Economy: June 2021 Current Affair | Indian Economy for State PSC Exams - BPSC (Bihar) PDF Download

 Page 1


 
17                                                                                                                                                        
Reverse Charge Mechanism  
• The GST has to be typically paid by the 
supplier of goods and services. But in some 
cases, the liability to pay the tax falls on 
the buyer. This is called reverse charge.  
• This is only applicable in certain instances 
e.g. when a business buys goods or 
services from a supplier who is not 
registered to pay GST or in cases of import. 
3. ECONOMY 
3.1. 4 YEARS OF GST 
Why in news? 
Recently, India marked the fourth anniversary of the 
Goods and Services Tax (GST).  
About Goods and services Tax 
• GST is a single domestic indirect tax law for the 
entire country levied on the supply of goods and 
services.  
• It is a comprehensive, multi-stage, destination-
based tax that is levied on every value 
addition.  Under GST, several indirect taxes like 
excise duty, VAT, service tax, luxury tax etc. have 
been subsumed. 
o However, several goods like Property Tax & 
Stamp Duty, Electricity Duty, Excise Duty on 
Alcohol, Basic Custom Duty, Petroleum crude, 
Diesel, Petrol, Aviation Turbine Fuel, Natural 
Gas, etc are not covered under GST. 
• It has multiple slabs- 5%, 12%, 18%, 28% with 
different products classified in them. Apart from 
these, GST on gold is 3% and 0.25% on semi-
precious and rough stones. 
o Also, a minor portion of all goods and services 
under the GST regime does not invite any tax, 
including different salt types, sanitary napkins etc. 
• GST rates are decided mutually by States and Center via 
GST Council. 
• The GST is levied at every stage of the production process 
but is collected from the point of consumption (Reverse 
Charge Mechanism), refunding all parties eventually other 
than the end consumer. 
Achievements of GST 
• Widening of India’s tax base: Tax base has almost doubled 
from 66.25 lakhs to 1.28 crores in the last four years (2017-
2021).  
• Increase in GST revenue collection: Revenue collection has 
been over the Rs 100,000 crore mark for eight consecutive 
months in a row. The revenue collection in FY 2019-20 
soared by 42% as compared to the collections made in FY 
2016-17. 
• Ease of compliance: It has also brought in efficiencies in 
indirect tax compliances and reduced the number of 
indirect tax authorities that business needed to interact 
with.  
o “E-Invoicing” has also ensured that a trade invoice is 
identified by a unique identification number which is 
generated by automated government-backed online portals. 
• Increased Logistics efficiency: GST has eliminated all the inter-state barriers by removing check-posts, 
introducing a nationwide e-way bill, eliminating the entry tax. Thus, it has reduced transit time of movement 
Page 2


 
17                                                                                                                                                        
Reverse Charge Mechanism  
• The GST has to be typically paid by the 
supplier of goods and services. But in some 
cases, the liability to pay the tax falls on 
the buyer. This is called reverse charge.  
• This is only applicable in certain instances 
e.g. when a business buys goods or 
services from a supplier who is not 
registered to pay GST or in cases of import. 
3. ECONOMY 
3.1. 4 YEARS OF GST 
Why in news? 
Recently, India marked the fourth anniversary of the 
Goods and Services Tax (GST).  
About Goods and services Tax 
• GST is a single domestic indirect tax law for the 
entire country levied on the supply of goods and 
services.  
• It is a comprehensive, multi-stage, destination-
based tax that is levied on every value 
addition.  Under GST, several indirect taxes like 
excise duty, VAT, service tax, luxury tax etc. have 
been subsumed. 
o However, several goods like Property Tax & 
Stamp Duty, Electricity Duty, Excise Duty on 
Alcohol, Basic Custom Duty, Petroleum crude, 
Diesel, Petrol, Aviation Turbine Fuel, Natural 
Gas, etc are not covered under GST. 
• It has multiple slabs- 5%, 12%, 18%, 28% with 
different products classified in them. Apart from 
these, GST on gold is 3% and 0.25% on semi-
precious and rough stones. 
o Also, a minor portion of all goods and services 
under the GST regime does not invite any tax, 
including different salt types, sanitary napkins etc. 
• GST rates are decided mutually by States and Center via 
GST Council. 
• The GST is levied at every stage of the production process 
but is collected from the point of consumption (Reverse 
Charge Mechanism), refunding all parties eventually other 
than the end consumer. 
Achievements of GST 
• Widening of India’s tax base: Tax base has almost doubled 
from 66.25 lakhs to 1.28 crores in the last four years (2017-
2021).  
• Increase in GST revenue collection: Revenue collection has 
been over the Rs 100,000 crore mark for eight consecutive 
months in a row. The revenue collection in FY 2019-20 
soared by 42% as compared to the collections made in FY 
2016-17. 
• Ease of compliance: It has also brought in efficiencies in 
indirect tax compliances and reduced the number of 
indirect tax authorities that business needed to interact 
with.  
o “E-Invoicing” has also ensured that a trade invoice is 
identified by a unique identification number which is 
generated by automated government-backed online portals. 
• Increased Logistics efficiency: GST has eliminated all the inter-state barriers by removing check-posts, 
introducing a nationwide e-way bill, eliminating the entry tax. Thus, it has reduced transit time of movement 
 
