Demonetisation Barely Made Any Difference to Tax Collections - Vivek Kaul's Diary
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Demonetisation Barely Made Any Difference to Tax Collections

Aug 7, 2017

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Since November 8, 2016, the Narendra Modi government has made many attempts to pass off demonetisation as a success. In the first series of attempts they tried to offer logic and economic theory in order to defend demonetisation. And in the more recent months, they have offered data.

The latest such data being offered to show demonetisation as a success is that it has led to an increase in the taxbase in the country. Sushil Chandra, the chairman of the Central Board of Direct Taxes said something to that effect in late July 2017.

On August 4, 2017, Santosh Gangwar, the minister of state for finance, said something similar in a reply to a question in Lok Sabha. The question put to the department of revenue, ministry of finance, was: "Whether the number of Income Tax payers has increased in the country after demonetisation?"

Gangwar said: "The number of income tax payers has increased after demonetization. During the period of 09.11.2016 to 31.03.2017, 1.96 crore returns were filed as compared to 1.63 crore returns filed during corresponding period of FY 2015-16."

This statement doesn't really tell us much. Yes, the number people filing returns between November 9, 2016 and March 31, 2017, was higher than in comparison to the corresponding period between November 2015 and March 2016. But Gangwar hasn't given us the number of returns filed during the same period in earlier years, in order to be able to make a fair comparison.

Having said that he has given us the size of the taxbase for the last three years. Before we get into the details it is important to define what the term taxbase actually means. The meaning of the term has been changed a few times by the Central Board of Direct Taxes, over the last few years.

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As per the annual report of the ministry of finance for 2015-2016, the latest annual report which is publicly available: "The definition of "Tax base"... has undergone change. Tax base as on 1 st April of the financial year is now taken as number of persons who have either filed Income Tax Returns (ITRs), or in whose case tax has reportedly been paid or deducted, in any of the three consecutive financial years, previous to the reference year." Table 1 shows us the taxbase for the last three financial years.


In 2016-2017, the taxbase grew by 10.7 per cent in comparison to 2015-2016. In 2015-2016, the taxbase had grown by 8 per cent in comparison to 2014-2015. Hence, the taxbase has increased at faster pace, thanks to demonetisation. But the difference in growth rates pre and post demonetisation isn't really huge. If this is all the difference that demonetisation made on the taxbase, then it is really worth asking, whether it was worth all the trouble.

Also, there is another way of analysing that needs to be looked at here. Ultimately, the idea behind increasing the taxbase is to ensure that there is an increase in the total direct taxes collected by the government as a proportion of the total size of the economy (i.e. the tax to the gross domestic product(GDP) ratio should go up). If tax collections as a proportion of the GDP are not going up along with the taxbase, then it means that only more tax returns are being filed. And that basically means that the chartered accountants(CAs) are making more money and nothing else. (This is one of the unwritten rules in life, whatever happens the CA makes more money).

Let's see how things look on that front. How do things look when we look at the total corporation tax plus the income tax collected as a proportion of the GDP, over the last few years? (I have ignored wealth tax here simply because it was abolished from 2015-2016 onwards and including it wouldn't make for the right comparison). Take a look at Figure 1.

Figure 1

What does Figure 1 tell us? It tells us that as far as corporation tax plus income tax as a proportion of GDP is concerned, the income tax department is just about trying to play catch up. This ratio was much higher up until 2013-2014, without any demonetisation being carried out.

How do things look if we were to look at just income tax as a proportion of the GDP? Take a look at Figure 2.

Figure 2

What does Figure 2 tell us? The income tax to GDP ratio in 2016-2017 has seen a jump of 23 basis points to 2.33 per cent in comparison to 2015-2016. The question is at what cost? Demonetisation cost India at least 100 basis points of economic growth. Also, it is worth remembering here that the jump in income tax came about because of the two income tax amnesty schemes were run by the government in 2016-2017. If we were to leave these schemes out, the income tax to GDP ratio would have been more or less the same as earlier years. The government won't have access to these amnesty schemes during the current financial year and it will impact its tax collections.

For the year 2017-2018, the projections made by the government stand as follows. The corporation tax plus income tax to GDP ratio is expected to come in at 5.82 per cent. The income tax to GDP ratio is expected to come in at 2.62 per cent of GDP. Looking at past data, these are fairly optimistic projections. Also, with the economy slowing down, there is bound to be some impact on the taxes collected by the government. Having said that, it is too early in the year to figure out if these projections will turn out to be right or not.

To conclude, demonetisation has led to a minuscule increase in tax collections when it comes to income tax. But overall direct tax collections have more or less stayed the same as in previous years. Also, all this it has come at the cost of a major destruction of large sections of the economy, particularly the informal sector.

Given this, trying to project demonetisation as a major success on the tax front is basically a marketing spin and nothing else. But then that is the speciality of the Modi government. As Evan Davis writes in Post Truth-Why We Have Reached Peak Bullshit and What We Can Do About It: "A fact is reported, the fact is true, a legitimate interpretation is placed on that fact - but then it is puffed up to a magnitude well beyond anything it deserves."

This is exactly how things have played out as far as the issue of higher taxes and higher taxbase because of demonetisation, is concerned.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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20 Responses to "Demonetisation Barely Made Any Difference to Tax Collections"

tkrishk

Aug 11, 2017

Vivek
I think, your datapoints are not correct or there is a big difference in what you are saying and what Economic times is saying. MOreover your one point agenda that the Government has goofed up in demonetisation is not cutting ice. The Pychological impact was quite good though people were inconvenienced. It also led to people curtailing their spending and being careful. Currency which flowed freely to fund staged activism and terrorism was taken out and we saw relative peace in the valley. That for me alone is a good effect of demonetisation.

