GST fails its biggest promise: Formalisation of economy

A year into implementation, the 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 on Friday. The report 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,” it said.

In April, Finance Minister Arun Jaitley had claimed that the GST and note-ban had led to increased formalisation of the economy and also cited that 10 million 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 pre- note-ban levels.