Demonetisation’s long-term benefits to Indian economy can’t be ignored

Dubai: Political rhetoric in India on the impact of demonetisation ranges from a ‘monumental failure’ as depicted by the opposition parties and a ‘grand success’ as what the ruling Bharatiya Janata Party (BJP) would like people to believe.

The truth lies somewhere in between and there is no denying the fact that the exercise will have a long-term positive impact on the economy despite falling short when it comes to all of its originally stated objectives.

Ever since the Reserve Bank of India (RBI) put out its annual report which revealed that close to 99 per cent of India’s currency in circulation had been returned to the banks following the note ban, opposition parties have attacked the government, blaming it for pushing through a move that disrupted the country’s growth momentum without any tangible benefits.

The Finance Ministry issued a statement saying that tax authorities had found undisclosed income of Rs175.25 billion (Dh10 billion), and that they had also seized Rs10 billion after demonetisation. The ministry further said that a significant portion of the deposited cash could turn out to be black money — unaccounted money that has evaded tax.

The government claims that the note ban was a step to formalise the economy by getting down to the source and flow of funds that had floated around in an informal sector.

According to the Income Tax Department, the number of e-returns filed by individual taxpayers in the period running up to August 5, 2017 stood at to 27.9 million, up from 22.2 million in the corresponding period last year. This was an increase of about 5.7 million returns, or 25.3 per cent, and shows a marked improvement in the level of voluntary compliance as a result of action taken by the Income Tax Department on the basis of data concerning cash deposits in the wake of demonetisation, the department’s statement said.

Income Tax Department data 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 demonetisation 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 August 5, 2017 showed a growth of about 41.79 per cent over the corresponding period in FY [fiscal year] 2016-17.”

Armed with a new set of data, the taxmen have embarked on an ‘Operation Clean Money’ exercise targeting suspicious businesses. These include about 14,000 properties of more than Rs10 million (Dh566,837) each where persons have not even filed income tax returns.

“The investigations are in progress,” the statement said.

The government has claimed that after demonetisation, more than 100,000 shell companies saw their licences were cancelled. The development came after it was found that these firms were created to evade taxes. The government claimed further that the authorities had found over 300,000 registered companies involved in suspect dealings.

Chief economic adviser Arvind Subramanian recently said that after demonetisation, there had been a 20 per cent reduction in cash in the economy.

Economic Survey 2016-17 showed that the 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 demonetisation,” Subramanian said, adding that the cash-to-GDP ratio has come down by 1.6 percentage points.

At least 1.8 million people were identified with suspicious transactions after demonetisation. Central Board of Direct Taxes chairman Sushil Chandra had earlier spoken about the suspicious transactions and said the tax department had found over 10 million accounts where above Rs200,000 had been 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 reportedly said, implying that once the probe is over, a large sum of money may turn out to be black money.