How GST is Revolutionizing India's Tax System and Curbing Black Money
Introduction to GST (Goods and Services Tax) and its impact on black money in India.
Understanding the Dynamics of Black Money in India
For decades, India has struggled with a parallel black money economy that has permeated various sectors. This shadow economy thrives on cash transactions, making it difficult for authorities to track and tax. The demonetization of high-value currency notes in 2016 brought this issue to the forefront, leading to a significant reduction in cash transactions. However, the challenge lies in maintaining this progress and ensuring long-term sustainability in tax compliance.
Impact of GST on Black Money
The Goods and Services Tax (GST) reform, being one of the largest indirect tax overhauls post-independence, is set to play a vital role in curbing black money. By introducing a comprehensive tax system that integrates all indirect taxes, GST aims to make it easier to track economic activities and reduce the incidences of unreported or underreported transactions.
The Role of GST in Curbing Cash Transactions
Post-demonetization, several traders and businessmen are highly apprehensive about dealing in cash. The number of Information Technology (IT) notices issued during the demonetization period, under 'Operation Clean Money,' have continued to deter people from keeping cash. Despite the willingness to transact and pay taxes, many remain hesitant due to the fear of past activities coming under scrutiny. For instance, a trader who has avoided registration under certain indirect tax structures may no longer feel safe registering in the old tax regime.
The introduction of GST provides a fresh start, incentivizing traders to register and comply with tax laws. The psychological impact of GST, combined with the timing of the demonetization, sets the stage for a new era of transparent transactions. Traders and businesses who have traditionally avoided tax may now be more willing to comply, given the fear of future shocks.
Features of GST that Enhance Tax Compliance and Discourage Black Money
1. **Comprehensive Transaction Tracing:** - **Value Chain Visibility:** GST mandates the recording of every transaction across the value chain. This creates a continuous and transparent trail, making it impossible to conceal sales or purchases. Previously, traders could easily wipe off purchases or sales off their books, but this loophole is closed with GST.
2. **Input Credit Availability: - **Encouraging White Money:** Earlier, the procurement of services and raw materials was often done in cash to avoid taxes. Under GST, input credit is provided on all such expenditures. For example, a company that has historically procured services in cash to avoid service tax can now benefit from the credit on the service tax. This encourages them to switch to white money transactions and record all activities.
3. **Seamless Integration of Direct and Indirect Taxes: - **Enhanced Scrutiny:** The GST registration number is linked to the PAN number, ensuring that tax data from indirect taxes directly supports the direct tax system. This integration makes it difficult to conceal income under any form of taxation. Previously, multiple indirect taxes were isolated and did not interact with the direct tax system, allowing for evasion.
Impact on Traditionally 'Black Economy' Sectors
Traditionally, sectors such as gold, silver, real estate, and other cash-intensive businesses have been prime grounds for generating and storing black money. However, with the introduction of GST, these sectors are now brought under the purview of the tax system. All transactions in these sectors are linked to individual PAN numbers, ensuring closer scrutiny and reducing the potential for black money conversion.
Conclusion:
In conclusion, the Goods and Services Tax, combined with the aftermath of demonetization, presents a transformative opportunity for curbing black money in India. By creating a robust and interconnected tax system, GST ensures that all economic activities are transparent, reducing the opportunities for unreported or undeclared transactions. As a result, the economic context and the structural features of GST are poised to significantly contribute to a more transparent and tax-compliant economy.