HSBC report reveals that GST did not formalise, but failed the economy

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A British brokerage report revealed on Friday that a year into the implementation of Goods and Services Tax (GST) did not formalise the economy as it had earlier promised and has however, led to increase in the demand of cash.

“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.”

The report also said that in the long term, GST would lead to formalisation in the economy. At the moment, it had gone back to the pre-note ban levels.

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“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 stated.

According to the report, the cash in circulation was rising above the trend because of a revival in the ‘informal’ sectors due to a continued remonetisation.

Before demonetisation, rural wages used to be the key driver of cash demand, but the relationship for now was ‘broken’.

“As much as 70 per cent of rural India, whose main source of income is wages, may not be doing too well at present. As such, growing of cash in circulation should be tempered. But, instead, the cash-to-GDP ratio has shot up since mid-FY18,” the report stated.

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The report also charted the fall of tax evasions and informality once GST would become comfortable in the Indian context.

“Rural wages will rise on higher inflation, stronger construction growth, normal rains and minimum support price increases which can put pressure on cash in circulation growth,” the report said.

GST was implemented w.e.f July 1, 2017 and has undergone lowering of tax rates of many items and an increase in the numbers of cesses and the levy rate which earlier had to be done away with the implementation of this tax regime.


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