by Meera Sanyal
Developed by the National Payments Corporation of India (NPCI), UPI is a real time payment system that works by instantly transferring funds between two bank accounts on a mobile platform. Unlike mobile wallets such as Paytm, which take a specified amount of money from users and store this in their own accounts therefore benefitting from the ‘float income’, UPI withdraws funds directly from the bank account of the payer and deposits these funds instantly into the bank account of the recipient. When launched, it was announced to be free for transactions from `1 to `1 lakh. The interface regulated by the RBI was built over the secure and tested IMPS (Immediate Payment Service) platform.
Combined with the millions of Jan Dhan Yojana bank accounts21 opened in the last few years and high mobile penetration, UPI paved the way for Indians to embrace digital payments, as anyone in India who had a bank account and a mobile phone could now transfer funds to anyone else with a mobile and bank account, instantaneously, free of cost and at any time of day or night.
This was a perfect platform to popularize cashless, electronic transactions. It was enabled for all scheduled banks across India to use. Yet on the date of demonetization, only 27 banks had enabled UPI. Missing from the list were some of India’s largest public sector and private banks. UPI should have been popularized and advertised (like other high-profile initiatives such as Swachh Bharat) with basic training and incentives provided to Jan Dhan Yojana account holders during the 10 months leading up to demonetization.
Popularizing the robust and safe UPI electronics payment system prior to withdrawing the `1,000 and `500 currency notes would definitely have eased some of the hardships caused by demonetization. At the very least, it would have added credence to the government’s claim that a major objective of the move was to help make India cashless.
Of course, the note ban was not necessary to achieve this objective. Given the fact that digital payments are more convenient for both the payer and receiver, and cheaper and more efficient for all the financial intermediaries involved, there was no doubt that Indians would gradually and seamlessly make the switch. Not because cash was bad, but because the digital alternative was more convenient.
However, as cash from the system was sucked out post-demonetization, e-wallets such as Paytm took centre stage and moving to a less cash digital India suddenly became a justification for the move.
Paytm was set up in in August 2010 by Vijay Shekhar Sharma as an e-payments and e-commerce brand of One97 Communications. The name was an acronym for ‘Payment Through Mobile’. The company had attracted foreign venture capital investments, notably Chinese investment, from Jack Ma’s Alibaba. As on 31 March 2016, Alibaba (through Alibaba.com and Alipay Singapore E Commerce Pvt. Ltd) held 40.93 per cent, Venture Capital Fund SAIF (through SAIF Mauritius and SAIF Partners India Pvt. Ltd.) held 28.68 per cent and Vijay S. Sharma held 21.33 per cent of the equity in the firm.
On 9 November 2016, the morning after demonetization, Paytm ran full front-page advertisements in mainline newspapers across the country, displaying Prime Minister Modi’s picture prominently and congratulating him for ‘taking the boldest decision in the financial history of independent India’. The ad used the hashtag ‘Ab ATM nahin, #Paytm Karo’ (now, instead of ATMs, use Paytm).22
How Paytm was able to secure this enormous quantum of advertising space in every national newspaper, that too at such short notice, became the subject of much speculation. Questions were also raised as to whether the Prime Minister had given his prior approval for his image to be used in the advertisement – which was in contravention of the Emblems and Names (Prevention of Improper Use) Act, 1950. While the first question remains unanswered, the answer to the second question emerged four months later. On 10 March, Minister of State for Consumer Affairs C.R. Chaudhary said in a written reply to the Rajya Sabha that ‘Clarifications were sought by the Department of Consumer Affairs (in February 2017) from Paytm… wherein they have apologised for their inadvertent mistake.’23
Continuing their advertising blitz, on 12 November, Paytm rolled out what many felt was a very insensitive TV commercial: ‘Drama band karo, Paytm karo’ (Stop being melodramatic, use Paytm). The ad, which was subsequently withdrawn, featured a visibly angry woman talking about the hardships that demonetization had created, especially for daily wage workers and household help, who was then advised to stop creating a ‘drama’, and just use Paytm.24
In the meanwhile, the company claimed that it registered a 700 per cent increase in overall traffic and 1,000 per cent growth in the amount of money added to the Paytm account. During this period, the transaction value continued to be 200 per cent of the average ticket size while the number of app downloads went up 300 per cent. The number of transactions per user also went up from three transactions to over 18 transactions in a week.25
It was clear that Paytm was one of the biggest beneficiaries of demonetization. In an article by Bloomberg26 on 10 January 2017, founder Sharma was quoted as saying that post-demonetization Paytm had been signing up the equivalent of a small European country’s quantum of customers every week. ‘Overnight,’ Sharma says, ‘we went from a new thing to a must-have… I want to be India’s first $100 billion company by value… I think I’ve landed in the world where there are miracles at work.’
