EXPLAINED NATIONAL

Demonetisation: Increasing the Tax Compliance

Among the many positive impacts of demonetisation, one of the less noted yet a significant impact has been on increasing the tax compliance in the country.

The following story covers this aspect in detail.

A. Actions taken post-demonetisation:

As part of the post-demonetisation exercise, Income Tax Department (ITD) analysed cash deposit data and tried to identify possible cases of tax evasion. Operation Clean Money (OCM) was launched on 31st January 2017, with the mission to “Create a tax compliant society through a fair, transparent and non-intrusive tax administration, where every Indian takes pride in paying taxes”.

  • F.Y. 2016-17:
    • Promoting Voluntary Compliance: The cash deposit data was analysed to identify persons whose cash transactions did not appear to be in line with the tax payer’s profile. This analysis resulted in identification of about 17.92 lakh persons for online verification process in the first phase. Online verification of cash transactions was enabled and the information in respect of the identified cases was made available in the e filing window of the PAN holder at the portal https://incometaxindiaefiling.gov.in. Email and SMS were sent to the taxpayers for submitting online response on the e-filing portal. There was an overwhelming response to online verification and nearly 11.85 lakh persons submitted their responses online.
    • A dedicated web portal (https://www.cleanmoney.gov.in) was launched for ‘Operation Clean Money’ to enable citizen engagement (pledge, contribution, feedback, social media integration etc.) and taxpayer education.
    • Enforcement Actions: Data analytics was used to analyse cash deposit data and identify high risk cases/groups for investigation. This led to:
      • Conducting of searches in 900 groups during November, 2016 to March, 2017 leading to seizure of Rs. 900 crores, including cash of Rs. 636 crores and admission of undisclosed income of Rs. 7961 crores.
      • During the same period, 8239 surveys were conducted leading to detection of undisclosed income of 6745 crores.
  • F.Y. 2017-18:
    • In 278 cases involving demonetized cash/ such cash deposited in bank accounts, an amount of Rs 231 crores was provisionally attached under the Prohibition of Benami Property Transactions Act, 1988.
    • Notices u/s 142(1) of the Income Tax Act,1961 were issued to 3.04 lakh persons, who deposited cash of Rs 10 lakh or more, but had not filed their return of income till the due date of filing. Returns were filed by 2.09 lakh of such identified non-filers. These persons had deposited self-assessment tax of Rs. 6,531 crores.
    • Electronic Campaign was executed for non-filers who had deposited cash between 5 to 10 lakh rupees, during the demonetisation period.

Actions taken against non-filers in various categories, have led to a payment of Rs. 13,068 crores (inclusive of Rs. 6,531 crores) by way of Self-Assessment tax.

  • F.Y. 2018-19:
    • In the Computer Assisted Scrutiny Selection (CASS) of 2017 and 2018, more than 1,49,000 cases, involving cash deposits during demonetisation were selected on the basis of various risk parameters.
B. Impact on Revenue Collection:

         (i) Net direct tax collections:

  • The gross Corporation Tax collections in F.Y. 2018-19 (as on 31/10/2018) stood at Rs. 3.51 lakh crores, which is higher by 19.5% as compared to last year. Similarly, the gross Personal Income Tax collections in F.Y. 2018-19 (as on 31/10/2018) stood at Rs. 2.54 lakh crores, which is higher by 20.2% as compared to last year.
  • Net direct tax collections in F.Y. 2018-19 (as on 31/10/2018) stood at Rs. 4.99 lakh crores, which is higher by 14.5% than the collections last year on the same date. This is despite a growth of 30.7% in the refunds issued this year up to 31/10/2018 over the refunds issued in the same period last year.
  • Net direct tax collections in F.Y. 2017-18 amounted to Rs. 10.03 lakh crore, which was 18% higher than the collections for F.Y. 2016-17.
  • The collections for F.Y. 2016-17 were also 14.6% higher than the collections for 2015-16.
  • On the other hand, the growth rates in 2015-16 and 2014-15 were only 6.6% and 9.0%, respectively.

The robust growth in direct tax revenue in the year of demonetisation, and in the years after that, is indicative of a positive impact of demonetisation on the level of tax compliance in the country. The growth rate of 18% for 2017-18 was the highest in the last seven financial years.

(ii)  Personal Income Tax:

There has also been an exceptional growth in the revenue flow from Advance Tax and Self-Assessment Tax under Personal Income Tax (PIT).

  • In F.Y. 2018-19 (as on 31/10/2018) PIT Advance Tax collections are higher by 30.6% and PIT Self-assessment tax collections by 37.7%, over the collections on the same date in F.Y. 2017-18.
  • In F.Y. 2017-18, PIT Advance Tax collections increased by 23.4% and PIT Self-Assessment Tax by 29.2%, over those for 2016-17.

The above growth rates corroborate the premise that demonetisation and the subsequent use of bank deposit data by the I T Department has had a major impact on voluntary tax payments by the non-corporate/ individual taxpayers.

C. Impact on Tax Base:

           (i) Income Tax Return filings: 

  • In F.Y. 2018-19 (as on 31/10/2018) 5.99 crore Income Tax Returns (ITRs) have been filed, which is higher by 54.33% than the returns filed in F.Y. 2017-18 in the corresponding period.
  • During F.Y. 2017-18, 6.86 crore ITRs were filed with the Income Tax Department, as compared to 5.48 crore ITRs filed during FY 2016-17, showing a growth of 25%.

The above growth rate is the best growth rate achieved in last five years. The spurt in I-T returns is a definite indicator of raised compliance level in the wake of demonetisation.

    (ii) New Filers:

  • During F.Y. 2018-19 (as on 31/10/2018), the number of new ITR filers stood at 86.35 lakh.
  • During F.Y 2017-18, the number of new ITR filers increased to 1.07 crore as compared to 85.51 lakh new ITR filers added during FY 2016-17, which translates into a growth of 25%.
  • In F.Y. 2016-17 also, 85.51 lakh new return filers were added at a growth rate of 29%.

There is a clear upswing in the new tax filers after F.Y. 201516, which can be attributed to higher level of compliance due to transfer of cash into the formal channels as a result of demonetisation.

Conclusion

As can be seen from the data above, Demonetisation acted as a catalyst in increasing tax compliance rate as well as overall tax base, leading to unprecedented rise in new tax filers. The move also managed to create a positive outlook for the government by honouring the honest tax payers while taking stringent action against the corrupt.