Did demonetisation widen India’s tax base? A 10-year data review | Economy & Policy News

The data shows that the number of persons filing income-tax returns increased from 35.10 million in FY 2014-15 to 85.63 million in FY 2024-25. Direct-tax collections also rose from ₹6.95 trillion to ₹22.26 trillion over the same period.

Income-tax return filers more than double in a decade

CBDT data shows that the number of persons filing income-tax returns increased steadily over the past decade, with a sharper rise in the years immediately following demonetisation.

The number of return filers increased from 39.05 million in FY 2015-16 to 44.71 million in FY 2016-17. It rose further to 54.51 million in FY 2017-18 and 63.31 million in FY 2018-19.

By FY 2024-25, the number had reached 85.63 million.

The increase was particularly pronounced in FY 2017-18, when the number of return filers rose from 44.71 million to 54.51 million. The upward trend continued in subsequent years.

The figures, however, measure the number of people filing returns and should not be treated as a direct measure of the number of people paying income tax as some individuals file returns despite having no tax liability.

Direct-tax collections rose after demonetisation

Direct-tax collections also increased in the years following demonetisation.

CBDT data showed that total direct-tax collections rose from ₹7.41 trillion in FY 2015-16 to ₹8.49 trillion in FY 2016-17. Collections increased further to ₹10.02 trillion in FY 2017-18 and ₹11.37 trillion in FY 2018-19.

The growth rate in direct-tax collections increased from 6.63 per cent in FY 2015-16 to 14.52 per cent in FY 2016-17 and 18.01 per cent in FY 2017-18.

The figures show that direct-tax collections grew at a faster rate in FY 2016-17 and FY 2017-18 than in the preceding two years. However, collections declined in FY 2019-20 and FY 2020-21 before recovering in subsequent years.

Over the ten-year period between FY 2014-15 and FY 2024-25, direct-tax collections more than tripled.

The increase in collections also needs to be considered alongside changes in economic activity, tax rates, compliance and enforcement. Higher revenue alone cannot establish that demonetisation brought a corresponding number of new taxpayers into the tax net.

Direct-tax-to-GDP ratio increased, but not consistently

The direct-tax-to-GDP ratio provides another measure of tax collections relative to the size of the economy.

According to CBDT data, the ratio increased from 5.55 per cent in FY 2014-15 to 5.53 per cent in FY 2016-17 and 5.86 per cent in FY 2017-18. It reached 6.02 per cent in FY 2018-19 before declining to 5.23 per cent in FY 2019-20 and 4.78 per cent in FY 2020-21.

The ratio subsequently recovered to 6.73 per cent in FY 2024-25.

The ratio’s movement shows that the increase in direct-tax collections was not uniform throughout the decade. It also indicates that the relationship between tax collections and economic output was affected by developments beyond demonetisation.

Taxpayer numbers and return filers are different measures

The distinction between return filers and taxpayers is important when assessing whether the tax base has widened.

CBDT defines a taxpayer as a person who has either filed an income-tax return for the relevant assessment year or had tax deducted at source (TDS) during the relevant financial year but did not file a return.

On this broader definition, the number of taxpayers increased from 57.03 million in assessment year (AY) 2014-15 to 121.32 million in AY 2024-25.

This broader measure includes people whose income tax was deducted at source even if they did not file returns. It should therefore not be interpreted as the number of individuals who independently entered the income-tax return-filing system or paid income tax.

What did the government attribute to demonetisation?

In August 2018, then Finance Minister Arun Jaitley defended demonetisation on the grounds that it had increased tax compliance and formalisation.

“The larger purpose of demonetisation was to move INDIA from a Tax Non-compliant society to a compliant society. This necessarily involved the formalisation of the Economy and a blow to the black money,” Jaitley said in a statement on August 30, 2018.

He said that approximately 1.8 million depositors had been identified for enquiries into whether their cash deposits were consistent with their declared income.

Attributing the increase in tax collections and return filings to demonetisation and other measures, he also cited an increase in income-tax returns filed, from 38 million in March 2014 to 68.6 million in FY 2017-18.

Jaitley also cited the implementation of GST on July 1, 2017. The number of GST-registered assesses increased from 6.61 million to 11.41 million in its first year, a rise of 72.5 per cent. However, GST registration figures relate to the indirect-tax system and cannot be directly equated with the number of individual income-tax return filers.

What does the Economic Survey say?

The Economic Survey 2016-17 identified the expansion of the income-tax base and an increase in reported and taxable income as important indicators of demonetisation’s long-term success.

“Perhaps the most important marker of success will be taxes,” it said.

The Survey also said that the number of new income-tax payers and the magnitude of reported and taxable income should increase over time.

It presented FY 2013-14 as a baseline, estimating 36.51 million taxpayers who filed returns and another 17.29 million who paid tax but did not file returns, taking the combined number to 53.80 million.

The Survey’s assessment was that the impact of demonetisation on tax compliance would need to be evaluated over a longer period. It also identified GST implementation, follow-up measures and structural reforms as factors that could contribute to the economy’s formalisation.