Better Tax Compliance
Demonetization has led to increased compliance of tax as hoarding black money and non-disclosure became disincentivised. Higher taxes in the hands of government means the money is going to be spent on roads, railways, ports, technology, health and education.
Direct Tax data was released by CBDT in October 2018. The increase in various parameters is seen as follows-
- Number of Returns Filed– Increase of more than 80%. 3.79 crores in FY 2013-14 (base year) to 6.86 crore in FY 2017-18.
- Number of Tax Payers– Increased by 40% from 5.27 crores in FY 2013-14 to 7.41 crores in FY 2017-18
Looking at the tax collection data closely, it reveals an interesting picture in the increase of tax collections. We see the data for 2 years before Demonetization and 2 years after Demonetization.
(All figures in Crore Rupees)
|FINANCIAL YEAR||(i) Personal Income Tax||% Increase||(ii) Corporate Tax||% Increase||(iii) Other Direct Taxes||% Increase||Total Direct Taxes
(i+ ii+ iii)
|FY 14-15 & FY 15-16||553,409||39%||882,153||19.72%||2174||1133%||1,437,736||27.84%|
|FY 16-17 & FY 17-18||769,501||1,056,123||26827||1,852,451|
Conclusions from the above table-
- Personal Income Tax– The increase in personal income tax indicates increased disclosures of incomes as well as businesses leading to more personal income tax collections
- Corporate Tax– The increase shows an uptick in formal businesses
- Other Direct Taxes– They include mainly the taxes and penalties on various Income Disclosure Schemes. Thus, most of the unaccounted income was declared and the tax on it added in the Other Direct Taxes. The rise is a stupendous 1133%
Overall, we find that tax compliance has increased post demonetization.
Direct Tax : GDP Ratio trends
|Financial Year||Direct Tax: GDP Ratio||Buoyancy Factor||Personal Income Tax Buoyancy Factor|
While Direct Tax : GDP ratio has shown an increase, the biggest growth is seen in the buoyancy Factors. Buoyancy Factor is defined as the growth of tax in relation to growth in GDP. Higher buoyancy factor shows tax collection is growing at a larger rate than GDP. Highest increase in the buoyancy factor is seen in the Personal Income Tax collections.
Tracking of Suspicious Transactions-
- The May 2017 status report of Clean Money Operation of the income-tax department says that 17.73 lakh citizens amounting to 3.68 Lakh Crore were searched and undisclosed income of over Rs16,000 crore admitted.
- Finance Ministry data says that by FY18, 2.26 lakh shell companies have been de-registered and 4.25 lakh directors are under scrutiny.
Formalization of Economy
Demonetization forced people to come in the formal sector in the following ways-
- More tax payers– Economic Survey 2018 says that the total number of new taxpayers in the 13 months since demonetisation (November 2016 – November 2017) compared with previous 13-month time windows increased by 1.01 crore filers compared with an average of 62 lakh in the preceding six years
- More deposits– After witnessing the effects of holding cash, people began depositing savings in the banks as well as equity markets which lead to more money coming in official channels. Jan Dhan accounts have increased to around 32.9 crores till October 2018 while the deposits have crossed 85000 crores
- Formalization of Credit– Credit formalization took place as cash liquidity reduced. Farmers, small entrepreneurs and MSME are now seeking formal credit, mainly through the MUDRA Yojana. The loans sanctioned under MUDRA have crossed 14 crores till October 2018, while the value of loans given has crossed 6 lakh crores.
- Declaration of Workforce– Reduced cash payments to workers forced employers to pay them electronically through banks. This resulted in formal registration of workforce under EPFO. Till March 2017, new registrations to EPFO for the earlier unregistered workers crossed the 1 crore mark.
- Helped in implementation of GST– Demonetization helped in formalizing the economy, the results of which were seen in GST collections. The GST collections for the month of October 2018 crossed the 1 lakh crore mark, totalling to 100,710 crores.
Trigger for Cashless Economy and Digitization
Demonetization acted as a trigger to ensure cashless economy. There has been a marked increase in the transactions involving credit cards, debit cards, mobile banking, POS machines and UPI based applications.
Citizens benefit from cashless economy due to-
- Ease of transactions due to less time
- No need to carry physical money
- No danger of stealing or loss of notes or soiling
- Easy tracking
Let’s see how digital transactions increased post demonetization-
- UPI based transactions– UPI transactions involve BHIM App and USSD services. RBI and NPCI data reveal an exponential rise in volume and value of UPI transactions. Notice the stupendous rise.
|Month and Year||Volume in millions||Value in Crore rupees|
- Increase in mobile banking transactions
- Increase in sale of POS machines till April 2018. Note the spurt after November 2016.
- Increase in Credit Card and Debit Card transactions
There has been an increase in Credit card and Debit card transactions in both value and volume.
|Month and Year||Credit Card Transactions||Debit Card Transactions|
|Volume in millions||Value in Crore Rs||Volume in millions||Value in Crore Rs|
Reduction in Naxal attacks
A noticeable decline in Naxal activity and increase in arrests were seen after Demonetization. The Naxal incidents had reduced with a rate of around 6% from 2016 to 2017 while the Naxals arrested.
The PPRC Report has come out with some interesting observations about how Demonetization affected the Naxals-
- Invalidation of stored cash– Naxals usually store money in cash for three years in advance for the sake of contingency. Demonetization invalidated maximum of the stored currency of high denominations. All the efforts at exchanging old notes were put on hold by the intelligence agencies.
- Reduced attacks– Naxalites were not able to implement their strategy of ambush on the forces due to cash crunch and hence this decrease in the number of Naxal offences.
- Increased arrests– Demonetization forced Naxalites to come out in open to the villages to get money exchanged via their sympathizers as well as to get food and resources. Intelligence agencies tracked them and got them arrested
- Reduced cadre recruitment– After initial brainwash, the Naxal youth start getting a fixed amount of money which acts as the continued motivation for them to remain in the cadre. Demonetization resulted in cash crunch, thus reducing recruitment
- No support of contractors– Naxals used to extract money from contractors. But Demonetization lead to contractors also being short of cash, leading to less revenues for Naxals
- Crackdown on Urban Naxals– Post demonetization, organizations which were used by the Naxals to get the invalidated currency exchanged through banks and their transactions were put under scanner and after several have been banned and blacklisted already.