Nearly two years after the demonetization [November 8, 2016] announced by the prime minister, N Modi, the Reserve Bank of India [RBI] has released – in its Annual Report for 2017-18 – the numbers on the value of the demonetized old 500/1000 rupee notes that were not returned to the banking system. This is about Rs 10,700 crore out of a total of Rs 1541,000 crore which were with the public as on November 8, 2016.
This has triggered waves of exhilaration among the critics of demonetization [especially the main opposition party Congress] who have been quick to point out that this was a flop show. They contend that it achieved nothing in terms of its stated objective of denting black money even as it led to closure of tens of thousands small businesses and loss of jobs.
Their conclusion is based on a facile assumption that since almost all of the old currency declared illegal has come back, there was no black cash existing then, and even if there was any, the very act of the same being deposited in the bank [or exchanged for new currency] has made it white. To presume that there was no black cash is utopian to say the least. The second needs close scrutiny.
The idea of demonetization [albeit sudden] was to sink an element of fear in the minds of hoarders of black cash. On depositing this in the bank, they would not only run the risk of losing the entire amount, but also pay penalty and even jailed. So, they would be better off letting this money be destroyed in their hands. Modi estimated that the amount of black cash would be over Rs 300,000 crore.
Ideally, a person indulging in wrong doing is expected to be afraid of the law of the land. He fears that in the event of being caught, the state machinery and the judiciary will go after him hammer and tongs. So, he prefers to opt for a lesser punishment. Accordingly, in this case, it was expected that hoarders of black money won’t come forward and let it die in their homes/offices.
But, they did not choose this option. Instead, they came forward to deposit in the banks or exchange for new notes. Clearly, they were not afraid as they believed that they would manage the system. They did so in collusion with bank officials. Indeed, this is a reflection of a cult nurtured for decades that whatever wrong they do, the state/agencies/judiciary won’t punish them.
With this cash back in the system, they are celebrating that demonetization has failed. But, don’t forget the money that was hitherto anonymous, now has an identity and an address. The Income Tax [IT] department can confront them with the returns filed [or even no returns] and make them pay tax plus penalty and even jail in exceptional cases [e.g. proceeds of corruption]
This is precisely what is being done when Modi exhorts that 1.8 million cases of so called ‘suspicious’ deposits are under scrutiny for necessary action. While, these are big fish [persons depositing more than Rs 500,000/-], millions of smaller depositors have already started to file return and pay tax due to the fear of coming under the lens of IT department. The impact is already visible in the numbers of return filers and tax collection.
During 2017-18 assessment year [AY], the total number of return filers were about 70 million which was almost double the number in AY 2014-15 or 36 million. Of the 34 million filers added during the last 3 years, around 16 million were added during AY 2017-18 alone. A good slice of this can be attributed to demonetization. The Goods and Services Tax [GST] also helped as the trail of sale/purchase of businesses on GST network [GSTN] left them with no other option but to file their IT returns.
The current AY [2018-19] has more spectacular results. Up to August 31, 2018 [last date of filing return], the number of e-filers alone were 54.2 million which is 71% higher than 31.7 million filers during the corresponding period last year. Further, the e-filers in individual category other than the salaried class [who pay tax on presumptive income] up to August 31, 2018 are about 12 million up from around 1.5 million last year.
Last year, with 31.7 million e-filers up to August 31, 2017, the total number of return filers for the whole year were 70 million. During current year with e-filers up to August 31, 2018 alone being 54.2 million and assuming the same trend as last year, the total number of return filers may even go well beyond 100 million.
The stupendous increase in the number of filers has got reflected in buoyancy in tax collections. The direct tax revenue increased from Rs 850,000 crore during 2016-17 to over Rs 1000,000 crore during 2017-18. During the current year, from all available indications, the collection may well exceed Rs 1100,000 crore.
When, scrutiny of big ticket cash deposits [read: 1.8 million] gets completed, the accretion to tax collection plus penalty would be much more. All put together, the government would be able to garner more than Rs 300,000 crore – the benefit alluded to by the prime minister from demonetization.
The much bigger takeaway from this structural reform is to make a frontal assault on the cult of not paying taxes. In view of the government having access to the identity/addresses of hitherto non-tax payers, their spending profile from various sources, advanced tools of data analytics and coordination among various agencies, they won’t be in a position to escape the tax net.
This lays the foundation for increase in tax collection on a sustainable basis. With buoyant revenue, the government would be able to spend more on building infrastructure –both physical and human – and welfare schemes for majority of the poor without causing any slippage in its fiscal consolidation program. In short, the economy is poised for accelerated growth, a growth that will extricate millions out of poverty.
Clearly, the gains from demonetization in the short-term are unprecedented and will continue to unfold in the long-term as the economy moves forward.