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Last Updated : Nov 08, 2019 09:00 PM IST | Source:

Demonetisation: Three years on, more taxpayers and greater digital payment usage, but some pain points remain

The government had pitched the move as part of a broader strategy to clamp down on India's bustling parallel economy where deals take place in cash.

Three years after the government's decision to "demonetise" Rs 500 and Rs 1,000 notes, authorities are sifting through a mine of data, amid a sharp rise in taxpayers' base, rise in digital payments and a mount of reports on dodgy companies allegedly used to funnel slush funds.

After the announcement by PM Narendra Modi on November 8, 2016, citizens were given 50-days to deposit old notes in banks and post-offices by December 30.


The government had pitched the move as part of a broader strategy to clamp down on India's bustling parallel economy where deals take place in cash.

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These transactions remain outside the legitimate financial system, evading tax and hoodwinking authorities by obscuring the flow and source of slush money.

The currency recall, however, disrupted India's broader economy slowing down both household spending and corporate investment, with critics pointing out that the economy is still smarting under its after effects.

The move was also aimed at aiding a gradual shift towards a "less cash" economy, and expanding the tax base.

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The use of debit card at point of sales devices has grown 83 percent since November 2016. According to latest RBI data, the volume of debit card transactions has surged from 234.7 million in November 2016 to 428.7 million in August 2019, the latest for which data is available.

Likewise, online bank transactions through national electronic fund transfer (NEFT), commonly used by businesses, stood at 221.1 million in August 2019, up 80 percent since November 2016.

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Immediate payment service (IMPS), another electronic bank transfer facility, also saw its usage jump five-fold since demonetisation to 200 million in August 2019.

According to government sources, during demonetisation, through which the government had outlawed old Rs 500 and Rs 1,000 notes, cumulative cash deposits of more than Rs 25 lakh were made in about of 4.62 lakh bank accounts during November 8 to December 30, 2016. Cash deposits of more than Rs 5 lakh were made in 23.87 lakh accounts during these 50 days.

Banks have also reported a sharp rise in "suspicious transactions" during 2016-17 and 2017-18, accounts that show "unusual activity compared with past transactions," sudden activity in dormant accounts, and fund movement in accounts that are inconsistent, with what would be expected from declared business.

According to the Financial Intelligence Unit (FIU), the premier technical snoop wing under the Finance Ministry, in 2017-18, the financial year after demonetisation, banks and financial institutions (FIs) filed 14.36 lakh suspicious transaction reports (STRs), compared to 4.73 lakh in 2016-17 and 1.05 lakh in 2015-16.

According to FIU, “there was a remarkable increase in the number of STRs received in 2017-18, more than 3- times over the previous year. The most notable increase was in the category of banks, which recorded almost a 272 percent increase over 2016-17”.

This have forced many tax dodgers to come clean, rapidly widening the individual tax base over the last three years.

The number of total taxpayers –individuals, firms and other entities— have vaulted from 61.38 million in 2015-16, the year before demonetisation, to 84.52 million in 2018-19, a jump of 38 percent.

The number of individual taxpayers has also increased from 57.9 million in 2015-16 to 80.4 million in 2018-19, a rise of 38 percent.

A government dossier tracking transactions during and immediately after demonetisaion listed about 17,000 companies including some stock market listed investment advisory firms, realty businesses, hotels, grain mills, jewellery traders and a few film production and media houses for funneling thousands of crores of undisclosed funds during November 2016 to June 2017.

The dossier, reviewed by Moneycontrol, lists 16,794 companies as the main conduits for moving around slush money after the sudden demonetisation of Rs 500 and Rs 1000 notes on November 8, 2016.

The dossier, running into hundreds of pages that four government agencies—the Serious Frauds Investigation Office (SFIO), the income tax department (ITD), the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED)—have been prepared based on payment records, tax returns, intelligence bureau inputs, foreign exchange deals and banks’ STRs.

ITD sleuths have found that 14,247 of these companies have disclosed income in their tax returns far lower than what their bank records and spending patterns suggest. The ED, which tracks overseas transactions and money laundering deals, have found 50 companies to have salted away funds to foreign accounts flouting rules.

The CBI has found substantive evidence of financial crime against 482 companies, while the SFIO have recommended framing of corporate fraud charges against 2015 companies where directors and promoters have been found to be directly involved in tax evasion and financial swindle.

This dossier contains names of 43 food companies, nine rice mills, five flour mills, 17 oil traders, 860 real estate, construction and infrastructure companies, about 150 steel and metal firms, more than 40 advertising and mutli-media firms, two news media organisations, dozens of gems and jewellery traders, two broadcast houses and thousands of financial advisory and stock broking companies among others.

It also lists an industry association, a residents' association and a consumers' group for seeking to obscure the source of funds through multiple cash-based transactions.

The dossier has mapped data upto June 1, 2017 based on permanent account number (PAN) that companies had disclosed while filing their advance taxes. Unlike salaried individuals, who file their tax returns after the financial year ends, companies pay advance tax every quarter based on their projected income.

Since November 2016, the government has also has deregistered and shuttered more than 3,00,000 'shell' or paper companies with doctored accounts based on data mined from demonetisation.

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First Published on Nov 8, 2019 04:07 pm
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