M. Ratchanya

IV Year, B.Com. LL.B.,(Hons.), School Of Law, Sastra University

ABSTRACT

GST and Demonetization are two bold decisions taken by the Indian government to tackle the issues which are existing and to resolve the emerging issues which arises day by day in the Indian economy. GST and Demonetization are likely to be described as game changers of the Indian Economy. GST will require companies to not just be tax complaint but also readjust their structure and supply chain networks. On the other hand Demonetization is leading to boom the cashless payments. These two will render great opportunity for customers to relook at their structure and redesign their supply chains, since the current supply chain has been designed according to interstate taxation. This biggest Tax reform in Independent India, the Goods and Services Tax Act (GST) has brought on a platter, a concept called “Composition Levy’ to its taxpayer. One of the fundamental features of GST is the seamless flow of input credit across the chain (from the manufacture of goods till it is consumed) and across the country. The money in the economy is circulating as a network of pipes through which water is flowing. The banking system manages this network, and the efficiency of this system is known as liquidity. The morally and ethically depraved society of today is an outcome of these stark inequalities. Black economy also uses the money it makes, but focuses more on assets and hoarding. It pushes up demand for property and gold. It hoards the cash locally and globally, treating it as a store of value. Evaders will pay taxes on what they bring into the bank. Therefore cash can be a store of value, as the risk of demonetisation is real.

 1.INTRODUCTION:

Goods and Services Tax which is commonly referred to as “GST” is consumption based tax/levy. It is based on the “Destination principle.” GST is applied on goods and services at the place where final/actual consumption happens. Though GST is a tax reform, it is going to impact every sphere of business activity, be it procurement, supply chain; IT, logistics, pricing, margins, working capital, etc. as a number of business decisions taken are based on the current tax structure which  may no longer be relevant in the new GST regime. On the other hand, Demonetisation which is an act of stripping a currency unit of its status as legal tender. The necessity for Demonetisation arises whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit. The major motive of this demonetisation is to combat inflation, to combat corruption, and to discourage a cash system. Therefore the process of demonetisation involves either introducing new notes or coins of the same currency or completely replacing the old currency with new currency.

2.DEMONETISATION AND GST ROLL-OUT WILL HELP ECONOMY IN THE LONG RUN:

Generally Indian banks and companies will face short-term downside risks due to the cash crunch which arises from the government’s decision to invalidate old high-value currency notes. Indian government reforms will have long-term structural benefits but the same will carry short-term execution and adjustment risk. The decision to demonetize Rs. 500 and Rs. 1, 000 currency notes had led to a significant cash crunch in the economy. The General public of the Indian economy expects both demonetization and the goods and services tax (GST) to adversely impact some sectors of the economy in the short run but have long-term benefits. This demonetization and a goods and service tax (GST) are expected to be implemented by September 2017 which is likely to have a higher disruptive impact on the informal, rural, and cash-based segments of the economy. However, in the long run, demonetisation and GST could result in a wider tax base and greater participation in the formal economy. This should benefit India’s business climate and financial system in the long run.

As per the existing scenario in the Indian economy, the disruption from demonetisation should be short-lived with demand revival in the next one to two quarters, limiting the impact on Indian banks and corporate. However, in the short term, the rural and informal sectors of the economy are experiencing large-magnitude adjustments. Business sectors that often transact in cash, including jewelry and real estate, will also face some degree of upheavals. In a less-likely downside scenario, the shock of demonetisation will not be absorbed within the next few months and the economic disruption will spill over into fiscal 2018, and potentially coincide with the introduction of the GST. Economic growth will stay lower for longer, raising stress levels on corporate, banks, and other financial institutions; although the sovereign rating is likely to remain resilient.”

3.ECONOMIC CONSEQUENCES OF DEMONETISATION OF 500 AND 1000 RUPEE NOTES:

People who have black money are mostly in pithole. Either they have to go to banks to exchange their money into new forms of notes and get under the government radar. Else they forget the money because it will turn into useless paper soon. The following are the chief economic consequences:

3.1. Effect on parallel economy:  The removal of these 500 and 1000 notes and replacement of the same with new 500 and 2000 Rupee Notes is expected to – remove black money from the economy as they will be blocked since the owners will not be in a position to deposit the same in the banks, – Temporarily stall the circulation of large volume of counterfeit currency and – curb the funding for anti-social elements like smuggling, terrorism, espionage, etc.

 3.2. Effect on Money Supply:  With the older 500 and 1000 Rupees notes being scrapped, until the new 500 and 2000 Rupees notes get widely circulated in the market, money supply is expected to reduce in the short run. To the extent that black money (which is not counterfeit) does not re-enter the system, reserve money and hence money supply will decrease permanently. However gradually as the new notes get circulated in the market and the mismatch gets corrected, money supply will pick up.

3.3. Effect on Demand : The overall demand is expected to be affected to an extent. The demand in following areas is to be impacted particularly the Consumer goods · Real Estate and Property · Gold and luxury goods · Automobiles (only to a certain limit). All these mentioned sectors are expected to face certain moderation in demand from the consumer side, owing to the significant amount of cash transactions involved in these sectors.

