Effect of Demonetisation on Tax Collection

Why in News?

The deadline for FY17 return filings ended on March 3st ; official data on direct tax collections for FY17 and FY18 is available. This makes an objective analysis possible on what demonetisation did to India’s tax base.



Tax Buoyancy

Tax buoyancy explains the relationship between the changes in government’s tax revenue growth and GDP growth rate. It refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without increasing the tax rate.

Current Scenario

i)Tax revenues have risen despite Tax rates have been stable in the last couple of years, with an only minor increase in surcharge and cess.

ii)India managed a second consecutive year of strong growth in its direct tax collections in FY18. Net collections increased by 17.1%  in the last fiscal year.

iii)Since the note ban, buoyancy numbers have perked up quite a bit. Direct tax buoyancy doubled from 0.6 times in FY16 to 1.3 times in FY17 and accelerated further to 1.7 times in FY18.A higher buoyancy signifies higher compliance.

iv)The number of income tax returns filed has grown by 57% in the last two years.

v)According to the Economic Survey, the number of individual tax filers rose by an additional 18 lakh or 3% of the existing base, due to the demonetisation exercise and the rolling out of the goods and services tax (GST).


Source-The Hindu.