GST AND DOMONETIZATION – MY TAKE: By CA Rashmi Jain

1.       There is no correlation or corroborative research conducted showing interrelationship between demonetization and GST introduction.  Even though economists agree that GST is a good economics for India; but demonetization has still to prove itself as a good economics strategy.

2.       One thing is sure, My Take view, is that GST success will be and is always dependent upon the transactions routed through books and if cash transactions are restricted and cashless transactions are encouraged or legally forced upon the traders; then GST will garner revenues beyond anyone’s expectations.  Just before GST sees light of the day in April 2017; this move may prove a “game changer” not only to unearth the black money; so to say, but also create enough fear in the minds of trading community that either they follow the law; book all purchases and sales through books and pay the due taxes; OR, they move out of the system.  Take or leave it or Love me or Leave Me approach – a choice the traders and SMEs will have to make.  With currency in circulation may be intentionally restricted, the GST system will leave no one untouched and all transactions will have to be recorded and due tax paid, as is required by the Constitution of India.  More so, when the consumers buy, who are not B2B(Business to business), the revenue earnings will be huge.  Since the consumers pay by cheque or one line or through any other means, other than cash, the seller will have no choice but to record the transitions and hence pay the tax. Hence, my take is  GST is a good economics and Demonetization will make it better.

On direct tax front too, this will change the game.  People who have benami properties; luxury cars purchased benami; live on posh houses without paying consequential income tax; must worry now.  If your Balance Sheet is not healthy; start worrying and make it healthy on ASAP basis. My Take is income tax collection may take time to garner Demonetization benefit; but it will happen.  In the short run income itself may be affected and hence tax payments may also come down. But once law takes its full circle and economy booms, as is expected, direct tax collections will also go up as all incomes and expenditures will have to be booked;  NO WAY OUT

3.       Undoubtedly, demand is expected to be affected to an extent; economy may be sluggish in the initial few months.  Particularly, demonetization shall affect Consumer Goods ( normally bought in cash); real estate and property ( the cash portion that attracted no taxes – indirect or direct will dither away now, though perforce); Gold and Luxury goods ( jewelers are already on hit list, perhaps rightly so – and luxury goods like LCD; Apple high end phones; laptops, high end HD Television sets; luxury clothing and foot wear; luxury travel equipment; luxury furniture and lighting; precious metal utensils etc etc ); and Automobiles to some extent, especially in the entry level cars where cash payments were huge. There may be other sectors like eating joints; luxury restaurants, liquor bars where cash was prevalent to a very large extent.  These are sectors for rich and famous but high value and bread earners for Revenue Departments.  Above all the liquor industry will suffer the maximum as liquor is mostly purchased in cash.

4.       Supply remaining constant, demand being pulled down due to lack of liquidity and easy money, price level must come down. This is demand driven fall especially due to cash transactions becoming difficult.  Cards and other online modes of payments are not used by large section of India – in rural economy for example.  Even in cities people who know income tax provisions, they refrain from buying on line and make e-payments as such payments would include an element of income tax as well.  Definitely bad economics if these are purchased from the legitimate income.

 Real Estate, My Take, feels will be the worst sufferer as the real estate industry has never prepared itself for such statutory and forced eventualities.

5.       Unless the cash situation improves to the comparable state as of today; I feel many sectors will face negative impact; especially the agriculture and its allied sectors; small traders ( who mostly deal in cash ); small and medium enterprises ( due to cash transactions for purchases and sales); service sector ( consumer based and industry based, both); households ( only most essential requirements shall be purchased and the rest deferred especially the household durable goods); professionals ( who normally are paid in cash and who deal with consumers and not the corporate sector); day to day utility service providers like carpenters; plumbers; mechanics etc. and above all organized retail outlets who transaction mix was in favor of cash rather than plastic money.  Checks may not be accepted at all by the trade.

6.       E commerce companies may also suffer and their Deewali honeymoon sales may be over no sooner than they thought.  Alternative use of money, other than cash, is prevalent in younger generation and people who understand tax economics refrain from buying only all those things that relate to fashion, electronics; personal belongings.  I seem demand to drop significantly unless COD facilities are workable again.

Last but not the least; political parties will be severally hit.  Cash collection up to 20k, without a receipt, will virtually dry down.  No one is going to hand over their new currency, obtained after wasting a number of working hours, and hand over the same to them.  Politicians therefore may suffer and start travelling by busses or trains rather than business class travel by air.

Concluding; GST is a good economics; but demonetization perhaps may not be that good an economics as is being thought out.  Will it affect GST implementation; let’s keep our fingers crossed?