 3.4. Effect on Prices : Price level is expected to be lowered due to moderation from demand side. This demand driven fall in prices could be understood as follows:

  • Consumer goods: Prices are expected to fall only marginally due to moderation in demand as use of cards and cheques would compensate for some purchases.
  • Real Estate and Property: Prices in this sector are largely expected to fall, especially for sales of properties where major part of the transaction is cash based, rather than based on banks transfer or cheque transactions. In the medium term, however the prices in this sector could regain some levels as developers rebalance their prices (probably charging more on cheque payment).

3.5. Effect on various economic entities:  With cash transaction lowering in the short run, until the new notes are spread widely into circulation, certain sections of the society could face short term disruptions in facilitation of their transactions. These sections are: · Agriculture and related sector · Small traders · SME · Services Sector · Households · Political Parties · Professionals like doctor, carpenter, utility service providers, etc. · Retail outlets

However in the long term, though, this is likely to drive several benefits for the economy. India has made the first move from cash economy to a digital economy. Larger amount of savings and cash will find a way into the mainstream economy and be deployed for physical and financial asset creation. Use of digital currency and payment systems driven by UPI, wallets and cards will create enormous transparency and paves way for faster evolution of Fintech companies in India especially in transactions and Online lending space. But however it needs to be accepted that the caricatured version of black money driving Indian real estate is no longer applicable.

4.INDIA’S DEMONETISATION THREATENS GST’S LEGISLATIVE TABLE:

India’s central and state government representatives have cited taxpayer convenience as a reason for overseeing administration of GST. The central government maintains that a single administrator would simplify implementation of the GST network, and states argue that small businesses have become accustomed to dealing with state tax authorities. Some sources in the economy said that the demonetization scheme has taken precedence over the goods and services tax bills.

5. DEMONETISATION PAVING BEETER WAY FOR GST IN PLACE!

The 8th of November, 2016 was an important day in the calendar of Indian reforms. On this day, a significant milestone in the implementation of the Goods and Services Tax Network (GSTN) portal was achieved with over 80 lakhs of indirect tax assesses starting to shift to the portal. There is also a striking similarity between the aims of demonetization and GST. Here are some points to consider:

5.1. A planned step: Much is said of demonetisation being a planned step, rather than a haphazard decision that might have been arrived within a span of one week. It is said to continue from the Jan Dhan Yojana, Income Declaration Scheme, conversion of local post offices into semi banks and then the announcement on the same day when the GSTN portal’s biggest step into its implementation had commenced.

5.2.The Bull’s Eye: GST had hit the target of making traders aware that each of their transactions would be tracked. With demonetization announced at the same time, the cumulative effect is to make the ‘target people’ worried and uncomfortable, thus trying finding new options and solutions! However, the real target had been to get all the hoarded cash into the circulation and also to have all the tax payers on-board into one single system. One of the most important functions of GSTN will include running the matching engine for matching, reversal and reclaim of input tax credits.

GST is yet again one more reform in the Indian economy which is to assist India in moving further to the goal of a digital India, encouraging paperless transactions by ensuring, Electronic Tax Liability Register, E-Register for Cash Payments, Credits, mandating proper documentation and record keeping

6. GST AND DEMONETISATION WII CHANGE INDIAN ECONOMY:

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 percent 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.

7. DEMONETISATION IN INDIA – WHO WILL PAY THE PRICE?

The role of cash and high-value bank notes in the Indian economy cannot be understated. According to Reserve Bank of India (RBI) figures, as of March 2016 currency in circulation amounted to Rs16,415 billion. Of this, Rs500 notes accounted for 47.8% in value and Rs1,000 notes another 38.6%. Together, they were more than 86% of the value of the notes in circulation. That’s a whopping amount to be frozen in one fell swoop. Understandably, banks and ATMs can do only so much. There’s a lot of tinkering to be done with limits and schedules of the exchange outlets and bodies authorized to take payments in old bills  state owned electricity suppliers, for instance. To the credit of the government, this is being done on a continuous basis. But there are questions   especially from political parties over their effectiveness. The fact that the government has already announced Rs2,000 notes is a tacit admission that people need higher denomination notes in the future due to inflation. Expected inflation is running high due to India’s monetary and fiscal history. Small notes will rapidly lose further value so that essential goods cannot be purchased with a reasonable quantity. Governance needs to be improved in all its dimensions. Cosmetics will not cut it.

Demonetisation will place a temporary brake on illegal transactions in cash until operators figure out alternative ways of financing such transactions. The aim behind the government’s action was to combat tax cheating, counterfeiting and corruption. Eliminating large denominations makes it harder to hide large amounts of cash. Therefore to break the grip of corruption and black money, the currency notes presently in use will no longer be legal tender. The goal of this move is to clean transactions, to clean money. The size of the cash economy will shrink, as will black money generation avenues, because of the better cash-flow trail.”

8. 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 and Demonetization just to stall it.

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2 Comments

  1. Vithal says:

    Last sentence is “So we need to be prepared for the usual suspects to rake all sorts of issues about GST and Demonetization just to stall it.”

    This sentence reflects what the author really wanted to say, but reserved for the finale! The author should have dwelt in detail on this aspect –> who are the “usual suspects” and what are “all sorts of issues” that would be raked.

    Then, perhaps the article would be equally bold 🙂

  2. Subramani says:

    A good narrative as student. There would be lot of issues in GST transition. Demonetization has slowed down the economy. Probably, if planned well the discomforts of demonetization could have been minimised.

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