Impact Of DeMo And GST: India added 40 Lakh New Filers To The Tax Base

The introduction of goods and services tax (GST) and demonetisation of high-value currency notes brought significant number of people into the income-tax net, this was revealed in the Economic Survey 2017-18 released on Monday.

"One of the aims of demonetisation and the goods and services tax (GST) was to increase the formalisation of the economy and bring more Indians into the income tax net, which includes only about 59.3 million individual taxpayers (filers and those whose tax is deducted at source in 2015-16), equivalent to 24.7 per cent of the estimated non-agricultural workforce," said the report.

Has this happened and to what extent?

According to the report, at first blush, there does seem to have been a substantial increase in the number of new taxpayers.

Figure 1 compares the total number of new taxpayers in the 13 months since demonetisation (November 2016 – November 2017) with previous 13-month time windows. After November 2016, 10.1 million filers were added compared with an average of 6.2 million in the preceding six years, an addition of 40 lakh people.

A rigorous assessment of the impact of demonetisation, however, must account for the pre-existing trend growth in new tax filers. To address this, a regression analysis is undertaken. The result is depicted in Figure 2.

The report added that taking seasonality into account, it is found that there is a 0.8 per cent monthly trend increase in new tax filers (annual growth of 10 per cent). The level of tax filers by November 2017 was 31 per cent greater than what this trend would suggest, a statistically significant difference. This translates roughly into about 1.8 million additional tax payers due to demonetisation-cum-GST, representing 3 per cent of existing taxpayers.

"Further analysis suggests that new filers reported an average income, in many cases, close to the income tax threshold of Rs 2.5 lakhs, limiting the early revenue impact. As income growth over time pushes many of the new tax filers over the threshold, the revenue dividends should increase robustly," said the Economic Survey report.