Research paper: Analysis of the Demonetization and GST Impact on the Indian Economy. Demonetisation and the Goods and Services Tax (GST) are the two major headwinds that held back India's economic growth last year, former RBI Governor Raghuram Rajan has said, asserting that the current seven per cent growth rate is not enough to meet the country's needs.

1. Research Paper Presentation, Singapore Chamber of Commerce, 16th January 2019
Analysis of the Demonetization & Goods and Service Tax impact
Mr Harsh Chitroda Master of Commerce Advanced Accountancy, CBA
Mr Karan Tibrewala Master of Financial Technology, BSE
Abstract
The following paper discusses and highlights the various aspects and significance of
Demonetization & GST that affected every single person of India i.e. politician, businessman,
bureaucrat, laborer, etc. Demonetization done by our honorable Prime Minister Narendra Modi
on 8th November 2016 & GST was launched on 1 July 2017 by the President of India, Pranab
Mukherjee, and the Government of India was with a intention to reduce corruption, black
money & to eliminate tax on tax or double taxation, which cascades from the manufacturing
level to the consumption level from the economy. This double back to back decision shook the
economy for a while, and everybody debated on its impact on Indian economy, business and
different sectors of the economy. The economy has come out of that sudden jerk of cash crunch
and trying to be stabilized. It will take at least 5-6 years to get the complete results of this both
events. This paper is an attempt to find out these short-term impacts of demonetization & GST
on Indian Economy both positive and negative. This study adopts a descriptive, analytical
approach based on secondary data to find out these positive and negative effects of
Demonetization & GST on Indian economy.
Keywords: Demonetization, GST
Objectives
 To highlight out whether government objectives of Demonetization & GST have been
fulfilled.
 To find out positive and negative impacts of Demonetization & GST on Indian Economy.
 To suggest measures to reduce negative impacts and increase positive effects.
Demonetization
Demonetization refers to an economic policy where a certain currency unit ceases to be
recognized or used as a form of legal tender. In other words, a currency unit still loses its legal
tender status as a new one comes into circulation.

2. The opposite of demonetization is “remonetization’’ in which a form of payment is restored as
legal tender. (Not relevant to the scope of the paper).
Demonetization is generally considered to have a good effect in the long-term because it
accelerates the digitization of the economy. If an economy is chiefly cash-based, and there are
large cash-based transactions, then demonetization may promote the digital economy.
Once people deposit their physical cash in their bank account, they are more likely to use digital
modes while making payments. Fake currency is filtered and not allowed to be deposited or
exchanged. This indeed helps the government fight against the problem of fake currency. The
process of demonetization also helps the government to track unaccounted money or cash
whose income tax has not being paid.
Due to demonetization, there is also a likelihood that people who have been hiding their income
will declare their income and pay tax on the same. The banning of high-value currencies also
reduces illegal activities, as most of these types of activities are funded by cash that is gotten
from people engaging in illegal activities.
Demonetization in India
On November 8, 2016, Indian Prime Minister Narendra Modi, in a stunning surprise announced
and declared that 500 and 1,000-rupee notes were to be demonetized. In the interest of
eliminating tax evasion by targeting “black money” hoarders and monetary fraud, a 50-day
target was set for exchanging the old notes for new ones, in theory allowing the cash-dependent
aspects of the Indian economy time to get back on their feet.
The drive for demonetization began as an explicit war against black money in the words of the
government, with references to currency fraud and terror funding interspersed. The underlying
aim was to make the economy less dependent on the paper currency and more inclined towards
the digital platform.
Impacts of Demonetization
Positives: This is by no means an exhaustive list but it gives an indication
 Black money  Real estate cleansing  Counterfeit currency
 Note bank politics  Hawala transactions  Kashmir unrest
Black money: Of the Rs.17 lakh crore of the total currency in circulation in the country,
black money is estimated at mind-boggling Rs.3 lakh crore. Black money is nothing but
plunder of the nation. Black money operators run a parallel economy which shakes the very
foundation of the Indian economy.

