THE fact that almost 99 per cent of the banned cash has returned to the banking system doesn’t point to the limitations of demonetisation, the government said Wednesday, listing what it called were its several benefits: expansion of both direct and indirect tax base, more digital transactions and sustained clean-up of black money.
Finance Minister Arun Jaitley said that one of the principal objects of demonetisation was to gradually bring down the quantum of cash operating in the system and an integration of the informal economy with the formal one where progress has been achieved.
“The object of demonetisation was not confiscation of money. The object of demonetisation was that India is predominantly a high-cash economy and, therefore, that scenario requires to be significantly altered,” he told reporters after the release of Reserve Bank of India’s Annual Report for 2016-17.
He further said, “It is unfortunate that those who have never fought against black money and when in power never took a single step against black money, tried to confuse the object of demonetisation exercise as to how much currency gets confiscated. Or how much disappears. That is not the real object of demonetisation. The real object of demonetisation was formalisation, attack on black money, less cash currency, bigger tax base, digitisation, a blow to terrorism and we do believe that in each of these areas, the effect of demonetisation has been extremely positive.”
The intent of the government was to “give a blow to black money” by enlarging the country’s tax base that has expanded “substantially” post-demonetisation, Jaitley said.
“It is obvious that post-demonetisation, the direct tax base has already started expanding substantially. In fact, personal income tax returns have increased by over 25 per cent and this is because of the fact that those dealing in cash currency are now compelled to deposit the money in banks and the anonymity which existed with regard to ownership of the cash money operating in the system has come to an end. The money has now got identified with a particular owner. The expansion of even indirect taxation which is evident in the initial results of the deposits of the GST is indicative of the fact that there are more and more transactions taking place within the system itself. So, both the direct and the indirect tax base is unquestionably getting expanded, which was the prime objective.”
The other objective was expansion of digitisation, Jaitley said, adding that it “climaxed” during the demonetisation period and the government is now trying to sustain that momentum even after the remonetisation exercise has been completed.
“It was also one of the principal objects that the quantum of cash operating in the system must gradually come down, that was one of the purpose of demonetisation. So rely more on banking transactions and digitisation and admittedly as per the RBI report, the volume of cash currency has come down by 17 per cent,” he said.
Jaitley said that the government has taken many steps for “squeezing out cash” and for “formalisation of the economy”, starting from ensuring bank account for every Indian, subsidy transfer into bank accounts instead of just distributing cash doles, strict action against foreign black money, end of round tripping through treaty misuse and the curb on shell companies and benami properties. “Next step is going to be to put an end to use of black money in elections and therefore, how to ensure tax paid money comes into elections system,” he added.
At a book launch event earlier in the day, Jaitley had said that the government will adopt a carrot-and-stick policy on taxation, adding that post-GST, tax authorities will go after evaders whose invoices do not match tax payment. “You need to be reasonable in your rates, you need to be reducing the compliance burden as far as procedures are concerned, you need to use more technology in order to ensure the physical contact between the assessee and the assessing authority is minimised. But at the same time you need to carry the stick if somebody still tries to evade the law,” he said.
In his Independence Day speech on August 15, Prime Minister Narendra Modi had said that the number of new taxpayers filing income tax returns from April 1- August 5 had “more than doubled” to 56 lakh as against 22 lakh returns filed in the same period last year. “This is the result of our fight against black money,” he had said.
Modi had also stated that post-demonetization, the reports from data mining “astonishingly revealed that there are 3 lakh shell companies dealing in hawala transactions”. “Out of these 3 lakh shell companies, registration of 1.75 lakh companies were cancelled,” he had said.
The government has already identified more than 37,000 shell companies which were engaged in hiding black money and hawala transactions. Around 163 companies which were listed on the exchange platforms were suspended from trading, pending submission of proof documents. The Income-tax Directorates of Investigation have identified more than 400 benami transactions up to 23 May, 2017 and the market value of properties under attachment is more than Rs 600 crore, a Finance Ministry release said.
The release added that the demonetisation drive led to significant change of saving habits and formalization of assets market. Considerably more funds came into the organized financial markets, whereas earlier households were parking much of their savings in unproductive physical assets, it said.
“The savings in the form of investment in equity mutual funds, life insurance premia etc. increased. The total assets under management of mutual funds rose by 54% by the end of June 2017 from March 2016. As on 16 August 2017, the number of Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts stands at 29.52 crore with rural accounts comprising 60% of it. Thanks to demonetisation-led efforts, zero balance accounts under PMJDY declined from 76.81 % in September 2014 to 21.41% in August 2017,” it said.