The debate over the achievements of demonetization is not settled yet. Ever since the Reserve Bank of India put out its annual report which revealed that close to 99 per cent currency returned to the banks, political parties such as Congress, CPI(M) and TMC have attacked the government and asked Prime Minister Narendra Modi to apologise for undertaking a move that disrupted the country’s growth momentum.
Senior politicians like P Chidambaram and Mamata Banerjee called the demonetization a big scam which facilitated the conversion of black money. Their argument is fairly simple. They say that the government had expected dividend of close to Rs 4-5 lakh crore, however, the RBI data shows it got just Rs 16,050 crore. So, was it wise decision to lose one per cent GDP for just Rs 16,000 crore? critics ask.
But, would it be fair to see demonetization from the lens of only windfall margin? Certainly not, the government argues. And Finance Minister Arun Jaitley on Wednesday said that the money has come back to system doesn’t mean that all of them are legitimate. The Finance Ministry issued a statement saying that the tax authorities have found undisclosed income of Rs 17,526 crore, and they have also seized Rs 1,003 crore after the demonetization. It further said that a significant portion of deposited money could turn out to be black money.
So, what the government is trying to say is that the impact of demonetization on Indian economy cannot be determined solely by looking at windfall profits. The government claims that note ban was a step to formalize the economy by getting down to the source and flow of funds that were sloshing around in informal sector.
The demonetization may not be a perfectly successful as it couldn’t achieve to anticipated black money, but calling it a big scam will be a bit of exaggeration and sheer politics.
As a result of demonetization, and in tandem with Modi’s ‘Digital India’ strategy, which aims to expand India’s online infrastructure, the country now sits on a treasure trove of data. The government has been gradually making enrollment to its national electronic database ‘Aadhaar’ mandatory for tax returns, opening of bank accounts and any purchases above 50,000 rupees. It is estimated that over 99 percent of Indians aged 18 and above are now enrolled in the scheme.
This means that the government can expect to see the benefits of taxation on previously hidden black money over the coming months and years. There are also long-term benefits from demonetization in terms of increasing income tax payments going forward and encouraging the use of digital payments over cash, a means of encouraging better tax compliance among businesses
India’s finance ministry says it is probing 1.8 million bank accounts where cash inflows during the demonetization period “did not appear in line with its tax profile,” meaning it can expect some belated tax payments.
Not to mention but Demonetization also helped to curb out all the fake currency which was in circulation.
Also, apart from benefits discussed above there are few other positive points as well that substantiate Modi Govt’s decision about Demonetization as a right decision
Demonetization impact on widening of Tax-base: According to the Income Tax, the number of e-returns of Individual taxpayers filed till 5th August increased to 2.79 crore from 2.22 crore returns filed during the corresponding period of last year, registering an increase of about 57 lakh returns or 25.3 per cent. “This shows marked improvement in the level of voluntary compliance as a result of action taken by the Income Tax Department on the basis of data of cash deposits in the wake of demonetization, the I-T statement said. It further stated that the total number of all returns (electronic + paper) filed during the entire Financial Year 2016-17 was 5.43 crore which is 17.3 per cent more than the returns filed during FY 2015-16. The Tax department also put out number of new taxpayers and said: “For Financial Year 2016-17, 1.26 crore new taxpayers (return filers + non-filers making tax payments) were added to the tax base.”
Demonetization impact on Direct Tax Collections: The Income Tax Department showed a growth of about 41.79 per cent in the collection of Advance Tax under Personal Income Tax. In a statement it said: “The effect of Demonetization is also clearly visible in the growth in direct tax collections. Collection of advance tax under personal income tax (i.e. other than Corporate Tax) as on 05.08.2017 showed a growth of about 41.79 per cent over the corresponding period in FY 2016-2017.” It further said that the collection of self assessment tax under personal income tax showed a growth of 34.25 per cent over the corresponding period in FY 2016-2017.
14,000 high-value properties under scanner: The Income Tax department on Thursday released a statement saying the operation clean money exercise which was started after demonetization has unearthed large number of persons and clusters having suspect transactions. “These include about 14,000 properties of more than Rs.1 crore each where persons have not even filed Income Tax Returns. The investigations are in progress,” the statement said.
Lakhs of shell firms detected: The Prime Minister while speaking on Foundation Day of Institute of Chartered Accountants of India revealed that after the demonetization over 37,000 shell firms were detected. He further said that the authorities have cancelled the registrations of more than 1 lakh shell companies. The development came after it was found that these firms were created to evade taxes. The government claimed that the authorities had found over 3 lakh registered companies that were involved in suspected dealings. “The government has cancelled registration of over 1 lakh companies in a single stroke and more than 37,000 shell firms have been identified for strong action,” the Prime Minister had said.
Benami properties identified: After the demonetization, the CBDT claimed to have identified over 300 Benami Properties. These properties were identified during Income Tax’s clean money operation. The tax authorities also identified over 1,300 high-risk cases where people’s real estate deals and land purchases did not match with their tax profiles. The total value of these property transaction was more than Rs 6,000 crore.
Cash to GDP ratio declined: Chief Economic Adviser Arvind Subramanian recently said that after demonetization there has been a 20 per cent reduction in cash in the economy. Economic Survey 2016-17 showed that currency in circulation contracted by 19.7 per cent whereas reserve money contracted by 12.9 per cent. “Cash has come down in the economy. There has been a 20 per cent reduction in cash relative to what might have been without demonetization,” Subramanian said adding that the cash-to-GDP ratio has come down by 1.6 percentage points.”
Suspicious transaction: At least 18 lakh people were identified with suspicious transactions after demonetization. Central Board of Direct Taxes Chairman Sushil Chandra had earlier informed about the suspicious transactions and said that tax department had found over 1 crore accounts where above Rs 2 lakh money was deposited. “We have compared these vast data with the income profile, turnover and the various other particulars of income available in the income tax data bank. In the first phase where the deposits in account are not matching with our data, we are putting the same on our e-filing portal seeking explanation of source of income,” he had reportedly said. So, once the probe is over, a large sum of money may turn out to be black money.