Two significant new economic measures taken by the Indian Government are Demonetization and introduction of GST i.e. Goods and Services Tax.
Demonetization: ₹ 500 and ₹ 1000 notes were demonetized with the aim of curbing black money, popularizing digital transactions and combating terrorism. Cash money can be a source of many vices. It is often termed as the primary medium for funding terrorism, bribery, corruption and counterfeit currency. Large amounts of cash money reach tax havens through hawala transactions. But one must remember that most modern economies have already moved towards cashless society. This is especially important in context of Indian economy where tax evasion is firmly entrenched in societal mind-set as way of life. Most transactions are made in the form of 'kaccha' and 'pakka' money. Demonetization was introduced as a step to counter this phenomenon. For an economy undergoing such an important step, transient effects on people and economy are unavoidable. But, the long-term advantages superseded the short term considerations. A common criticism of this move has been that much of the high denomination currency has returned to the banking system. But, the colour of the currency does not change by simply becoming a part of the banking system. Rather, the money that was previously untaxed and unaccounted for, now comes under the taxation purview. The banks, as a result of Demonetization, now have large amount of money because of low cost deposits. Hence, banks can lend more money and at lower interest rates. Another important effect of Demonetization is the increase in online transactions. The regulation of online transactions is far easier than regulation of physical currency.
However, the unorganised sector has incurred huge losses. The long queues in front of banks displayed the sufferings and distresses of the common man, who is no way connected to black money. It also debatable whether the benefits of demonetization are worth the troubles faced by the general public. Moreover, demonetization is only a very small step in the war against black money. Black money does not exist solely in the form of cash. For combating other forms, new steps should be undertaken.
Goods and Service Tax (GST): GST was introduced at midnight event in the Parliament on July 1, 2017 and marks a paradigm shift as India moves towards 'One Nation One tax One market'. The GST subsumes previously existing multiple taxes like VAT, entertainment tax, central excise duty, octroi, entry tax, luxury tax etc. Currently products are taxed under 4 slabs : 28 % , 18 % ,12 % and 5 %. Apart from these slabs, some products have been exempted i.e. a fifth slab of 0%. GST is expected to increase tax compliance, reduce logistic costs, reduce interstate transport costs, remove biases and improve India's ranking in World Bank's Ease of doing Business report. The GSTN (GST network) will provide a single interface for tax payers. The ITC (Input Tax Credit) scheme will remove the previously existing tax on tax phenomenon, which resulted in cascading effect of taxes. This will increase tax compliance. Previously, it was estimated that 60 % of the time of goods in inter-state transport was spent at check posts. Now, check posts have been abolished and interstate transport of goods has become much easier. Moreover, manystates used to have different tax rates. This resulted in an inherent bias in companies towards states with higher tax rates, neglecting other factors. Now, with uniform tax rates across all states, this bias shall be removed. India's ranking jumped from 130 to 100 in World Bank Index's ease of doing business report from 2017 to 2018 without factoring in the GST. It is expected that 2019 report, after GST is factored in, there will be big improvement in ranks. GST is a destination based tax intended to remove existing confusions and provide a better environment for businesses to flourish. Incentives have been provided for MSMEs (Micro small and medium enterprises). Companies with a turnover less than ₹ 20 lakhs are not required to register in the GSTN (₹10 lakhs for special category states).
The implementation of GST has been an excellent example of cooperative federalism in India, 1/3 for the centre and 2/3 for the state show the accommodating nature of federalism. Notwithstanding the inclusion of cesses for luxury items to cover the losses in state exchequer, it is true that states had to tread on murky waters, right after some states had declared the farmer loan waiver. This was not so much of an issue in other countries where GST has been implemented, because states had the power to enforce direct taxes while centre was in control indirect taxes. However, in countries like India, the centre enforces direct tax and now, as a result of GST, will have almost 50% stake over indirect taxes as well. States like Tamil Nadu have legitimately argued that tax money was used to implement social welfare schemes. In fact, states like Tamil Nadu and Kerala rank similar to OECD countries in HDI.
GST is a welcome step in reforming the tax structure in the country. But , the present system of multiple tax slabs is confusing ( though understandable , taking into account the diversity of India ). Efforts should be made to move towards a single tax rate for all goods and services. The tax rate of 28% is highest across the world. Even UK and USA have only 17% tax rate. The goods and services currently excluded from the GST ambit need to bring under the step.
Over the last twenty-five years, as a result of the launch of the new economic policy and its continuation, the Indian economy has undergone significant improvement. Currently, India is one of the fastest growing economies in the world.
Demonetization and GST have been revolutionary steps in transforming the Indian economy. While questions do remain over their overall implementation, it is certain that they shall take the Indian economy in the right direction in due course of time.
- Megha Mukherjee