JOIN USOne year has passed since demonetisation was announced. And even now, it is argued whether the government had enough data to justify its decision of demonetising 86% of the total value of the currency.
There are two clear data indicators for the government to announce a radical measure like demonetisation. The first one is the sudden surge in the currency in circulation. The data showed that there is an abnormal increase (20.1%) in currency holdings with the public between September 2015 and September 2016, whereas the normal growth pattern of currency in circulation has been about 11% to 13% in the previous years.
India witnessed only about 5% of inflation in terms of Consumer Price Index between September 2015 and September 2016. The non-cash transaction, especially electronic and online transactions have been on the increase in all sectors between September 2015 and September 2016. Paytm registered a phenomenal growth and has more than 12.2 crore active users as of April 2016.
Given the per capita income of Indians at Rs 1 lakh, economist Ajit Ranade estimated that the maximum denomination of currency required for Indian society is Rs 250. In this backdrop, it can be understood that denominations up to Rs 100 should have been the most preferred ones and Rs 500 should be the next preferred note, on a limited level.
However, in the pre-monetisation era, Rs 1,000 and Rs 500 notes constituted about 38% and 48%, respectively, of the total value of the currencies in circulation. Currencies up to Rs 100 constituted only 14% of the total value of the currency in circulation. In hindsight, one can blame all the governments in power between 2000 and 2016 for increasing the share of Rs 500 from 24.5% in 2001 to 48% in 2016 and the share of Rs 1,000 from 1.7% in 2001 to 38% in 2016 in the total currency with the public, leaving enough scope for people who want to keep unaccounted money in high denomination currencies.
It is not as if the currency in circulation surged only between September 2015 and September 2016. Even between September 2009 and September 2010, there was an unprecedented growth of 18.1% in the currency holding with the public, which is a clear indication that there was something fishy. However, no simple corrective measures like increasing the share of denominations up to Rs 100 was thought of. In fact, benefit in terms of lower expenditure of printing currencies could have outweighed the decision not to reduce the share of Rs 500 and Rs 1,000 notes.
The second data indicator is the reduced share of direct tax in the total tax collections. The direct tax collections which peaked at 60.8% in the total tax collections during the FY 2010-11 started declining thereafter and expected to reach about 51% during the FY 2016-17.
In addition, the number of effective income tax (I-T) assessees in the individual category increased only from around 4 crore in AY 2011-12 to around 5 crore in AY 2014-15 (effective assessees means those who have submitted I-T returns (irrespective of whether they paid income tax or not plus those subject to tax deduction at source (TDS) but have not filed returns).
With no major change in the direct taxation slabs between AY 2011-12 and AY 2014-15, the growth in the number of effective assessees was a pittance in these four years. Among a population of 123 crore in 2013-14 (AY 2014-15), 60% of the population is in the working age of 18 to 60, which means 37.5 crore men and 37.5 crore women are in demographic dividend category. In India, women involved in economic activities to earn independent income is about 40% in the working age group, which means 15 crore women earn an independent income.
On the assumption that 90% of men in the working age and no men above the working age group are involved in economic activities, 33.75 crore men earn independent income from economic activities, totalling to 48.75 men and women earning an independent income.
Where's true income?
In India, the trend is that only 45% of the effective income tax assessees show their true income. For instance, AY 2014-15, the actual number of people who paid income tax is about 2.33 crore and compared to the people who earn independent income from economic activities, this is about 4.88%. This shows that the reduced share of direct tax in the overall tax collection is due to three categories of people failing to obey I-T rules. The first category belongs to those who earn in the income bracket but do not even acquire PAN card and don't fall under the radar of I-T department.
The second category belongs to people who have PAN card and submit their I-T returns but don't pay tax, although their true income falls in the I-T slab. The third category belongs to people who pay income tax, which is lower than what they are supposed to pay as per their true income. There has been tax evasion in both breadth and depth. In fact, the I-T department estimated that direct tax collections have been only 25% of what it should have been, which means there is a scope to increase the direct tax collections by fourfold. Those who have been dealing mainly in cash are the ones who have the potential to hide their true income as it is not traceable.
The I-T department after multiple scrutinies of demonetised currency deposited in banks believes that responses should be sought from 13.33 lakh accounts of 9.72 lakh people with unusual cash deposits of around Rs 2.89 lakh crore. This would raise the direct tax revenues substantially.
The government was able to crack down on 3,5000 shell companies which transacted about Rs 17,000 crore immediately after demonetisation. One such shell company alone traded Rs 2,484 crore post-demonetisation. With no demonetisation, there would be no new information on unaccounted cash and tax evasion.
(The writer is an independent consultant and researcher)