Demonetisation should not be used as an excuse to delay GST, if anything it should expedite GST


The latest GST council meetings have fallen short of expectation. Lack of consensus on the issue of tax administration or ‘dual control’ means that the April 1, 2017 deadline for GST implementation looks unachievable. A few states also believe that GST should be deferred due to the ongoing demonetisation drive.

These states argue that they cannot absorb the impact of two ‘major disruptions’ – demonetisation and GST – simultaneously. This is interesting, because GST was hardly seen as a ‘disruption’ before the currency ban.

So, should demonetisation be a ground for delay in implementation of GST?

A closer look at facts suggest otherwise. At a conceptual level, one of the primary objectives of both demonetisation and GST is to check tax evasion. Demonetisation does it by bringing a larger part of economy under banking channels, GST is proposing to do it by tracking all business transactions through the GST Network (GSTN) system. So, GST should complement measures to curb black money.

Some economists make the point that small businesses are most impacted by demonetisation and they would not be able to align themselves with GST so quickly. There is hardly any merit in this argument. In GST, there is a proposal to exempt small businesses upto annual sales of Rs 20 lakh (10 lakh for northeastern states). Further, those in the range Rs 20-50 lakh would have the option to pay composition tax at a flat rate, without claiming credits and maintaining detailed paperwork.

These small businesses will hardly be impacted by GST. It’s relevant to point out that agricultural produce would be kept out of GST as well. Larger businesses were anyway expected to prepare for GST, with or without demonetisation. In fact they look forward to savings, which GST-led efficiencies are expected to bring about.

These businesses are used to making tax payment online, also mandatory under current excise and service tax laws. Further, they can make GST payment through debit and credit cards as well, which will further simplify the tax payment process. In any case GST is now likely to be delayed by at least 3 months or so, which gives businesses more time to prepare for it.

From state governments’ perspective, admittedly, demonetisation could lead to drop in tax revenues (primarily VAT) in the current year, due to lower sales that many companies are experiencing, particularly those dealing with FMCG or consumer products. However, such a revenue loss is fully protected by the Centre for a period of 5 years of GST implementation.

Further, the base year to be taken for arriving at the state tax revenues is 2015-16, before demonetisation. For every year thereafter, a minimum annual growth of 14% has been assumed. Therefore, even assuming that state revenues drop in 2016-17 due to demonetisation by say 20%, they would continue to get compensation on the basis of base year 2015-16 plus 14%.

It only means that the quantum of compensation might increase for the Centre due to less than normal revenue collection by states. Thus the Centre needs ways to collect additional revenue. In the last GST council meeting, a consensus has already been reached that alternative sources to fund the additional compensation should be explored by the Centre.

For the Centre, while excise and customs duty collections may drop initially (due to fall in demand after demonetisation), they could make up the shortfall by higher collection of income tax as a significant part of parallel economy is expected to come within the tax net, as we go forward.

For consumers, GST is decidedly a better system of taxation – simple and transparent. There is an expectation that GST would bring down the prices of most products of general usage. The government’s proposal to introduce an ‘anti profiteering’ clause in the revised draft of GST laws would mean that businesses would be forced to pass on the benefit accruing to them on account of GST, even though implementation of such a provision could be a challenge. Drop in prices would spur demand, which is exactly what the doctor ordered to deal with demonetisation’s fallout.

So demonetisation should not delay GST, if anything it should expedite GST. Most definitely, it cannot be used as a scapegoat for derailing the GST bandwagon.


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