The difference between India and a developed country is that the latter has less cash-based activities, explained Srinivas Thiruvadanthai, Director of Research, Jerome Levy Forecasting Center. In India, 86% of the market activity is still dependent on cash.
In an interview with Bloomberg, Srinivas Thiruvadanthai said that due to the efforts of the government to formalise the economy through the GST and demonetisation, the tax to GDP ratio is now at near record level. He said that counties that have hard currency are developed nations and have deep financial markets and a lot of financial assets, and India is making efforts towards such formalisation.
“First thing, the government has done is to try and formalise the economy. There are a number of steps, they have taken… In the case of GST, they are enforcing it through electronic payment and the input tax credit. So if businesses are paying taxes and they have to claim the ITC, they want their supplier, even if it is a small supplier, on the network. Otherwise, they are not going to get the input credit,” Srinivas Thiruvadanthai.
On being asked if these initiatives are working in India, Srinivas Thiruvadanthai said that they have helped in increasing the country’s tax buoyancy. “Tax buoyancy is working; tax to GDP is now at near record level. Even as the Gdp is not growing so fast, there is nice buoyancy in the tax numbers.
The GST is settling down, other things post-demonetisation, like the trends you have seen, is that digital transactions are increasing dramatically. More importantly, people are putting more money in mutual funds, life insurance products,” he said.
India’s tax to GDP ratio witnessed a dramatic surge after 2016. The Narendra Modi government announced demonetisation in November 2016, which was followed by the implementation of the Goods and Services Tax (GST) in July 2017. The GST subsumed over a dozen taxes of the previous regime.
A report by rating agency Crisil also noted that large informal sector in India made the country poor tax compliant. “But this is starting to change, given some notable moves from the Modi government,” the report said.