18                                                                                                                                                        
of goods within the country. As per an estimate more than 50% of logistics effort and time is saved in GST 
regime. 
• Impact on transaction costs: In previous regime, all the interstate transactions had an additional cost of 2% 
(Central Sales Tax), which post GST has now been reduced to 0%. This has reduced the transaction cost 
significantly. 
• Reinforced Cooperative Federalism: GST council has emerged as a successful example of cooperative 
federalism and its functioning has been free from political biases. 
• Increase in Transparency: Taxpayers can track their compliances online on the GST Portal. Also, they can 
easily get the basic information about any business by entering the respective PAN or GSTIN which has 
increased transparency in the system. 
Challenges 
• Overestimation of GST collection: In the initial year government has overestimated the GST collection, 
which was not fulfilled, and hence created a sense of failed taxation regime.   
• Complex tax slabs: The complex slab structure and continually switching between them has created an 
undesired confusion in the compliance system. Additionally, fluctuating tax rates often led to unethical 
profiteering practices. 
• Cumbersome filing structure: The current GST return filing structure is complex and cumbersome and put 
too much onus on the taxpayer. The requirement to possess a valid tax invoice/debit note, actual receipt of 
goods/service by the recipient, tax submission at each level by different seller etc., has deprived the nation 
of seamless tax regime. 
• Ambiguous and conflicting AAR judgments: Conflicting rulings from various benches of the Appellate 
Authority for Advance Ruling across different States has led to confusion among taxpayers. Additionally, 
more than 80% of rulings, since the establishment of the AARs, have 
been revenue biased, leading to disgruntled taxpayers.  
• Cracking down on tax evasion and tax fraud: GST tax evasion and tax 
fraud, including use of fraudulent invoices, fake e-way bills, etc has led to 
massive losses in revenue collection.  
o A news report in March 2020 states that India has faced over 
?70,000 crore worth of losses due to tax evasion. 
• Expanding the GST purview: Many commodities, especially fuel and 
alcohol are not under the GST purview mainly due to Centre and State 
being at loggerhead over revenue collections.  
o The Centre and states have been increasingly dependent on excise 
duties on petroleum products to shore up their revenues. Hence, the 
GST council has been reluctant to discuss the matter, as around 30 
per cent of the states’ revenue comes from excise duties on petrol 
and diesel. 
• Concerns related to compensation to states: The pandemic and 
lockdown have intensified the problem of revenue shortfall for States 
and the Centre, thus leading to the Centre’s inability to pay the dues to states on time. This has led to 
tensions in cooperative federalism, with states getting disenchanted with the system. 
o Also, Central Government’s over reliance on Cess and Surcharges has undermined the constitutional 
arrangement related to fiscal federalism.   
• Delay in reforms: Falling revenue amid disruptions caused by the pandemic is said to have continuously 
delayed reforms related to revision of tax slabs, robust compliance regime, etc., has made GST regime 
lackluster. 
• Transitional Issues: Even after four years, many assesses are still experiencing technical/legal issues as a 
result of the transition from the old to the new GST system. 
Way Forward 
• Simpler tax structure: A simpler tax slab structure limiting commodities to three tax slabs is the need of the 
hour. Experts have recommended a three-slab structure that will help rationalize this indirect tax system. 
• Optimising digital resources: It can help accelerate the process of claiming input tax credit. It can also 
increase the capacity of the portal to handle higher numbers of data processing.   
Page 3


 
17                                                                                                                                                        
Reverse Charge Mechanism  
• The GST has to be typically paid by the 
supplier of goods and services. But in some 
cases, the liability to pay the tax falls on 
the buyer. This is called reverse charge.  
• This is only applicable in certain instances 
e.g. when a business buys goods or 
services from a supplier who is not 
registered to pay GST or in cases of import. 
3. ECONOMY 
3.1. 4 YEARS OF GST 
Why in news? 
Recently, India marked the fourth anniversary of the 
Goods and Services Tax (GST).  
About Goods and services Tax 
• GST is a single domestic indirect tax law for the 
entire country levied on the supply of goods and 
services.  
• It is a comprehensive, multi-stage, destination-
based tax that is levied on every value 
addition.  Under GST, several indirect taxes like 
excise duty, VAT, service tax, luxury tax etc. have 
been subsumed. 
o However, several goods like Property Tax & 
Stamp Duty, Electricity Duty, Excise Duty on 
Alcohol, Basic Custom Duty, Petroleum crude, 
Diesel, Petrol, Aviation Turbine Fuel, Natural 
Gas, etc are not covered under GST. 
• It has multiple slabs- 5%, 12%, 18%, 28% with 
different products classified in them. Apart from 
these, GST on gold is 3% and 0.25% on semi-
precious and rough stones. 
o Also, a minor portion of all goods and services 
under the GST regime does not invite any tax, 
including different salt types, sanitary napkins etc. 
• GST rates are decided mutually by States and Center via 
GST Council. 
• The GST is levied at every stage of the production process 
but is collected from the point of consumption (Reverse 
Charge Mechanism), refunding all parties eventually other 
than the end consumer. 
Achievements of GST 
• Widening of India’s tax base: Tax base has almost doubled 
from 66.25 lakhs to 1.28 crores in the last four years (2017-
2021).  
• Increase in GST revenue collection: Revenue collection has 
been over the Rs 100,000 crore mark for eight consecutive 
months in a row. The revenue collection in FY 2019-20 
soared by 42% as compared to the collections made in FY 
2016-17. 
• Ease of compliance: It has also brought in efficiencies in 
indirect tax compliances and reduced the number of 
indirect tax authorities that business needed to interact 
with.  
o “E-Invoicing” has also ensured that a trade invoice is 
identified by a unique identification number which is 
generated by automated government-backed online portals. 
• Increased Logistics efficiency: GST has eliminated all the inter-state barriers by removing check-posts, 
introducing a nationwide e-way bill, eliminating the entry tax. Thus, it has reduced transit time of movement 
 
