Immediate impact of demonetisation on tax collections was muted

The average income reported of the new taxpayers - Rs. 2.7 lakh - was not far above the tax threshold of Rs. 2.5 lakh, said Economic Survey

GN Bureau | September 7, 2017


#economic survey   #demonetisation   #taxes  
(Photo: Arun Kumar)
(Photo: Arun Kumar)

The tax base did expand after demonetisation, said the Economic Survey 2016-17 volume 2, which added: “It is, however, interesting that the average income reported of the new taxpayers-Rs. 2.7 lakh - was not far above the tax threshold of Rs. 2.5 lakh, so the immediate impact on tax collections was muted.”
 
According to the tax data, the number of new individual tax payers (based on returns filed) increased from 63.5 lakh in 2015-16 to 80.7 lakh in 2016-17, said the report
 
“But all this increase cannot be attributed to demonetization because there is some natural trend increase in new taxpayers. Instead, this impact by measuring the increase in taxpayers in the post-demonetization period (Nov. 9, 2016-end-March 2017) relative to the increase in the same period the previous year is estimated.”
 
It added that the growth of tax payers’ post-demonetisation was significantly greater than in the previous year (45 percent versus 25 percent). “The addition amounted to about 5.4 lakh taxpayers or 1 percent of all individual taxpayers in just a few months. The addition to the reported taxable income (of these new payers) was about Rs.10,600 crore.”
 
The report said that overall, demonetisation should continue to pay dividends over time, as the impetus toward formalising the economy and expanding the tax base that it has set in motion continues.
 
It went on to say that reliance on cash appears to have declined sharply. “This decline suggests that a considerable portion of cash holdings was used for savings, which has now been transferred to the banking system. In addition, post-demonetisation a new enforcement and compliance regime and increased digitalization have reduced the use of cash for transactions.”
 
Digitalisation can broadly impact three sections of society: the poor, who are largely outside the digital economy; the less affluent sections, who are becoming part of the digital economy, having acquired Jan Dhan accounts and RuPay cards; and the affluent, who are fully digitally integrated via debit and credit cards. Different indicators capture the impact on each of these categories: Aadhaar enabled payments (AEPS) for the ‘digitally excluded’, Rupay cards for the intermediate category; and credit and debit cards for the digitally connected.
 
“It is clear that there has been a substantial increase in digitalization across all categories. And even though the immediate post-demonetisation surge has moderated in some cases, the level and pace of digitalisation are still substantially greater than before demonetisation. Demonetization was expected to reduce black market transactions in real estate which would be manifested in reduced real estate prices. Even prior to demonetisation, there was deceleration in house price inflation, and there was a further reduction in prices post-demonetisation. The decline has since been reversed, and prices appear to be rising again,” the report said.
 

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