Visakhapatnam, Jan 27 (PTI) Finance Minister Arun Jaitley on Friday put up a spirited defence of demonetisation, saying the drive "shook" the financial system for a short while, but will integrate the shadow economy with the formal in the long run and ensure better tax compliance.

He said most contentious issues regarding the Goods and Services Tax (GST) have been sorted out between the Centre and states and the new indirect tax regime is at the final stages of implementation.

"This (demonetisation), coupled with GST, in the days to come will ensure much larger revenues as far as states and the central government are concerned and expand the size as far as the formal economy is concerned," Jaitley said at the CII Partnership Summit here.

Stating that India is largely a tax non-compliant society, he said states and the central government struggled with their revenues to run the system which created an unfair enrichment in favour of the evader.

"It also becomes very unfair on the normal taxpayer because what the evader manages to evade is what the compliant has to pay more," Jaitley said.

The government, therefore, decided to demonetise the high denomination currency, "which shook the system for some time".

Jaitley said demonetisation has gradually increased the process of integrating the shadow, parallel and informal economies in far greater number with the formal economy.

"The size of the formal economy is expanding, so are the transactions in the banking system and through the digital mode," he said.

As for the implementation of GST, the finance minister said new indirect tax regime will make India one single market, eliminate multiple assessments, check evasion and bring more revenues into the system.

"I am glad that almost all state governments have actively co-operated in making this a reality. Most of the contentious issues have been sorted out in the GST Council, a forum where you will see deliberative democracy in action.

Those are now at final stages of implementation," Jaitley said.

The government plans to implement GST, which will subsume excise, service tax, VAT and other local levies, from July 1.

Demonetisation and GST promote formalisation and stronger tax compliance, consolidating indirect taxes into a single market framework. Demonetisation is presented as a measure to disrupt large-value cash holdings and integrate shadow, parallel and informal economies into the formal economy, increasing banking and digital transactions and improving tax compliance. The Goods and Services Tax is framed as a consolidated indirect tax creating a single market by subsuming excise, service tax, VAT and local levies, eliminating multiple assessments, checking evasion and increasing revenues, with most contentious issues reportedly resolved through the GST Council and implementation in advanced stages.