18                                                                                                                                                        
of goods within the country. As per an estimate more than 50% of logistics effort and time is saved in GST 
regime. 
• Impact on transaction costs: In previous regime, all the interstate transactions had an additional cost of 2% 
(Central Sales Tax), which post GST has now been reduced to 0%. This has reduced the transaction cost 
significantly. 
• Reinforced Cooperative Federalism: GST council has emerged as a successful example of cooperative 
federalism and its functioning has been free from political biases. 
• Increase in Transparency: Taxpayers can track their compliances online on the GST Portal. Also, they can 
easily get the basic information about any business by entering the respective PAN or GSTIN which has 
increased transparency in the system. 
Challenges 
• Overestimation of GST collection: In the initial year government has overestimated the GST collection, 
which was not fulfilled, and hence created a sense of failed taxation regime.   
• Complex tax slabs: The complex slab structure and continually switching between them has created an 
undesired confusion in the compliance system. Additionally, fluctuating tax rates often led to unethical 
profiteering practices. 
• Cumbersome filing structure: The current GST return filing structure is complex and cumbersome and put 
too much onus on the taxpayer. The requirement to possess a valid tax invoice/debit note, actual receipt of 
goods/service by the recipient, tax submission at each level by different seller etc., has deprived the nation 
of seamless tax regime. 
• Ambiguous and conflicting AAR judgments: Conflicting rulings from various benches of the Appellate 
Authority for Advance Ruling across different States has led to confusion among taxpayers. Additionally, 
more than 80% of rulings, since the establishment of the AARs, have 
been revenue biased, leading to disgruntled taxpayers.  
• Cracking down on tax evasion and tax fraud: GST tax evasion and tax 
fraud, including use of fraudulent invoices, fake e-way bills, etc has led to 
massive losses in revenue collection.  
o A news report in March 2020 states that India has faced over 
?70,000 crore worth of losses due to tax evasion. 
• Expanding the GST purview: Many commodities, especially fuel and 
alcohol are not under the GST purview mainly due to Centre and State 
being at loggerhead over revenue collections.  
o The Centre and states have been increasingly dependent on excise 
duties on petroleum products to shore up their revenues. Hence, the 
GST council has been reluctant to discuss the matter, as around 30 
per cent of the states’ revenue comes from excise duties on petrol 
and diesel. 
• Concerns related to compensation to states: The pandemic and 
lockdown have intensified the problem of revenue shortfall for States 
and the Centre, thus leading to the Centre’s inability to pay the dues to states on time. This has led to 
tensions in cooperative federalism, with states getting disenchanted with the system. 
o Also, Central Government’s over reliance on Cess and Surcharges has undermined the constitutional 
arrangement related to fiscal federalism.   
• Delay in reforms: Falling revenue amid disruptions caused by the pandemic is said to have continuously 
delayed reforms related to revision of tax slabs, robust compliance regime, etc., has made GST regime 
lackluster. 
• Transitional Issues: Even after four years, many assesses are still experiencing technical/legal issues as a 
result of the transition from the old to the new GST system. 
Way Forward 
• Simpler tax structure: A simpler tax slab structure limiting commodities to three tax slabs is the need of the 
hour. Experts have recommended a three-slab structure that will help rationalize this indirect tax system. 
• Optimising digital resources: It can help accelerate the process of claiming input tax credit. It can also 
increase the capacity of the portal to handle higher numbers of data processing.   
 
19                                                                                                                                                        
• Robust compliance regime: To catch the tax evaders indulge in unethical and illegal tax practices the 
Government should focus on creating a robust, technology driven intelligent GST system.  
• Focus on Cooperative federalism: The Centre needs to urgently figure out and put to rest the battle 
between the Central and State Governments on sharing of revenue collections.  
3.2. DIRECT MONETISATION OF THE FISCAL DEFICIT 
Why in news? 
There is a debate whether India should undertake direct monetisation of the deficit by Reserve Bank of India 
(RBI), given the hurt to its economy caused by second wave of Covid-19 infections.  
More on the news 
• India has recorded a fiscal deficit of 9.3% of GDP in 2020-21 and for 2021-22, the deficit has been put at 6.8 
per cent of the GDP. 
o This is mainly due to rise in expenditure to mitigate the fallout of pandemic and moderation in revenue 
and low tax collection due to COVID 19 induced economic slowdown.  
• Thus, there have been debates on how to finance the growing fiscal deficit given the need to provide 
additional stimulus to the Indian economy amid the ongoing pandemic. 
What is Fiscal deficit and how is it financed? 
• Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital 
receipts) and its total expenditure. It occurs when the government’s expenditure exceeds its income. 
Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government 
(Revenue receipts + recovery of loans + other receipts) 
• Typically, governments have two basic choices for financing their fiscal deficits: they can borrow (issue debt) 
or raise taxes.  
• Alternatively, the central bank can print currency for the government to bridge its fiscal deficit, which is 
known as monetisation of deficit. 
 
