Little Doubt That DeMo Has Improved Personal Tax Compliance Levels 

Evidence from the latest time series on taxpayer data released by the Income Tax Department shows that tax compliance at the individual taxpayer level is rising – which supports the government’s claims that demonetisation and the shift to goods and services tax (GST) may have made a significant contribution in this regard.

The time series data on direct tax collections relates to the period from 2000-01 to 2017-18, the latest of which is provisional. It shows that personal income tax paid as a proportion of corporation tax is rising and stood at nearly 74 percent in 2017-18 (see table). Corporations paid out Rs 5,71,202 crore in taxes in that year – the year after demonetisation and GST – compared to Rs 4,19,998 crore paid by individuals.

This proportion of personal income tax as a proportion of corporation tax is the highest ever achieved since the Vajpayee years, where the proportion was around 80 per cent between 2000-01 and 2004-05. During the UPA (United Progressive Alliance) years, personal income taxes paid were around 57 per cent of corporate taxes on an average, which may indicate one of two things, or both: that compliance rates were lower under UPA, or that corporate incomes may have risen faster than personal incomes during 2004-05 and 2013-14. Or both.

In contrast, during the Modi years (2014-15 to 2017-18), the share of personal tax payments as a proportion of corporate taxes has been steadily rising, from 62 per cent in the first year to 74 per cent in the last fiscal. The sharpest rise was noticed in the last two years, at 72 per cent and 74 per cent (figures rounded off to nearest full number).

Once again, we can attribute this to two possible reasons: one is corporate over-leveraging problem and slower profits growth, and the other is improved compliance at the personal tax collection level.

While corporate tax collections probably have a high correlation to growth and profits, which have admittedly been under pressure for the last few years, it is surprising that personal income taxes are not showing a similar correlation. Individuals are paying more in taxes even when the economic situation is difficult. This cannot but indicate better compliance.

This must inevitably lead to the conclusion that demonetisation and GST have had a positive impact on personal tax compliance levels, if nothing else.

One can definitely ask whether disrupting growth and incomes with a harsh measure like demonetisation was justifiable in terms of economic costs and benefits, but higher relative compliance levels between corporations and individuals cannot be denied any more.