Return filings contracted nearly 2% to 67.4 million in FY19 from the high base of the previous year
Return filings contracted nearly 2% to 67.4 million in FY19 from the high base of the previous year

Economic downturn dents growth in tax returns seen after demonetisation

  • Third anniversary of demonetisation: The number of income tax returns filed grew 6.5% in FY15 to 40.4 million, then surged 14.5% in FY16 before jumping 20.5% in FY17
  • In the subsequent year, FY18, income tax returns filed surged 23.1% to 68.7 million

New Delhi: The sharp growth in filing of income tax returns, seen after the June 2016 amnesty scheme and the high value currency ban on November 2016, has taken a beating with the Indian economy slipping into a deep slowdown. Friday marks the third anniversary of demonetisation.

The trend of over 20% rise in return filings seen in FY17 and FY18, gave way to contraction in FY19, a trend not seen in nearly a decade for which data is readily available.

According to data from the Income Tax department, number of income tax returns filed grew 6.5% in FY15 to 40.4 million, then surged 14.5% in FY16 before jumping 20.5% in FY17, the year of demonetisation. The government had announced an income disclosure scheme, effective June 2016, for people to report previously untaxed income, pay tax and penalty and avoid prosecution.

In the subsequent year, FY18, income tax returns filed surged 23.1% to 68.7 million.

The tax department’s persuasion through text messages and emails that accompanied the government’s drive against black money had aided this surge along with a steady growth in the economy. The Indian economy grew at a steady pace to 8.2% in FY17 from 6.4% in FY14. Although, economic growth slipped to 7.2% in FY18 from 8.2% in the year before, tax return filings had surged 23.1% in FY18. However, return filings failed to sustain the momentum in the next fiscal, contracting nearly 2% to 67.4 million in FY19 from the high base of the previous year as economic growth slipped to 6.8%.

The basket of tax payers is dynamic, with the number of returns filed dependent on income levels which in turn are subject to the vagaries of the economy. People may go out of the tax net due to reduction or loss of income or death, while new earning members may get added.

According to a survey of people’s perception of demonetisation’s impact, its biggest positive was bringing tax evaders into the tax net, while its biggest negative was the economic slowdown and loss of livelihood for many in the unorganised sector. A survey conducted by LocalCircles, an online community and social platform engaging with citizens, showed that three fourth of close to 8,500 people who chose to give their views on a specific question said demonetisation helped reduce black money, increase tax receipts, and brought evaders into the tax net.

Former economic affairs secretary in the finance ministry Subhash Chandra Garg in a blogpost on Friday said cash in the system remains high and that the Rs2000 notes introduced after demonetisation are being hoarded.

Despite the government’s objective of reducing currency-to-GDP ratio to make the country a less-cash economy, currency in circulation has come back with a vengeance even as digital payments have grown substantially.

Calling for another round of demonetisation, Garg said people should be asked to deposit the 2000 notes in their bank accounts without any counter replacement. “ 2000 bank notes account for one third of currency notes in circulation in value terms. A good chunk of Rs. 2000 notes are actually not in circulation, having been hoarded. Rs. 2000 note, therefore, is not presently working as a currency of transaction. It can be demonetized, without causing any disruption," he added.

Garg also said digital payments have been rising globally, but in India it has been happening at a much slower pace. “Digital payment products continue to face two major disabilities - only banks are permitted effectively to offer; non-banks and other financial sector players are not. Amendment in the Payment and Settlement Act made through Finance Bill 2017 are still to be notified," he added.

The former secretary said fintech firms offering payment solutions are likely to be disadvantaged by the recent budget proposal to do away with Merchant Discount Rate without providing for an alternative to such firms to recover their costs and charges.

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