Page 4


 
17                                                                                                                                                        
Reverse Charge Mechanism  
• The GST has to be typically paid by the 
supplier of goods and services. But in some 
cases, the liability to pay the tax falls on 
the buyer. This is called reverse charge.  
• This is only applicable in certain instances 
e.g. when a business buys goods or 
services from a supplier who is not 
registered to pay GST or in cases of import. 
3. ECONOMY 
3.1. 4 YEARS OF GST 
Why in news? 
Recently, India marked the fourth anniversary of the 
Goods and Services Tax (GST).  
About Goods and services Tax 
• GST is a single domestic indirect tax law for the 
entire country levied on the supply of goods and 
services.  
• It is a comprehensive, multi-stage, destination-
based tax that is levied on every value 
addition.  Under GST, several indirect taxes like 
excise duty, VAT, service tax, luxury tax etc. have 
been subsumed. 
o However, several goods like Property Tax & 
Stamp Duty, Electricity Duty, Excise Duty on 
Alcohol, Basic Custom Duty, Petroleum crude, 
Diesel, Petrol, Aviation Turbine Fuel, Natural 
Gas, etc are not covered under GST. 
• It has multiple slabs- 5%, 12%, 18%, 28% with 
different products classified in them. Apart from 
these, GST on gold is 3% and 0.25% on semi-
precious and rough stones. 
o Also, a minor portion of all goods and services 
under the GST regime does not invite any tax, 
including different salt types, sanitary napkins etc. 
• GST rates are decided mutually by States and Center via 
GST Council. 
• The GST is levied at every stage of the production process 
but is collected from the point of consumption (Reverse 
Charge Mechanism), refunding all parties eventually other 
than the end consumer. 
Achievements of GST 
• Widening of India’s tax base: Tax base has almost doubled 
from 66.25 lakhs to 1.28 crores in the last four years (2017-
2021).  
• Increase in GST revenue collection: Revenue collection has 
been over the Rs 100,000 crore mark for eight consecutive 
months in a row. The revenue collection in FY 2019-20 
soared by 42% as compared to the collections made in FY 
2016-17. 
• Ease of compliance: It has also brought in efficiencies in 
indirect tax compliances and reduced the number of 
indirect tax authorities that business needed to interact 
with.  
o “E-Invoicing” has also ensured that a trade invoice is 
identified by a unique identification number which is 
generated by automated government-backed online portals. 
• Increased Logistics efficiency: GST has eliminated all the inter-state barriers by removing check-posts, 
introducing a nationwide e-way bill, eliminating the entry tax. Thus, it has reduced transit time of movement 
 
18                                                                                                                                                        
of goods within the country. As per an estimate more than 50% of logistics effort and time is saved in GST 
regime. 
• Impact on transaction costs: In previous regime, all the interstate transactions had an additional cost of 2% 
(Central Sales Tax), which post GST has now been reduced to 0%. This has reduced the transaction cost 
significantly. 
• Reinforced Cooperative Federalism: GST council has emerged as a successful example of cooperative 
federalism and its functioning has been free from political biases. 
• Increase in Transparency: Taxpayers can track their compliances online on the GST Portal. Also, they can 
easily get the basic information about any business by entering the respective PAN or GSTIN which has 
increased transparency in the system. 
Challenges 
• Overestimation of GST collection: In the initial year government has overestimated the GST collection, 
which was not fulfilled, and hence created a sense of failed taxation regime.   
• Complex tax slabs: The complex slab structure and continually switching between them has created an 
undesired confusion in the compliance system. Additionally, fluctuating tax rates often led to unethical 
profiteering practices. 
• Cumbersome filing structure: The current GST return filing structure is complex and cumbersome and put 
too much onus on the taxpayer. The requirement to possess a valid tax invoice/debit note, actual receipt of 
goods/service by the recipient, tax submission at each level by different seller etc., has deprived the nation 
of seamless tax regime. 
• Ambiguous and conflicting AAR judgments: Conflicting rulings from various benches of the Appellate 
Authority for Advance Ruling across different States has led to confusion among taxpayers. Additionally, 
more than 80% of rulings, since the establishment of the AARs, have 
been revenue biased, leading to disgruntled taxpayers.  
• Cracking down on tax evasion and tax fraud: GST tax evasion and tax 
fraud, including use of fraudulent invoices, fake e-way bills, etc has led to 
massive losses in revenue collection.  
o A news report in March 2020 states that India has faced over 
?70,000 crore worth of losses due to tax evasion. 
• Expanding the GST purview: Many commodities, especially fuel and 
alcohol are not under the GST purview mainly due to Centre and State 
being at loggerhead over revenue collections.  
o The Centre and states have been increasingly dependent on excise 
duties on petroleum products to shore up their revenues. Hence, the 
GST council has been reluctant to discuss the matter, as around 30 
per cent of the states’ revenue comes from excise duties on petrol 
and diesel. 
• Concerns related to compensation to states: The pandemic and 
lockdown have intensified the problem of revenue shortfall for States 
and the Centre, thus leading to the Centre’s inability to pay the dues to states on time. This has led to 
tensions in cooperative federalism, with states getting disenchanted with the system. 
o Also, Central Government’s over reliance on Cess and Surcharges has undermined the constitutional 
arrangement related to fiscal federalism.   
• Delay in reforms: Falling revenue amid disruptions caused by the pandemic is said to have continuously 
delayed reforms related to revision of tax slabs, robust compliance regime, etc., has made GST regime 
lackluster. 
• Transitional Issues: Even after four years, many assesses are still experiencing technical/legal issues as a 
result of the transition from the old to the new GST system. 
Way Forward 
• Simpler tax structure: A simpler tax slab structure limiting commodities to three tax slabs is the need of the 
hour. Experts have recommended a three-slab structure that will help rationalize this indirect tax system. 
• Optimising digital resources: It can help accelerate the process of claiming input tax credit. It can also 
increase the capacity of the portal to handle higher numbers of data processing.   
 
