Big 60 Per Cent Surge In Income Tax Returns Can Be Credited To GST, Not Just DeMo

The other day, Finance Minister Arun Jaitley claimed that demonetisation was a success since it achieved its goal of making Indians more tax-compliant. Responding to criticism that since 99.3 per cent of the demonetised Rs 500 and Rs 1,000 notes had returned to the banking system, the entire exercise was a failure, Jaitley changed the goalpost.

He said: “A widely stated comment has been that just because most of the currency came back into the banks, the object of demonetisation has not succeeded. Was the invalidation of the non-deposited currency the only object of demonetisation? Certainly not. The larger purpose of demonetisation was to move India from a tax non-compliant society to a compliant society.”

This is a smart statement, and, as if on cue, The Times of India notes in a story today (31 August) that there has been a 60 per cent surge in the number of people filing income tax returns. Some five crore returns were filed by 30 August this year as against 3.1 crore on 29 August 2017. (Note: 31 August is the last date for individuals, Hindu undivided families, associations of persons [AoPs], and Bodies of Individuals to file income tax returns for fiscal year 2017-18. Businesses can file by 30 September).

While it is not clear whether this surge has anything to do with the extension of the returns filing date by a month (from 31 July to 31 August), one thing needs stating: it is not easy to make the claim that demonetisation had everything to do with this. It must have contributed to better compliance, but GST may have contributed even more.

The big rise in income tax return (ITR) filers is more directly related to the goods and services tax (GST) system than demonetisation. Earlier, under the old sales tax, service tax, and central excise regimes, we had around 63 lakh indirect taxpayers; in the new GST system, some 49.53 lakh new taxpayers have been added, taking the total to 1.13 crore indirect taxpayers, reports The Hindu BusinessLine.

This half-crore new indirect taxpayers could have substantially swelled the income tax base this year. Reason: once the taxman knows the scale and profitability of your business, your income tax liabilities can also be guessed. You cannot avoid showing up some of the income as profit. Secondly, you cannot show low profits unless you show higher costs; so, workers who earlier were not shown in the books may now have been “formalised” and shown as additional cost factors. This could also explain the surge in the strong growth in employees’ provident fund subscribers. All this is good, and leading to greater formalisation of the economy and improved tax compliance, but one can’t give demonetisation all the credit for this happy development.

Many small businesses may still do a large portion of their transactions in cash to evade GST and avoid excess scrutiny by the taxman by opting for the “composition” scheme, under which they can pay a small tax on reported turnover rather than on products or services. But when they make supplies to larger companies, they have to be GST-compliant in order to retain that business. They may operate two books, one that is GST-compliant and another that is in cash, but whatever goes into the GST khata will be indicative of the profits they may have earned, and hence liable to payment of income tax.

It is GST that probably explains the bulk of the surge in income tax return filers, not demonetisation.