3. Note bank politics: Demonetization announcement has come as a shock and awe for the
political parties and politicians for whom black money is a lifeline. The pulling out of the old
Rs.500 and Rs.1000 currency notes will help make the election process clean and transparent.
Real estate cleansing: It is said that real estate is an industry built on black money.
Demonetization move will curtail the flow of black money into the real estate sector, according
to an estimate at least 40 per cent of real estate transactions in Delhi-NCR are in black.
Hawala transactions: Hawala is a method of transferring money without any actual money
movement. The route is used as a means to facilitate money laundering and terror financing.
With demonetization, these operations have come to a halt.
Counterfeit currency: Demonetization has dealt a death blow to the counterfeit Indian
currency syndicate operating both inside and outside the country. A study conducted by Indian
Statistical Institute, Kolkata on behalf of the National Investigation Agency (NIA) suggests
that fake Indian currency notes (FICN) amounting to Rs.400 crore are in circulation in the
country and around Rs.70 crore fake notes are pumped into Indian economy every year.
Kashmir unrest: No stone pelting on security forces has been reported in Kashmir ever
since the demonetization announcement was made. An intelligence estimate suggests that
Pakistan sends Rs.1000 crore annually to the separatists for fuelling unrest in Kashmir.
Terror financing: Terror financing is sourced through counterfeit currency and hawala
transactions. Those illegal counterfeit money are reduced to paper scrap after demonetization.
Negatives: This is by no means an exhaustive list but it gives an indication
 Cash shortage  Stock market crash  Agriculture
 Deaths  Transportation halts  Banking and business
Cash shortage: Of the Rs.17 lakh crore of the total currency in circulation in the country,
black money is estimated at mind-boggling Rs.3 lakh crore. Black money is nothing but
plunder of the nation. Black money operators run a parallel economy which shakes the very
foundation of the Indian economy.

4. Deaths: Demonetization announcement has come as a shock and awe for the political parties
and politicians for whom black money is a lifeline. The pulling out of the old Rs.500 and
Rs.1000 currency notes will help make the election process clean and transparent.
Stock market crash: It is said that real estate is an industry built on black money.
Demonetization move will curtail the flow of black money into the real estate sector, according
to an estimate at least 40 per cent of real estate transactions in Delhi-NCR are in black.
Transportation halts: Hawala is a method of transferring money without any actual money
movement. The route is used as a means to facilitate money laundering and terror financing.
With demonetization, these operations have come to a halt.
Agriculture: Demonetization has dealt a death blow to the counterfeit Indian currency
syndicate operating both inside and outside the country. A study conducted by Indian Statistical
Institute, Kolkata on behalf of the National Investigation Agency (NIA) suggests that fake
Indian currency notes (FICN) amounting to Rs.400 crore are in circulation in the country and
around Rs.70 crore fake notes are pumped into Indian economy every year.
Banking and business: No stone pelting on security forces has been reported in Kashmir
ever since the demonetization announcement was made. An intelligence estimate suggests that
Pakistan sends Rs.1000 crore annually to the separatists for fuelling unrest in Kashmir.
What is Goods and Services Tax (GST)?
The Goods and Services Tax (GST) is a value-added tax levied on most goods and services
sold for domestic consumption. The GST is paid by consumers, but it is remitted to the
government by the businesses selling the goods and services. In effect, GST provides revenue
to the government. GST is levied at every step in the production process but is meant to be
refunded to all parties in the various stages of production other than the final consumer.
Goods and services are divided into five tax slabs for collection of tax - 5%, 12%, 18% and
28%.The tax rates, rules and regulations are governed by the GST Council which consists of
the finance ministers of center and all the states. GST is meant to replace a slew of indirect
taxes with a unified tax and is therefore expected to reshape the country's 2.4 trillion-dollar
economy.

5. GST Launch in India
The GST was launched at midnight on 1 July 2017 by the President of India, Pranab
Mukherjee, and the Government of India. The launch was marked by a historic midnight (30
June – 1 July) session of both the houses of parliament convened at the Central Hall of the
Parliament. Though the session was boycotted by the opposition due to the predicted problems
that it will bound to lead for the middle and lower-class Indians. It is one of the few midnight
sessions that has been held by the parliament. After its launch, the GST rates have been
modified multiple times, the latest being on 22 December 2018, where a panel of federal and
state finance ministers decided to revise GST rates on multiple goods and services. The main
objective of incorporating the GST is to eliminate tax on tax or double taxation, which cascades
from the manufacturing level to the consumption level.
Goods and Services Tax Network (GSTN) software is developed by Infosys Technologies.
GSTN is a nonprofit organization formed for creating a sophisticated network, accessible to
stakeholders, government and taxpayers to access information from a single source. The portal
is accessible to the Tax authorities for tracking down every transaction, while taxpayers have
the ability of connect for their tax returns.
Impact of GST:
Positive Impacts: This is by no means an exhaustive list but it gives an indication
 Increased competitiveness  Greater Tax Revenues
 Increase in Exports  Removes inequalities in markets
Increased competitiveness: The retail price of the manufactured goods and services in
India reveals that the total tax component was around 25-30% of the cost of the product. After
implementation of GST, the prices have gone down, as the burden of paying taxes has been
reduced to the final consumer of such goods and services. There is a scope to increase
production, hence, competition increases.
Increase in Exports: After implementation of GST the exporters are getting full tax credit.
The export units are now able to quote better price for their products and services in comparison
with their past scenario. Increased export will ultimately have positive effect on the BOP

