The large-scale withdrawal of currency notes from circulation in India has implications for the impending GST to be adopted by the country.
The large-scale withdrawal of currency notes from circulation in India has implications for the impending GST to be adopted by the country. There are concerns over whether the expected contraction in economic activity following demonetisation will impact state revenues adversely. As the finance ministers of West Bengal and Kerala have noted, demonetisation is adversely affecting state revenues given the decline in collections from many relying heavily on cash transactions such as hotels & restaurants, transport, entertainment, tobacco, etc. The argument that the GST would come in at a time when several state revenues are already reducing can lead to demands for greater coverage of state revenue losses by the Centre. It might also provide the ground to some states to delay implementation of the GST.
Even if the GST kicks off on its scheduled date of April 1, 2017, the demonetisation experience has brought to light some of the challenges the implementation of the GST is going to face. Foremost among these is the capability of the technological infrastructure. Indeed, plunging into the GST without adequate technological preparedness might be counterproductive.
By now, most agree that while the objective of demonetisation was well-meaning, the authorities overestimated the capacity of domestic institutions for handling the ‘shock’ impact of withdrawal of more than 80% of the currency in circulation. The importance of settling very basic issues like recalibration of ATMs for dispensing new currency notes and equipping retail outlets and vendors for accepting plastic money was grasped only a few days after the withdrawal of notes and panic reaction from public. It can be argued that the banks were unaware of the move and taken by surprise. But the cash crunch actually compounded problems faced by people under normal circumstances for withdrawing such as ATMs reporting inability on several occasions to dispense cash, the need to repeatedly insert cards in these machines before the latter respond to the magnetic stripes, and the touch-screens of many ATMs being only partly sensitive to finger taps. For an already struggling digital infrastructure in many parts of the banking system, coping with the cash crunch has been an onerous task. On the other hand, frustrations have been high among many trying to use mobile wallets as unexpectedly high server traffic has led to delays in materialisation of transactions.
The success of the GST in ensuring a common market for goods and services in the country depends how efficiently various actors in the GST game are able to lock on to its technological apparatus. The number of actors involved in the process are huge. Apart from banks and financial institutions, the GST administration would involve manufacturers, traders, wholesalers, retailers, e-commerce operators, mobile and data service providers and, most importantly, central and state tax administration authorities. The GST network for enabling the technological infrastructure of the GST in the country would require, among other things, facilitating two-way data flows between the Centre and states. This by itself is a humongous exercise, made more complicated by the fact that the GST would require crediting of taxes paid at every stage of the supply-chain to the next user.
Managing demonetisation has been simple in one sense. The onus of performance has been on the banks. Post-demonetisation, the government-public interface has been limited to banks. No central or state government department has directly figured in the interface. The GST is going to be very different. For a long time, GST-sceptics have been pointing to the differential abilities and varied preparedness of states to take on GST as one of the major reasons for the commercial chaos that might follow its implementation.
With less than four months to go for bringing in the GST, the demonetisation experience has brought to light the great importance of various agencies reaching a common minimum level of technological preparedness and user knowledge for administering the GST. Such lack of preparedness can well create odd situations similar to those experienced during demonetisation like inability of ATMs to disburse new currency notes due to delay in recalibration. The risk of technological disequilibrium is high for GST given that all states are yet to agree to it. Though the consent of the minimum number of states necessary for getting the GST going has been obtained, flagging off the GST regime in a fiscal federation where not all states are party to it, might lead to greater complications.
At a time when demonetisation has ordained the economy and its actors to change their style of functioning to more cashless modes, the GST will add its own rules of the game. Before adding the latter, it is probably important to be as granular as possible in ascertaining the technological preparedness for implementing these rules. There is no harm in a few months’ delay for launching the GST if the technological preparedness across the country is not up to the mark.