19                                                                                                                                                        
• Robust compliance regime: To catch the tax evaders indulge in unethical and illegal tax practices the 
Government should focus on creating a robust, technology driven intelligent GST system.  
• Focus on Cooperative federalism: The Centre needs to urgently figure out and put to rest the battle 
between the Central and State Governments on sharing of revenue collections.  
3.2. DIRECT MONETISATION OF THE FISCAL DEFICIT 
Why in news? 
There is a debate whether India should undertake direct monetisation of the deficit by Reserve Bank of India 
(RBI), given the hurt to its economy caused by second wave of Covid-19 infections.  
More on the news 
• India has recorded a fiscal deficit of 9.3% of GDP in 2020-21 and for 2021-22, the deficit has been put at 6.8 
per cent of the GDP. 
o This is mainly due to rise in expenditure to mitigate the fallout of pandemic and moderation in revenue 
and low tax collection due to COVID 19 induced economic slowdown.  
• Thus, there have been debates on how to finance the growing fiscal deficit given the need to provide 
additional stimulus to the Indian economy amid the ongoing pandemic. 
What is Fiscal deficit and how is it financed? 
• Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital 
receipts) and its total expenditure. It occurs when the government’s expenditure exceeds its income. 
Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government 
(Revenue receipts + recovery of loans + other receipts) 
• Typically, governments have two basic choices for financing their fiscal deficits: they can borrow (issue debt) 
or raise taxes.  
• Alternatively, the central bank can print currency for the government to bridge its fiscal deficit, which is 
known as monetisation of deficit. 
 
 
20                                                                                                                                                        
About Direct Monetisation of deficit  
• It refers to a scenario where a central bank prints currency to the tune of accommodating massive deficit 
spending by the government. It happens when the government privately places its bonds with the Central 
bank i.e., the central bank purchases government bonds in the primary market. 
o Direct monetisation may not necessarily involve actual printing of currency as the central bank could 
simply credit the Government’s account with itself through an electronic accounting entry.  
• The exercise leads to an increase in total money supply in the system. 
• Direct monetisation of deficit is also referred to as helicopter money when large sums of new money are 
printed to stimulate an economy during a crisis — like a recession. 
Reasons behind demand of Direct monetisation  
• Financing recovery programmes: Monetization can solve several problems for a government during the 
COVID-19 crisis as it can provide easy liquidity to the government to directly cover some of the costs of 
extraordinary recovery programs.  
o For instance, it can be used to finance Government of India’s stimulus to the economy, under 
Atmanirbhar Bharat 3.0 which amounts to around ? 2.65 Lakh crore. 
• Mitigating deflation and stimulating moderate inflation: Printing money can ensure that the money reaches 
the masses which can then lead to higher spending. This provides an opportunity for the government to 
boost overall demand at the time when private demand has fallen.  
o If money printing leads to an increase in demand, Indian manufacturing companies can increase 
production quickly, without having to increase prices. 
• Maintaining financial stability: Since savings in an economy are limited, financing large deficits through 
issuance of G-Secs can substantially increase interest rates and cost of borrowing for the Government. This 
could increase the probability of default, threatening financial stability of the national economy.  
• Infusion of liquidity: Direct monetisation can provide liquidity in the financial system when interest rate cuts 
are not possible due to inflationary concerns.  
o For instance, the RBI reduced the repo rate by 115 bps between March and May of 2020. However, 
further interest rate cuts were not possible, and the repo rate was kept unchanged at 4% thereafter. 
• Keeping interest rates low: Printing money ensures that there is enough money going around in the 
financial system and in the process, interest rates continue to remain low.  
o Lower interest rates allow the Government to borrow and invest in productive assets such as roads, 
hospitals etc., corporates to borrow and expand, and people to borrow and spend leading to economic 
revival.  
• Other Benefits:  
o Unlike debt-financed fiscal programs, a money-financed program does not increase future tax burdens. 
Direct Monetisation of Deficit in India 
Until 1997: Automatic 
monetisation of deficit 
• India’s deficits were automatically monetised until 1997.  
o Ad-hoc treasury bills (non-marketable short term debt instruments issued by the 
Government of India), were automatically issued by the RBI on behalf of the Centre 
to itself at a fixed rate, to replenish the central government’s cash balances.  
• An agreement was signed between the RBI and the Government of India in 1997 
completely phasing out funding through ad hoc treasury bills and the practice was 
replaced with a system of ways and means advances (WMA) from April 1, 1997. 
1997-2006: RBI 
participating in primary 
issuance of Government 
securities 
• Even after a cessation of automatic monetisation, monetisation continued in another 
form as the RBI continued to subscribe to the primary issuances of Government 
securities (G-secs). 
2006-2018: Complete 
prohibition on direct 
monetisation 
• Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, was enacted 
which completely barred RBI from subscribing to the primary issuances of the 
government from April 1,2006. 
Since 2018: Direct 
monetisation allowed 
on certain grounds 
• FRBM Act was amended in 2017 adding an escape clause which permits monetisation of 
the deficit under special circumstances. 
o RBI can subscribe to the primary issue of central government securities in case the 
government exceeds the fiscal deficit target on grounds such as national security, 
act of war, national calamity, collapse of agriculture severely affecting farm output 
and incomes etc.  
Page 5


