stressful tax system. But as has been expressed here earlier, the next two quarters, from July – December 2017, the transition to GST will extract a price. And that price will be in the form of a slower GDP growth. This will be the policy bow being pulled. The arrow unleashed, stability of the GST system will come in the January – March 2018 quarter, after which the uptick will be sharp. This will be due to a rise in the number of taxpayers as well as the amount of taxes that were so far being evaded – on indirect taxes of course, but on direct taxes as well.

Conclusion

Thus GST will form a virtually unbreakable chain of transactions right from the initial raw material, till the goods are sold to the consumer. Demonetization on the other hand is a humongous reset button on the parallel economy, where every crook is forced to start afresh. It is like pulling some runners back to the starting line, because they got ahead in the race using unfair means. But nothing stops these runners from using the same means again and darting ahead. But the only things that can stop these runners, or make them slower, are hurdles. And GST will be one such major hurdle. Till now GST’s marketing has only been that of “One Nation One Tax”. Something which will render defunct, a complex system of taxes which was created over many years, and unite it into one single, business friendly, consumer friendly tax regime. While this is true, GST deserves more credit than this. The only future-oriented effect of demonetisation will be , once a person deposits a huge sum of cash in the bank, the tax authorities are instantly alerted that this person has so much wealth, hence he can remain on the radar in the future. GST, like demonetisation, would be another case of short-term pain for long-term gain. So we need to be prepared for the usual suspects to rake all sorts of issues about GST & Demonetization just to stall it.

References

  1. https://taxguru.in/goods-and-service-tax/impact-gst-demonetisation-indian-financial stability.html
  2. https://www.bna.com/gst-aftermath-demonetization-n57982085886/
  3. https://www.orfonline.org/expert-speak/arrow-effect-demonetisation-gst/
  4. https://indianexpress.com/article/business/banking-and-finance/gst-demonetisation-to-have-far-reaching-impact-says-rbi-governor-urjit-patel/
  5. https://www.business-standard.com/article/economy-policy/economy-disrupted-by-lingering-impact-of-demonetisation-gst-roll-out-118032901121_1.html

Cite this page

GST & Demonetisation Impact on Indian Financial Stability. (2021, Apr 03). Retrieved from http://studymoose.com/gst-demonetisation-impact-on-indian-financial-stability-essay

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