6. (Balance of Payment) of the country which will fill the gap that had fall in the cost of production
in domestic market.
Greater Tax Revenues: A simpler tax structure is bringing about greater compliance,
which increases the number of tax payers and in turn the tax revenues collected for the
government. By simplifying structures, GST would encourage compliance, which is also
expected to widen the tax base.
Removes inequalities between the markets: GST has led to imposition of unique tax
rate on specific goods and services everywhere in the country and by implementing the tax rate
it will removes the inequalities between the market which we can see in the market at present
because of the tax rate differentials. The increase in Foreign Investment with GST in India is
now a unified market and the foreign investment has increased in India. With this tax system,
more foreign companies have attracted towards India.
Negative Impact: This is by no means an exhaustive list but it gives an indication
 Proposed GST Rate > VAT  Effect on working capital
 Dual Control  Effect on price level of goods
Proposed GST Rate Is Higher Than VAT: The rate of GST is proposed to be higher
than the current VAT rate in India, which although reducing the price in the longer run, will be
of no help in cutting down prices of commodities. It has brought down prices and hence the
inflation since it will remove the impact of tax on tax and enable seamless credit.
Dual Control: A business will be indirectly controlled by both the Centre and the State in
all tax related matters. The State will lose autonomy to change the tax rate which will be
regulated by the GST Council.
Effect on working capital: As the firms are supposed to make the payment of the tax on
every transfer the companies working capital requirement will shoots up by proportional to the
purchase of inputs for the value addition. Although prices of goods and products can come
down, service industry will bear the brunt of higher taxes.

7. Effect on price level of goods and services: The proposed GST may lead to increase
the price of essential products and services which are presently exempted from the taxation.
Since GST is mostly related to the manufacturing segment, most manufacturing states may
incur losses. But the government has proposed to compensate for those losses for a period of 5
years.
Research methodology: The type of research method used by the researchers in the paper
is an analytical one, obtained information from a range of sources but focuses on analyzing the
different viewpoints represented from factual rather than opinionated standpoint. The
researcher is using the primary data for the research. At the same time the secondary data is
equally incorporated for the study of the samples and analyzing the information. For the
purpose of this research interviews and other articles published by major news reports and
government entities were used.
Findings
The researcher has following important findings: Demonetization

8.  As the score card says, it’s neck-to-neck now. By the end of the year we will probably be
able to make a sound final judgment - discounting long term effects.
 One needs to see the entire progression of events - Jan Dhan Yojana, Aadhaar Integration,
Demonetization, UPI, Benami Property laws, Bankruptcy Law, GST and hopefully in the
future UBI.
 Demonetization is a move that will surely be remembered for years and debated for decades
but for now, looking at the current facts, it doesn’t show a clear winner.
 I believe in the long run though, the increase in number of tax payers and better accounting
of cash in the system will definitely lead to more revenue for the government. The digital
economy helps more transactions be accounted for, a feature helping IT officials
immensely. NPA straddled banks got some breathing room as well. The GDP of India will
grow faster in medium and long term even though a short term setback is delivered. Big
picture stuff - Look at the government’s entire progression of economic reforms — they all
tell the same story - digitization, eradication of black money and subsidy/welfare reform.
The researcher has following important findings: GST
 The distribution of the GST base among the states is closely linked to the size of their
economies allaying fears of major producing states that the shift to the new system would
undermine their tax collections.
 Data on the international exports of states (the first in India’s history) suggests a strong
correlation between export performance and states’ standard of living.
 India’s internal trade is about 60 percent of GDP, even greater than estimated in last year’s
Survey and compares favorably with other large countries.
 India’s formal sector, especially formal non-farm payroll, is substantially greater than
currently believed.
Conclusion
The researcher has made the following conclusions: Demonetization
As far as demonetization goes, the government had a good idea but planning was poor leading
to a lot of confusion and chaos. Better planning such as not changing sizes of notes(so ATMs
don’t have to be re calibrated) would have speed things up - a larger stockpile of printed
currency and delaying demonetization by a few months(so farmers aren’t affected) would have
probably worked out better.