 
17                                                                                                                                                        
Reverse Charge Mechanism  
• The GST has to be typically paid by the 
supplier of goods and services. But in some 
cases, the liability to pay the tax falls on 
the buyer. This is called reverse charge.  
• This is only applicable in certain instances 
e.g. when a business buys goods or 
services from a supplier who is not 
registered to pay GST or in cases of import. 
3. ECONOMY 
3.1. 4 YEARS OF GST 
Why in news? 
Recently, India marked the fourth anniversary of the 
Goods and Services Tax (GST).  
About Goods and services Tax 
• GST is a single domestic indirect tax law for the 
entire country levied on the supply of goods and 
services.  
• It is a comprehensive, multi-stage, destination-
based tax that is levied on every value 
addition.  Under GST, several indirect taxes like 
excise duty, VAT, service tax, luxury tax etc. have 
been subsumed. 
o However, several goods like Property Tax & 
Stamp Duty, Electricity Duty, Excise Duty on 
Alcohol, Basic Custom Duty, Petroleum crude, 
Diesel, Petrol, Aviation Turbine Fuel, Natural 
Gas, etc are not covered under GST. 
• It has multiple slabs- 5%, 12%, 18%, 28% with 
different products classified in them. Apart from 
these, GST on gold is 3% and 0.25% on semi-
precious and rough stones. 
o Also, a minor portion of all goods and services 
under the GST regime does not invite any tax, 
including different salt types, sanitary napkins etc. 
• GST rates are decided mutually by States and Center via 
GST Council. 
• The GST is levied at every stage of the production process 
but is collected from the point of consumption (Reverse 
Charge Mechanism), refunding all parties eventually other 
than the end consumer. 
Achievements of GST 
• Widening of India’s tax base: Tax base has almost doubled 
from 66.25 lakhs to 1.28 crores in the last four years (2017-
2021).  
• Increase in GST revenue collection: Revenue collection has 
been over the Rs 100,000 crore mark for eight consecutive 
months in a row. The revenue collection in FY 2019-20 
soared by 42% as compared to the collections made in FY 
2016-17. 
• Ease of compliance: It has also brought in efficiencies in 
indirect tax compliances and reduced the number of 
indirect tax authorities that business needed to interact 
with.  
o “E-Invoicing” has also ensured that a trade invoice is 
identified by a unique identification number which is 
generated by automated government-backed online portals. 
• Increased Logistics efficiency: GST has eliminated all the inter-state barriers by removing check-posts, 
introducing a nationwide e-way bill, eliminating the entry tax. Thus, it has reduced transit time of movement 
 
