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Was improved tax compliance the only real achievement of demonetisation?

By Vikas Sv

New Delhi, Sep 7: While the BJP-led government has been raving about the achievements of demonetisation, the opposition has left no stone unturned to vehemently criticise it. It is in fact hard to label it either as success or failure in clear terms based purely on the political narrative.

Even the experts are divided on the matter and the fact that the note ban's affects can be looked at from so many different points of views makes it even more difficult to take a firm stand.

Representational Image

To begin with, there were three main objectives behind the banning of Rs 500 and Rs 1,000 notes in november 2016 - curbing black money hoarding, tackling the menace of fake currency and dealing a blow to terror financing. Apart from these, the government also wanted to give push to digital transactions and bring more people into the tax net.

The total value of Rs 500 and Rs 1,000 notes, which were banned on November 8, 2016, was Rs 15,417.93 billion, out of which Rs 15,310.73 billion was returned. This means that around 99.30% of the banned notes were returned. The value of currency that did not return is far less than what the goverment expected.

Coming the the fake notes problem, an RBI report said overall detection of counterfeit notes was 522,783 pieces in 2017-18 as compared to 762,072 pieces in 2016-17 which is 31.4 per cent lower. But, the number of fake notes of Rs 2,000 jumped to 17,929 in fiscal 2017-18 as compared to 638 pieces in 2016-17. Similarly, 9,892 pieces of counterfeit notes were detected in the new Rs 500 banknotes in 2017-18 as compared to 199 in the previous fiscal. So the overall fake notes in terms of number of counterfeit notes has come down, but the counterfeiting of new Rs 500 and Rs 2,000 notes, that boast of improved security features, has gone up.

[Did demonetisation really address fake notes problem?]

So, the two big objectives that the Prime Minister had touted in his late evening speech on November 8, 2016, - about catching black money and weeding out fake notes - have been less than successful.

Questions can also be raised about timing of the demonetisation. Some say the timing could not have been worse for such a drastic step as the economy had already started slowing down and the note ban caused the GDP growth to plunge further.

Tax compliance:

Finance Minister Arun Jaitley last week said demonetisation had led to formalisation of the economy and made India a more tax-compliant society. He said the larger purpose was to move India from being a tax non-compliant society to a tax-compliant society.

While bringing more people into the tax bracket was definately one of the objectives, the main ones were, however, to deal blow to black money hoarding and fake notes problem. The tax compliance did go up, but there can be several other reasons for it than just the demonetisation.

In March 2014, the number of Income tax returns filed was 3.8 crores. In 2017-18, this figure has grown to 6.86 crores. In the last two years, when the impact of demonetisation and other steps were analysed, the income tax returns have increased by 19 percent and 25 percent. The income tax collections have increased from the 2013-14 figure of 6.38 lakh crores to the 2017-18 figure of 10.02 lakh crores.

['Process of demonetisation is complete,' says DEA Subhash Chandra Garg]

The increase in revenue due to more people coming under the tax bracket is evident. While there can be other reasons contributing to this growth, demonetisation is surely one of the reasons. Other gains, as claimed by the government, are rise in number of people opting for digital transactions. This also adds to tax compliance as a digital transaction leaves a trail and is traceable.

[Demonetisation did not slowdown economy, Raghuram Rajan's policies did: Niti Aayog VC]

At least 18 lakh people have also been identified with suspicious transactions after demonetisation. Once the probe is over, a large sum of money may turn out to be black money. So, as of now, improved tax compliance seems to be the only objective that has been met to the satisfaction of the government.

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