Demonetisation and GST are not the 'demons' as some argue

The Indian economy is at a crossroads. The economic restructuring that began with the November 8 announcement of demonetisation, now faces the risk of being derailed by parties with vested interests. The process of demonetisation and the implementation of the Goods and Services Tax are important economic disruptions that can go a long way in overhauling the dilapidated structures of Indian economy.

Critics have suggested that demonetisation could not achieve its declared goal and are, therefore, quick to pronounce it as a monumental failure. The former prime minister even went to the extent of calling the process a 'legalised plunder'. It is, however, important to highlight why demonetisation was a critically important disruption that unveiled the depths of the black economy in India.

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Post-demonetisation, one of the major successes of the exercise has been the identification of additional 56 lakh taxpayers who filed e-ITRs between 1 April and 5 August 2017, while for the entire period of 2016-17, a staggering 91 lakh new taxpayers were added to the list. The number is expected to rise further with the implementation of complementary tax reforms. An estimated one crore new taxpayers will be contributing to the country's kitty by 2018.

For those who questioned the rationale of the process on the grounds that 99 per cent of the money came back into the system, it becomes important to highlight that while this may have gone against the government's initial calculations, the return of currency into the system was not as big a failure as is being made out. On the contrary, as previously unaccounted for money was deposited into the system, a large part of it was taxed, making major contributions to the government's kitty. The currency trail was, therefore, significant in the identification of the aforementioned pool of new taxpayers, who remained previously untaxed.

The exercise also helped in identifying a remarkable 3 lakh shell companies that were used for diverting funds and committing tax frauds. A crackdown on such companies was an effective anti-money laundering steps that was made possible by the currency trail identified post-demonetisation. While the usual narrative against the exercise uses the benchmark of “99% cash returned” to chastise the government, the actual benefits accrued from the disruption are brushed aside.

8 months after demonetisation, the implementation of the GST as an indirect tax reform measure is another very important economic reform taken by the government. The GST helped widen the government's tax net to incorporate the previously un-taxed business enterprises. The self-corrective mechanisms incorporated in the GST structure, namely, the input tax credits against double taxation helps squeeze the noose around those who used to pass the tax burden onto the customers/consumers but did not pass on the benefits to the government.

Not only has the implementation of the GST acted as a stepping stone towards the creation of a unified market structure, it has also helped the government identify direct taxpayers. It has expanded the indirect tax base to 6.6 lakh new business agents, previously outside the tax net. Besides, the GST has helped in a greater formalisation of the economy; a process that will ensure minimum wages for workers as well as formal work contracts for labourers that will go a long way in mitigating the evil of labour exploitation.

A greater formalisation of the economy will also help small businessmen keep a real-time record of their tax payments, and help them gain greater access to formalised credit options, thus, ending a previously faced constraint on credit-access. A digital record on the financial health of companies will also streamline investments and ultimately work to the benefit of consumers.

It is no surprise then that through the implementation of demonetisation and GST, within a year the government has announced three major capital-intensive schemes: the Saubhagya scheme to provide last mile electric connectivity to rural households, the Bharatmala scheme to upgrade the infrastructure of the country on a mission mode basis, and the bank recapitalisation scheme to improve the health of ailing public sector banks. While none of these schemes are 'populist' in the true sense, they still cater to the needs of those on the lowest rung of our socio-economic ladder.

To further deepen and widen its tax net, the government now must address the issue of high rates of taxes and bring them down to further encourage a voluntary filing of tax returns. The GST structures will need to be worked out so that filing of returns can be done effectively and easily. The government must be credited for putting a robust feedback mechanism in place. This must be used pro-actively to streamline the financial system by the end of this financial year.

For the rest, it must be remembered that no country can survive on an economic model that rests on a parallel system of white and black money. The unhindered flow from white-to-black-to-white has worked to hollow out our economic system. The government's emphasis on long-term economic reforms and socio-economic restructuring will go a long way in ushering in the idea of clean money. It has also instilled fear among those who choose to evade taxation and boost the morale of those who sustain on purely white incomes. This in itself, is an important moral victory for many.