Did Demonetization really go after black money?

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Missing Tax Payers or Tax Evaders?
Per the finance ministry, about 1.09 crore bank accounts received a deposit of Rs.2-80Lacs and another 1.58 Lac accounts received a deposit of >Rs.80Lacs. The IT department has officially said that after scrutinizing these 1.09 crore bank accounts, 18 Lac accounts whose deposits do not match their tax profile(s) are now under inquiry for tax evasion.

What the demonetization reveals about Tax evasion?
Post-demonetization, these 1.1 crore bank accounts received a total cash deposit of Rs.10.4Tn / $157bn. This number clearly matches the 1.05 crore missing assesses based on the top 1% wealthy. Demonetization has cleverly brought this huge chunk of people into the tax net.
In the 1st category, only deposits over Rs.5Lacs are being inquired, while all accounts under the next category are under inquiry - here a high average of Rs.3.31 crores in cash is a clear indication of tax evasion. The tax on the Rs.10.4Tn deposits @35.535% (incl surcharge) comes to Rs.3.43Tn (vs total Individual tax revenue today @Rs.1.91Tn). As the duration of accumulation of this unaccounted cash is not very certain & since most people tend to convert their unaccounted cash into capital assets (real estate, gold, forex & luxury goods) within 3-5 years, I am considering two scenarios to compute tax evaded - one over a 3 year period and another over a 5 year period.
This means in a 3-yr black money accumulation case, about 60% of tax collected today is evaded p.a and in the 5-yr case, 35% of tax collected today is evaded.

Did demonetization really go after black money?
Demonetization has surely chased down black money & has brought them under the IT radar. It has also made it difficult for these 1.05 crore people to hoard large amounts of cash in future, especially with the recent restriction on a max of Rs.3 Lac in cash transactions.
In a way, demonetization is hugely successful in widening the large tax payer net (incomes >Rs.5Lacs) from a meager 5.5 Lac assesses to over three times (an additional 18 Lac) assesses to the tax net. With stricter laws for preventing the creation & conversion of black money into other assets being put in place to curb tax evasion, this space needs to be monitored closely for effective outcomes!

Comments

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