The goods and services tax was touted as a major step towards formalisation of the economy. But nearly a year into its implementation, it has not yet delivered on that aspiration, a report by a foreign brokerage said on Friday.
Instead, glitches in the GST framework, such as delays in tax refunds, teething issues with the new IT network and higher tax rates for services, have led to an increase in “cash-based” activity, HSBC Securities and Capital Markets (India) Pvt Ltd said as it sought to look into the reasons behind the unexpected rise in currency in circulation (CIC) over the past six months.
Recent data from the Reserve Bank of India had shown the total currency in circulation had more than doubled to over Rs 19.3 lakh crore – from a post-demonetisation low of about Rs 8.9 lakh crore
According to the report, India’s CIC-to-GDP ratio fell sharply during the November 2016 demonetisation. However, as the RBI began to print new notes, the CIC ratio started to pick up and, by the middle of 2017, saw a steady rate of increase. But it began to rise sharply after a quarter. While cash-dependent villages have been a key driver of the currency in circulation, the increase came at a time rural wages were falling.
“We believe that the missing piece in the puzzle is the state of the informal economy. As is well known, the informal economy is more cash-intensive,” the report said, pointing out that this sector suffered during the demonetisation. But as remonetisation happened, it is likely to have revived.
“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. While we believe that the GST regime will unambiguously lead to more formalisation of the economy over the long term, we argue that in the short run, the glitches in the GST framework have led to an increase in ‘cash-based’ activity in the economy. And this, in our view, explains the acceleration in CIC since the middle of 2017-18.”
In April, finance minister Arun Jaitley had claimed the GST and the note ban had led to increased formalisation of the economy and said one crore new income-tax returns had been filed in 2017-18.
Citing corporate sales data, the report said the level of formalisation had gone back to pre-note-ban levels. “Any semblance of increased formalisation of the economy following demonetisation, if at all, has for now reverted to pre-demonetisation levels,” it observed, adding that there was econometric evidence to suggest the GST may have temporarily increased the demand for cash.
The report, however, said that once the GST settled down, the e-way bill system matured and refunds were speeded up with an improvement in IT systems, tax evasion would fall and the recent rise in informality would diminish gradually.
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