9. The researcher has made the following conclusions: GST
Now goods not conducive or harmful to the health of people are taxed extra by means known
as 'Sin Tax', or 'deterrent tax'. Thus tobacco and tobacco related items are penalized making
cost of Cigarettes etc. more. Kerala state has started a 'Fat Tax' on Pizza etc. That was to
discourage and even prevent people from falling victims to such habits. That serves a social –
health responsibility of the government. Now they are all out of extra taxation and are taxed as
any other goods. This will pave way for higher social health cost which will only help to
increase further taxation.
The government has not agreed to put any higher cap for tax rates. That very clearly shows that
there is always chance of higher rates of taxes. This will tear away the arguments of those who
say that GST is good.
GST does not do away with or replace all kinds of taxation. It has just merged just a handful
or less different taxes and fused them in one name.
Service tax is subsumed, but all services are included in GST as akin to goods. Those sectors
now excluded may first resist a try to avoid but if compelled will simply transfer the burden on
the final service user. So in effect there will be more items coming under service tax in the
guise of GST.
The supporters of GST claim that litigation on tax matters will be reduced. That is not true. It
depends on how clearly terms of implementation are worded and interpreted. Going from the
experience of 'officialise' or the jargons and clause- in-clause wordings of our laws and rules,
I am not that optimistic. The legal sector itself will be one which may start litigations as now
they also come under service taxes if interpreted correctly.
The service sectors will try to avoid or reduce tax liability by terming the major part of service
costs as reimbursements or revenue expenses etc. which could be got back and tax exemptions
obtained. That can defeat the expectation of higher tax revenue from service sector by GST.
The possible favorable points I see are (a) E commerce will get boost and more respectability.
However as online shopping does not deal in day to day items generally, common man is not
going to get much out of it. Moreover, as of now the scene is controlled by big multinationals.
There will be a little more ease for tax machinery. That is for the government and not for
common man. Retailers have to continue with same formalities as earlier though in different
names and forms.
The inclusion of petroleum products in GST is going to be a boon for the oil companies, which
also mainly goes to the private corporate. Those who had not reduced cost when international

10. price of crude fell by more than half cannot be expected to reduce costs by a small cosmetic
change in taxa mechanism. This will actually lead to more price rise only.
As price control is not there GST will not prevent the manufacturers or providers from taking
extra profit obtained from the subsuming of excise, service tax etc. Thus, my ultimate inference
is that GST will be beneficial to corporate manufacturers, traders and service providers. It has
come out of the necessity of bringing investment especially in regard to 'Make in India' as the
FDI investors need concession and benefits. There is not even an iota of intention or aim of
benefit and help to common man.
The only prayer is that let things not go worse to the common man who is already suffering
and seeing the real color of the government of not reducing even one rupee in railway tickets,
but making railways also a greedy commercial corporate entity.
References
 Article on advantages and dis-advantages of GST published by India Fillings, April, 2017
 Report on impact of GST on Indian economy published by Clear Tax, 12th June 2018
 Interview with Ramnik Stationary Store, Mumbai; dated: 12 October, 2018
 Detailed Report on GST showing its Impact was published on12th March 2018
 Paper Report published by Gstax Guru on 31st July 2017
 Book published: The Big Reverse: The Big Reverse: How Demonetization Knocked India,
Meera H. Sanyal , Originally published: 10 November 2018
 Book by C. P. Chandrasekhar, Jayati Ghosh, and Prabhat Patnaik, Demonetisation
Decoded: A Critique of India's Currency Experiment, Originally published: 2017
 Article published in Bloomberg Quint, The Two Puzzles Of Demonetisation - An Excerpt
From Arvind Subramanian’s Book ‘Of Counsel’ ; dated: Nov 29 2018
 Article published in Sunday Guardian Live, Demonetisation was suggested by Bill and
Nandan by Sunil Chacko, dated: January 5, 2019
 Article published on Bloomberg online portal “99.3% Of Demonetized Money Returns To
RBI, Report Shows’’ by Vishwanath Nair; dated: August 29, 2018
 Interview with Mr. Sunil Bhatia, Assistant Manager IDFC Bank, Mumbai; dated: 15
November, 2018
 Interview with Pratik Kanabar (ICWA, CIMA), Cipla Inc., Mumbai; dated: 18 October,
2018
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