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Day 28 – Q 1.What do you understand by ‘formalisation of economy’? Examine its benefits. Has GST led to increasing formalisation of the Indian economy? Critically examine.

1. What do you understand by ‘formalisation of economy’? Examine its benefits. Has GST led to increasing formalisation of the Indian economy? Critically examine. 

‘अर्थव्यवस्था के औपचारिकरण’ से आप क्या समझते हैं? इसके लाभ की जांच करें। क्या जीएसटी ने भारतीय अर्थव्यवस्था के औपचारिकरण को बढ़ाया है? समालोचनात्मक जांच करें।


According to Economic survey of India, formality can be defined in at least two senses. First, when firms are providing some kind of social security to employees. A second definition of formality is when firms are part of the tax net.


Benefits of Formalization of Economy:

  • Growth and Development.
  • Formal Credit Facility: Long term longs, Cheaper loans etc.
  • Benefits from government in form of Subsidies, Tax credit, Cheap Electricity and other supports.
  • Increased employment opportunity and attraction of Talent.
  • Revenue for Exchequer.
  • Social Infrastructure: With increased revenue government can invest more in Social infrastructure like Education, Skill Development etc.
  • Regulations: There will proper regulation and strict implementation of rules for welfare of workers, Environment protection etc.
  • Illegal Activities: It will reduce Black money generation, Corruption in politics, Money laundering etc.

GST has helped formalization of Economy in following ways:

  • There will be now seamless flow of availability of common set of data to both the Centre and the States making Direct and Indirect Tax collections more effective.
  • Tax Base Expansion: 6.6 lakh new agents, previously outside the tax net, have sought GST registration.
  • Housing: Further, a segment of land and real estate transactions has also been brought into tax net. This in turn would allow for greater transparency and formalization of cement, steel and other sales which earlier tended to be outside the tax net.
  • Digitalization: eliminating transactions which are not recorded earlier in the books of accounts and thus bringing those who were outside the tax net so far.

Issues with GST so far:

  • Cost: Additional cost for Small Business which will eventually reduce Profit margin leading to increase in prices in longer run.
  • Tax slabs: Different Tax slabs confuse illiterate and uneducated Small businesses leading to exploitation by auditors and Taxmen.
  • Trust Issues: Certain business which are exempt from GST face trust issues from customers when not able not produce bills.
  • Exemption: Certain products like Petroleum which has huge revenue potential is kept out of GST.
  • GSTN: Glitch while filing GST and Network issue have enabled massive Tax evasion.


It can be a revolution in Taxation reforms and second tryst with Destiny as projected if proper steps are taken to simplify the process and address the concerns raised.

Best Answer: Aspirant123.

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