Monday 23 October 2017

Demonetization: Impact on Direct Tax

Demonetization: Impact on Direct Tax

A lot has been said in the media by many economists and bureaucrats in last few months regarding the adverse impact of Demonetization and Goods & Services Tax on the economy. Many have gone on record to say that the Economy has been destroyed. However IMF defers from it in spite of revising the growth from 7.3% to 6.7% and calling it a blip. Even the global financial service, Morgan Stanley, firm has stayed positive on the economy. These contradicting views still keeps the doubt in mind if the exercise was really good?

From the point of view of direct taxation, the story seems a bit different.

If history of direct taxation is analysed it can be seen that something was not right. The average rate of growth in direct tax collection for past seventeen year was 17%. However, if the same is seen for past 8 years, it was only 10.65% or for past 5 years, it was only 8.74% or for the matter of past 3 years, it was further down to 6.89%.  After demonetization, however, it has gone up drastically to 15.3% for one year, considering the provisional figures as presented in the Union budget. This clearly explains that income tax was not being declared by many, in spite of rising working class and wages in last 17 years.

Further, if one analyses the Direct tax as a component of Total Tax revenue collected as on date, it also shows an irregular trend.
It was on constant rise till 2010, but after that it has been falling in an irregular manner. However, after the exercise of demonetization, it seems to have shed the trend of fall and has started to rise which again points back to the corrupt practices which existed earlier.

If the number of individual taxpayers are seen, than one can easily see that the number is on constant rise. For instance, the number of individual tax payers has gone up from 2.22 Cr to 2.79 Cr, a rise of 25%, as on 7th August 2017 as per the official press release of Central Board of Direct Tax.

The total tax Direct Tax collected in the financial year 2016-17 was INR 8.46 Lakh Cr., in which the rise in the last quarter from its previous one stood at 29.6%, which may be attributed to the exercise of demonetization. Even the provisional figures for the current year's budget stands at INR 9.80 Lakh Cr. If the till date collected figures for the Quarter ending in September 2017 are seen, it stands at INR 3.86 Cr, 18% more than the collection for the same quarter in the previous financial year.
If we interpolate the same as per average growth rate from April 2016 to Dec 2016 (as beyond that, demonetization impacted the collections) on accounting rising number of individual taxpayers and IT Department's 'Operation Clean Money' drive the value goes past INR 9.80 Lakh Cr comfortably.

If we assume the collection as projected, i.e. INR 10.48 Lakh Cr, it is around 70,000 Cr. more than the projected figures by government in the union Budget, which means we can actually expect the government to abolish the Income Tax for people earning up to INR 9,00,000 per year (AY 2014-15 data considered as latest authentic data is unavailable) which may come as a big relief to the people and may also help governing political party in future elections. Also this will increase spending and will give industries a much needed push. Although this is just an interpolation of an assumption, but the possibility cannot be ruled out as well as the exact data regarding the number of tax payers were not clear during the preparation of union budget.

On a holistic view, the exercise does seem to have created some short term jolts to the economy but the long term benefits seem to be much favourable, to the government in terms of revenue which can be spent on various social schemes and if the trend continues, to the middle class population as well if government relaxes the limit of the taxable income by certain amount.

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