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of goods within the country. As per an estimate more than 50% of logistics effort and time is saved in GST 
regime. 
• Impact on transaction costs: In previous regime, all the interstate transactions had an additional cost of 2% 
(Central Sales Tax), which post GST has now been reduced to 0%. This has reduced the transaction cost 
significantly. 
• Reinforced Cooperative Federalism: GST council has emerged as a successful example of cooperative 
federalism and its functioning has been free from political biases. 
• Increase in Transparency: Taxpayers can track their compliances online on the GST Portal. Also, they can 
easily get the basic information about any business by entering the respective PAN or GSTIN which has 
increased transparency in the system. 
Challenges 
• Overestimation of GST collection: In the initial year government has overestimated the GST collection, 
which was not fulfilled, and hence created a sense of failed taxation regime.   
• Complex tax slabs: The complex slab structure and continually switching between them has created an 
undesired confusion in the compliance system. Additionally, fluctuating tax rates often led to unethical 
profiteering practices. 
• Cumbersome filing structure: The current GST return filing structure is complex and cumbersome and put 
too much onus on the taxpayer. The requirement to possess a valid tax invoice/debit note, actual receipt of 
goods/service by the recipient, tax submission at each level by different seller etc., has deprived the nation 
of seamless tax regime. 
• Ambiguous and conflicting AAR judgments: Conflicting rulings from various benches of the Appellate 
Authority for Advance Ruling across different States has led to confusion among taxpayers. Additionally, 
more than 80% of rulings, since the establishment of the AARs, have 
been revenue biased, leading to disgruntled taxpayers.  
• Cracking down on tax evasion and tax fraud: GST tax evasion and tax 
fraud, including use of fraudulent invoices, fake e-way bills, etc has led to 
massive losses in revenue collection.  
o A news report in March 2020 states that India has faced over 
?70,000 crore worth of losses due to tax evasion. 
• Expanding the GST purview: Many commodities, especially fuel and 
alcohol are not under the GST purview mainly due to Centre and State 
being at loggerhead over revenue collections.  
o The Centre and states have been increasingly dependent on excise 
duties on petroleum products to shore up their revenues. Hence, the 
GST council has been reluctant to discuss the matter, as around 30 
per cent of the states’ revenue comes from excise duties on petrol 
and diesel. 
• Concerns related to compensation to states: The pandemic and 
lockdown have intensified the problem of revenue shortfall for States 
and the Centre, thus leading to the Centre’s inability to pay the dues to states on time. This has led to 
tensions in cooperative federalism, with states getting disenchanted with the system. 
o Also, Central Government’s over reliance on Cess and Surcharges has undermined the constitutional 
arrangement related to fiscal federalism.   
• Delay in reforms: Falling revenue amid disruptions caused by the pandemic is said to have continuously 
delayed reforms related to revision of tax slabs, robust compliance regime, etc., has made GST regime 
lackluster. 
• Transitional Issues: Even after four years, many assesses are still experiencing technical/legal issues as a 
result of the transition from the old to the new GST system. 
Way Forward 
• Simpler tax structure: A simpler tax slab structure limiting commodities to three tax slabs is the need of the 
hour. Experts have recommended a three-slab structure that will help rationalize this indirect tax system. 
• Optimising digital resources: It can help accelerate the process of claiming input tax credit. It can also 
increase the capacity of the portal to handle higher numbers of data processing.   
 
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• Robust compliance regime: To catch the tax evaders indulge in unethical and illegal tax practices the 
Government should focus on creating a robust, technology driven intelligent GST system.  
• Focus on Cooperative federalism: The Centre needs to urgently figure out and put to rest the battle 
between the Central and State Governments on sharing of revenue collections.  
3.2. DIRECT MONETISATION OF THE FISCAL DEFICIT 
Why in news? 
There is a debate whether India should undertake direct monetisation of the deficit by Reserve Bank of India 
(RBI), given the hurt to its economy caused by second wave of Covid-19 infections.  
More on the news 
• India has recorded a fiscal deficit of 9.3% of GDP in 2020-21 and for 2021-22, the deficit has been put at 6.8 
per cent of the GDP. 
o This is mainly due to rise in expenditure to mitigate the fallout of pandemic and moderation in revenue 
and low tax collection due to COVID 19 induced economic slowdown.  
• Thus, there have been debates on how to finance the growing fiscal deficit given the need to provide 
additional stimulus to the Indian economy amid the ongoing pandemic. 
What is Fiscal deficit and how is it financed? 
• Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital 
receipts) and its total expenditure. It occurs when the government’s expenditure exceeds its income. 
Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government 
(Revenue receipts + recovery of loans + other receipts) 
• Typically, governments have two basic choices for financing their fiscal deficits: they can borrow (issue debt) 
or raise taxes.  
• Alternatively, the central bank can print currency for the government to bridge its fiscal deficit, which is 
known as monetisation of deficit. 
 
 
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About Direct Monetisation of deficit  
• It refers to a scenario where a central bank prints currency to the tune of accommodating massive deficit 
spending by the government. It happens when the government privately places its bonds with the Central 
bank i.e., the central bank purchases government bonds in the primary market. 
o Direct monetisation may not necessarily involve actual printing of currency as the central bank could 
simply credit the Government’s account with itself through an electronic accounting entry.  
• The exercise leads to an increase in total money supply in the system. 
• Direct monetisation of deficit is also referred to as helicopter money when large sums of new money are 
printed to stimulate an economy during a crisis — like a recession. 
Reasons behind demand of Direct monetisation  
• Financing recovery programmes: Monetization can solve several problems for a government during the 
COVID-19 crisis as it can provide easy liquidity to the government to directly cover some of the costs of 
extraordinary recovery programs.  
o For instance, it can be used to finance Government of India’s stimulus to the economy, under 
Atmanirbhar Bharat 3.0 which amounts to around ? 2.65 Lakh crore. 
• Mitigating deflation and stimulating moderate inflation: Printing money can ensure that the money reaches 
the masses which can then lead to higher spending. This provides an opportunity for the government to 
boost overall demand at the time when private demand has fallen.  
o If money printing leads to an increase in demand, Indian manufacturing companies can increase 
production quickly, without having to increase prices. 
• Maintaining financial stability: Since savings in an economy are limited, financing large deficits through 
issuance of G-Secs can substantially increase interest rates and cost of borrowing for the Government. This 
could increase the probability of default, threatening financial stability of the national economy.  
• Infusion of liquidity: Direct monetisation can provide liquidity in the financial system when interest rate cuts 
are not possible due to inflationary concerns.  
o For instance, the RBI reduced the repo rate by 115 bps between March and May of 2020. However, 
further interest rate cuts were not possible, and the repo rate was kept unchanged at 4% thereafter. 
• Keeping interest rates low: Printing money ensures that there is enough money going around in the 
financial system and in the process, interest rates continue to remain low.  
o Lower interest rates allow the Government to borrow and invest in productive assets such as roads, 
hospitals etc., corporates to borrow and expand, and people to borrow and spend leading to economic 
revival.  
• Other Benefits:  
o Unlike debt-financed fiscal programs, a money-financed program does not increase future tax burdens. 
Direct Monetisation of Deficit in India 
Until 1997: Automatic 
monetisation of deficit 
• India’s deficits were automatically monetised until 1997.  
o Ad-hoc treasury bills (non-marketable short term debt instruments issued by the 
Government of India), were automatically issued by the RBI on behalf of the Centre 
to itself at a fixed rate, to replenish the central government’s cash balances.  
• An agreement was signed between the RBI and the Government of India in 1997 
completely phasing out funding through ad hoc treasury bills and the practice was 
replaced with a system of ways and means advances (WMA) from April 1, 1997. 
1997-2006: RBI 
participating in primary 
issuance of Government 
securities 
• Even after a cessation of automatic monetisation, monetisation continued in another 
form as the RBI continued to subscribe to the primary issuances of Government 
securities (G-secs). 
2006-2018: Complete 
prohibition on direct 
monetisation 
• Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, was enacted 
which completely barred RBI from subscribing to the primary issuances of the 
government from April 1,2006. 
Since 2018: Direct 
monetisation allowed 
on certain grounds 
• FRBM Act was amended in 2017 adding an escape clause which permits monetisation of 
the deficit under special circumstances. 
o RBI can subscribe to the primary issue of central government securities in case the 
government exceeds the fiscal deficit target on grounds such as national security, 
act of war, national calamity, collapse of agriculture severely affecting farm output 
and incomes etc.  
 
