Tax base growth: Note ban gains gone with the wind : 25-09-2020

Demonetisation bolstered the direct tax assessee base and improved the tax’s buoyancy to a reasonable degree, but the slump in economic growth and a return to old, evasive habits by sections of taxpayers have led to a sudden, precipitous erosion of these gains in FY19 and FY20 (see chart).

Needless to say, the scenario would be much worse in the current financial year, as the pandemic has dealt a body blow the economy.

The number of corporate assessees with income above Rs 25 lakh saw a dramatic 90% rise from 0.76 lakh in 2015-16 to 1.44 lakh in 2016-17, the year in which demonetisation was carried out. The non-corporate — largely individuals — taxpayer base reported one of the largest growth in history at 23% in 2017-18, the year that followed demonetisation.

Among personal income tax payers, those in the category of income above Rs 10 lakh more than doubled from 22 lakh in 2014-15 to 45 lakh in 2018-19, according to a CAG report tabled in Parliament on Wednesday. The growth in the number of people in the highest income slab bracket was even steeper than the overall growth of 70% in the PIT (non-corporate) assesse base during the period, to 6.2 crore.

The fizzling out of demonetisation gains is evident from the fact that direct tax revenue growth slipped from 18.5% in 2017-18 to 13.5% in 2018-19 and then plunged headlong to (-)7.4% in 2019-20. The growth in corporate tax collections declined from 17.8% in 2017-18 to 16.2% in 2018-19; the deep tax cuts fuelled the fall from thereon, and the revenue from this segment, one of the principal sources of revenue next only to GST in terms of size, saw an unprecedented fall of 16% in 2019-20.

An aspect to be noted is that the demonetisation’s positive impact was visible on PIT immediately, that is, in the year in which the measure was implemented, but it boosted the corporate tax assessee base and the corporate tax revenue mainly in the subsequent year. Direct tax buoyancy reached a temporary peak in 2018-19 and has since fallen; the buoyancy fell into an abyss in 2019-20 itself. Much worse in store for the current year.

The sudden slippage also shows the relative ineffectiveness of the Operation Clean Money mission, that was meant to track down those who deposited cash much in excess of their reported sources of income in their bank accounts during the note ban period. This is even as the income-tax department had identified 23.5 lakh permanent account numbers for post-note ban cash deposits inconsistent with income profiles.

In assessment year 2017-18 (FY17, the demonetisation year), “a total of 2,10,077 persons (who were sent notices) filed income-tax returns and total amount of self-assessment tax was Rs 6,560.88 crore,” the department had told FE, in response to a RTI filed by news paper.

Source : Financial Express

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