Also - this is probably the first time, something so bold was done in India and government learnt to tackle something like this on such a scale. Scale has its own challenges and keep it secret from affected parties also impacted the ability to reduce pain on the ground...but that is understandable. But we should appreciate the decisiveness and boldness of this government. And may be as more data pours in (Hopefully credible data) - we might still see that this was not all in vain

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Sanjiv

Aug 8, 2017

There is a misconception in the government that somehow increased tax collection will make India into El Dorado, the mythical city of gold. Mr. Jaitley has made increased tax collection his raison d'etra, and this is affecting India's growth. The government does not create growth--all of it is produced in the private sector. Every rupee that the government collects in taxes is one rupee less that the private sector has to invest in new plant and equipment. Inccreased taxes therefore dtract from economic growth. No country in history has ever taxed itself into prosperity. This government's fixation with taxes at the cost of growth will be a very costly lesson for India.
www.contractwithindia.com

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Anoop Kumar

Aug 8, 2017

Huge amounts paid to employees? on account of 7th pay commission have caused an excessive increase in income tax collections during 2016-17. It may also be considered.

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LOGANATHAN

Aug 8, 2017

Vivek,

Demonetisation is not the event which had happened in Fiscal 2016-17. Seventh Pay Commission was implemented in that Fiscal year with an outlay of Rs 1 lakh crores ( for 15 month period i.e., Jan 2016 to March 2017 ). Out of these wages to Central Government, Defence and Railway employees, 20% would have come back to the Government as TDS Tax revenue.

If this event is factored in Figure #1 & #2, real picture of tax collection, specifically growth, could have emerged.

Like (1)

Bhanu

Aug 8, 2017

Just saw this news:

Demonetisation prompted a 25% rise in I-T Returns filed this year, says CBDT

The figures prove that a substantial number of new individuals had been brought under the tax net, the department said.

The Central Board of Direct Taxes on Monday said that the number of Income Tax Returns filed in 2017 had risen by at least 25%. The department attributed this increase to the demonetisation drive, claiming it had curbed the circulation of black money.

"The growth in returns filed by individuals is 25.3%," the CBDT said, adding that they had received more than 2.79 crore returns till August 5, the last day to file them. Overall, more than 2.82 crore ITRs were filed, which is a 24.7% increase as compared to 9.9% in 2016.

“This clearly shows that a substantial number of new taxpayers were brought into the tax net subsequent to demonetisation.” the CBDT said.

There was also a rise in the amount of direct tax collected in 2017. Advance tax collections of personal income tax saw 41.97% growth as compared to that the last financial year. “Personal income tax under self-assessment tax grew at 34.25% over the corresponding period in FY 2016-17,” the CBDT said.

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Even Times of India carried a headline stating that total returns went up by 24.2% and individual returns by 25.1%. It is reported that advanced tax collections up to 5 Aug increased by close to 42%. There is still a mountain of data generated for the deposits during demonetisation time which will take more time to analyse and act.

So all the above statistics need to be reviewed.

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Nishi Nath Gupta

Aug 8, 2017

8585970726
The first benefit of demonetisation is that lot of unaccounted cash has come out in banking system. Secondly this unaccounted cash was responsible for austentious spending. This has reduced expenditure on non useful items which is appreciated by low & middle class. Therefore this class had voted whole heartedly for Modi.

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vin

Aug 8, 2017

the reality of real estate after demonetization is builders are not demanding black money , actually refusing it.
also the artificial swelling in real estate prices has gone down.
analyze this also.

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Sharada Schaffter

Aug 7, 2017

The truth about the impact of demonetization on India's poor half would be revealed if some organization would take the trouble of assessing the financial situation in the homes of those who have lost their means of livelihood because of demonetization.

Some black money might have surfaced; but should it be at the cost of the horrendous suffering of innocent millions and the death of scores? Even one death is one too many!

Governance has to be ethical; else, the government forfeits its right to govern.

Norbert Haering Ph D, writer for Germany's leading business newspaper 'Handelsblatt', and James Corbett have written extensively on the involvement of the US in the Indian demonetization saga
as a part of the worldwide effort to move away from physical currency towards digitized payments.
("A well-kept open secret.Washington is Behind India's Brutal Experiment of Abolishing Most Cash")
According to 29 January 2017 Washington's blog, Haering even mentions the joint report by Boston Consulting Group and Google in July 2016---yes, 2016--on the "$500bn Pot of Gold", which is the Indian digital payments market. Information like this punctures the PM's claims of demonetization 'going after black money'. Private 'Payment Banks' were given the license to operate by the RBI in 2015!

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Sudhirkant Makani

Aug 7, 2017

Dear Mr. Kaul, it is very informative article highlighting the facts. Your analysis and efforts to reveal actual practical impact on our Economy are very good. Some how I feel that these information and knowledge shall reach to all class of people, which is not happening. Keep it up. Thanks.

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DDB

Aug 7, 2017

Mr.Kaul is adept at changing his stand when he falls flat on his face on the stand taken by him on several issues.One thing which Mr.Kaul fails to realise that Sensationalising issues don't cut ice with all segments of readers. First Mr. Kaul tried all his literary and journalistic skills by using his column in all the print media to project the "Demon " in Demonetisation.Now that with the passage of time most of his theories /fears are gradually being proved wrong ,Mr. Kaul is back again in his own game . This time at least Mr. Kaul has acknowledged that some benefits of Demonetisation has accrued to the nation , but his ego prevents him from acknowledging it whole heartedly and he goes ahead by questioning "whether the benefits that has accrued was worth the trouble".Mr. Kaul seems to have forgotten the two maxims" There is no gain without any pain" and "Rome was not built in a Day".

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