In November 2016, Prime Minister Modi announced the withdrawal of two high-value currency denominations from circulation with immediate effect. Some social media economists and mainstream journalists had speculated that a large chunk of unaccounted cash may not return to the banks, thus resulting in a windfall for the government.
When most demonetised currency returned to the banks, questions were raised on the success of demonetisation itself. However, evaluating demonetisation’s success on this basis alone would be jumping the gun.
In December 2016, Tim Worstall in his article in Forbes had argued that –
The only practicable method of retaining the value of those old notes was to deposit them into the banking system.
However, we should also note that those same amounts of cash which have been deposited are now inside the reporting system for tax. And undoubtedly there will be some decent portion of those deposits which were formerly black money and which now will be righteously taxed.
In other words, a chunk of currency not returning to banks would have ensured a large but one-time dividend to the government. On the other hand, most money returning to banks would ensure sustained benefits in tax revenue spread over the long term.
Two years later now in December 2018, data on tax revenue has confirmed this hypothesis, as detailed below.
Expansion of Taxpayers base
- Per published data, the number of Income Tax returns have zoomed by 57% since demonetisation
- IT returns filed in FY14 were 3.79 crore
- IT returns filed in FY16 was 4.36 crore, implying that growth over 2 years period before demonetisation was 15%
- IT returns filed in FY18 was 6.84 crores, implying that growth over 2 years period after demonetisation was significantly higher at 57%
- Number of High Net Worth individuals, declaring income above Rs 1 crore, has surged by 68% since demonetisation
- Filers with 1 crore+ declared income in AY15 were 48,416
- Filers with 1 crore+ declared income in AY18 were 81,344 (up by 68%)
- Filers with 1 crore+ income, added in 69 years before demonetisation were 48,416
- New filers with 1 crore+ income, added in just 2 years after demonetisation were 32,928
A surge in Direct Tax collections
- The direct tax growth rate has soared to a 7 year high of 17%
- FY15 – 8.9%
- FY16 – 6.9%
- FY17 – 14.6% (noticeable jump in growth rate after demonetisation)
- FY18 – 17.1%
- Direct tax buoyancy has more than tripled after demonetisation and touched 1.9
- FY16 – 0.6
- FY17 – 1.3
- FY18 – 1.9
- from FY08 to FY16, direct tax buoyancy had hovered between 0.5 and 1.1
- Higher tax buoyancy after FY16 indicates increasing tax compliance
- At Tax buoyancy of 0.5, an 8% increase in GDP results in (0.5 * 8) only 4% increase in tax revenue for government
- At Tax buoyancy of 2.0, an 8% increase in GDP results in (2.0 * 8) 16% increase in tax revenue for government
- Hence, with the same economic growth, the government can now expect a much higher tax collection year after year to spend on healthcare, education and infrastructure development
Exponential growth in Digital Payments:
Lack of cash during demonetisation provided the necessary impetus to bring behaviour change in consumers adopting digital payments. As per the data published by National Payments Corporation of India (NPCI):
- UPI (India’s homegrown payment system) based digital payments in India have grown exponentially since 2016
- the number of transactions:
Aug 2016 – 93,000
Nov 2018 – 52.5 crore (up by 5,645 times)
- value of transactions:
Aug 2016 – 3.1 crore
Nov 2018 – 82,000 crore (up by 26,451 times)
- the number of transactions:
- Morgan Stanley has reported that digital payments are up almost three times, from 2.5% of GDP to 7% of GDP
- The proportion of cash transactions in total consumer spending has reduced by 10% (from 78% in 2015 to 68% in 2017) as reported by the head of payments practice for the Asia Pacific at Boston Consulting Group
- The exponential rise of digital payments in India received global attention and was covered extensively in Forbes, International Business Times, livemint, Entrepreneur, Financial Express, Bloomberg and other business publications
Deposited amounts are traceable to source and are under scrutiny
- During demonetisation, deposits were made in about 1 crore bank accounts
- Just 1.5% of these accounts (about 1.5 lakh accounts) hold more than two-thirds (Rs. 10 lakh crore) value of deposits with an average deposit of Rs. 3.31 crore in each account
- So far, 18 lakh accounts where deposits do not match known sources of income have been discovered. Tax notices have been sent to them and recoveries are expected from many
- The outcome and status of government scrutiny are accessible on the government portal for Operation Clean Money. Few prominent Success Stories of such tax recoveries and detailed reports are accessible on the portal
- Many companies who deposited large cash amounts were later found to exist only on paper. Many such companies have not come forward to claim those deposits due to fear of legal action. Per MoneyControl, such unclaimed deposits amount to Rs. 37,500 crore as of now
It must be understood that since demonetisation in November 2016, only one tax cycle has been completed so far.
- Demonetisation – November 2016
- End of Fin Year – March 2017
- Next End of Fin year – March 2018
- Tax filing deadline – August 2018
Individuals who deposited large amounts during demonetisation would be cross-checked for their tax filing in AY18 and subsequent future years. Hence, the benefits of demonetisation need to be evaluated over a long-term into future.
The pre-mature clamour based on single dimensional criteria of “all the money came back to banks” is meaningless by itself.
IIM-A alumnus, Software Sales Professional,
Writes about business, economy and politics; Passionate about numbers, facts and analysis