A year after the demonetisation of Rs 500 and 1,000 currency notes, the government has made some clear gains: an improvement in the level of voluntary tax compliance, and the stage being set for infusing funds into the country’s loss-laden banking system.
Sources said the bank recapitalisation programme could not have come at a more opportune time than this, when the banks are flush with liquidity in the aftermath of the demonetisation exercise. The large amount of cash deposits after demonetisation set the stage for banks to subscribe to the Rs 1.35-lakh crore worth recapitalisation bonds, which are proposed to be frontloaded over the next four quarters.
Tax compliance also got a boost in the months following demonetisation. A scrutiny of tax department data available until June 30, 2017 shows that for financial year 2016-17, 1.26 crore new taxpayers, including return filers and non-filers making tax payments, were added to the tax base of the country.
The total number of all returns, electronic as well as paper, filed during the entire financial year 2016-17 was 5.43 crore, 17.3 per cent more than the returns filed during 2015-16. The number of e-returns of individual taxpayers filed till the due date of August 5, 2017 increased to 2.79 crore from 2.22 crore returns filed during the corresponding period last year, an increase of about 25.3 per cent.
According to Income Tax Department, these figures show “marked improvement in the level of voluntary compliance” as a result of action taken on the basis of data of cash deposits following demonetisation. Alongside this, as per the tax department data updated till August, there was a 158 per cent increase in number of searches from 447 to 1,152 groups, 106 per cent increase in seizures from Rs 712 crore to Rs 1,469 crore, 38 per cent increase in admission of undisclosed income from Rs 11,226 crore to Rs 15,496 crore.
The number of surveys by the tax department recorded an increase of 183 per cent from 4,422 to 12,520, while detection of undisclosed income saw an increase of 44 per cent from Rs 9,654 crore to Rs 13,920 crore. Senior officials said the Income Tax Department is already in the process of scrutinising cash deposits and income profiles post-demonetisation through a partial rollout of the data analysis project named Project Insight.
The tax department has selected 20,572 tax returns for detailed scrutiny for discrepancies related to income profiles before and after demonetisation, officials said. Separately, they said, the department has identified one lakh “high risk” cases of alleged tax evasion for detailed investigation.
As part of its actions against tax evasion following demonetisation, the government also took action against shell companies, striking off 2.24 lakh companies from official records that had been inactive for long — 3.09 lakh directors of such companies have been disqualified. It was also found that cash deposits worth over Rs 17,000 crore were made and later withdrawn post demonetisation by as many as 35,000 companies, which are now deregistered.
The benefits of addition of new taxpayers, however, did not translate into a rise in tax payments, as was stated in the second volume of the Economic Survey, which was released in August. The Survey stated that the growth of taxpayers post-demonetisation was significantly greater at 45 per cent as against 25 per cent than in the previous year.
“The addition amounted to about 5.4 lakh taxpayers or 1 per cent of all individual taxpayers in just a few months,” it said. The addition to the reported taxable income of these new taxpayers, however, was about Rs 10,600 crore. “The tax base did expand after demonetisation. 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,” the Survey authored by Chief Economic Adviser Arvind Subramanian said.
The tax department later clarified that the growth in the number of taxpayers discussed in the Economic Survey was based on the number of new taxpayers assuming the previous year’s growth rate as the reference growth rate.