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o It can reduce the value of a government’s outstanding obligations to 
some extent by increasing inflation.  
Concerns regarding use of Direct monetisation in India 
• High inflation: Monetisation of the government's fiscal deficit may give rise 
to unproductive spending and may lead to higher inflation.  
o Estimates suggest that inflation could surge to an average of 12% in 
2021 if the RBI was to finance a second stimulus package of $270 billion 
(a similar amount to Atma-nirbhar Bharat package 1.0). 
• Erodes the credibility of RBI: The quantum and timing of money to be 
printed being decided by the government's borrowing requirement rather 
than the RBI's monetary policy.  
o Adopting monetization as a regular part of a central bank's toolkit, or 
even setting a precedent that it is available, could gradually erode the 
barriers between monetary and fiscal policy, damaging the central 
bank’s credibility and limiting its ability to fulfill its mandate. 
• May hurt fiscal prudence: Direct monetisation can disincentivize fiscal consolidation activities of the 
Government. India has already repeatedly pushed back its target of achieving 3% fiscal deficit. 
• Fiscal dominance: The lack of fiscal discipline in the long run affects the independence of the central bank as 
it will be forced to monetize an unsustainable, out-of control deficit to avoid negative economic outcomes 
leading to fiscal dominance. 
o Fiscal dominance is particularly detrimental to overall macroeconomic stability if it leads to reserve 
money growth above the desired level, which is required for monetary policy actions consistent with 
economic growth and inflation. 
• Ineffective to increase liquidity: Money extended by a fiscal program inevitably ends up in the banking 
system. This can increase the amount of bank reserves at the central bank as in times of stress banks are 
usually reluctant to lend, so they are likely to keep these excess reserves at the central bank and earn 
interest on them. 
• Depreciation of currency: The supply-demand imbalance in the currency market can cause the Indian rupee 
to depreciate.  
o RBI could step in and intervene using its forex reserves. However, running down on forex reserves can 
ultimately result in a balance of payments crisis.  
Way Forward 
• Productive use of fiscal deficit prior to direct monetization: If there exists enough underutilized resources 
and opportunities in the economy (as is the case in point for a labour abundant India), then printing money 
does not stoke excessive inflation. So, before India adopts direct monetization, the government should 
develop ‘credibility’ of its fiscal spends and ensure productive spending decisions for higher growth 
multiplier effects. 
• Exploring alternatives: The government could raise a part of its borrowing requirements by issuing Covid 
bonds to the public. 
o Appropriately priced and structured, they can provide relief to savers who are short-changed by the low-
interest rates on bank fixed deposits. Moreover, such Covid bonds will not add to the money supply and 
will not, therefore, interfere with RBI's liquidity management. 
• Using Direct monetization as a last resort: RBI is currently printing money and buying bonds from the 
secondary market through Government Securities Acquisition Programme (GSAP). G-SAP 1.0 was worth Rs 1 
trillion; G-SAP 2.0 will be of Rs 1.2 trillion. 
o Hence, presently there is no need for a direct purchase on bonds as GSAP has been successful in 
providing necessary liquidity, fulfilling economy stimulus, and keeping the bond yields comfortably low.  
Conclusion 
As the costs of COVID-19 continue to mount, so too have the sizes of government deficits and with them, the 
calls for monetization. It is a powerful emergency tool, capable of providing substantial stimulus and a dramatic 
reduction in real interest rates if it is communicated successfully and seen as credible.