While the Paytm miracle unfolded, arguments on the benefits of a cashless India trotted out by various government officials and spokespersons showed how muddled their thoughts were on this matter.
The first argument was that less cash in the economy would reduce corruption, based on the mistaken premise that it was cash that caused corruption. The second argument was that if every transaction were to be digitally recorded, tax evasion would be reduced. The third was that the economy would become more advanced and efficient with less cash used, as many developed economies have a lower cash to GDP ratio. All of these confused cause and effect and, moreover, targeted cash as the enemy.
Nevertheless, no matter what the arguments, let us assess whether demonetization was successful in achieving its objective of making India use ‘less cash’. While there is no doubt that the use of e-wallets like Paytm skyrocketed, and more and more Indians started using digital payments, did demonetization structurally reduce the use of cash in India?
To assess this, we can look at a simple objective data point, namely Currency in Circulation (CIC).
Every fortnight, the RBI releases data on money supply and money in circulation. If demonetization had indeed succeeded in making India more ‘cash less’, CIC should have fallen post-demonetization and remained at much lower levels than pre-demonetization. The data is as follows:
Table 11: Currency in Circulation
Date Currency in Circulation
(` lakh crore/trillion) Percentage of Pre-Demonetization CIC
4 November 2016 17.97 100 %
6 January 2017 8.98 50 %
30 June 2017 15.06 84 %
30 June 2018 19.12 106 %
Source: RBI Data on Money Supply, RBI Annual Report 2018
As is evident, Currency in Circulation, which fell drastically post-demonetization, is now higher than pre-demonetization levels. By this measure, the move failed to make India use less cash.
Another objective measure is the Currency (or Cash) to GDP ratio. Had demonetization succeeded in persuading Indians to use less cash, the Currency to GDP ratio should have declined. Unfortunately, as the RBI’s Annual Report 2018 points out, demonetization failed on this score as well: ‘India’s currency to GDP ratio moved up to 10.9 per cent in 2017–18, returning to being amongst the highest levels of currency usage in peer emerging market economies and advanced economies as well. In consonance, the use of digital payments, which had surged to a peak in December 2016 in the aftermath of demonetisation, fell back to the elevated post-demonetisation trend.’
Notwithstanding this, advocates of demonetization have pointed out that digital payments have increased since demonetization and this is undoubtedly true, especially in respect o
f UPI payments.
However, as pointed out in an article by James Wilson,27 the trend towards digitization preceded demonetization, and, even today, digital transactions are still a small percentage of cash transactions.
‘The biggest year to year growth in overall retail digital transaction was recorded between 2011–12 to 2012–13 (53 per cent) and between 2012–13 to 2013–14 (49 per cent), while 2016–17 witnessed only a growth of 46 per cent from the previous financial year despite demonetization and a digital push. Despite their phenomenal growth, UPI and Prepaid Instruments (PPIs, e.g., e-wallets) are still a tiny fraction of total digital retail transactions, which themselves are still only 25 per cent of total retail transactions.’
Ajit Mozoomdar, former Finance Secretary and Secretary of the Planning Commission, summed up the situation well, saying:
What is wholly unnecessary is forcing the pace of digital transactions between individual buyers and sellers in order to reduce the use of cash… The wrong-headed approach, treating cash transactions as undesirable and hence to be curtailed, sets impossible targets and will lead to wasted effort… The government would do well to concentrate on restoring normal cash flows in the economy in all parts of the country and dissuade the apologists from promoting absurd notions of the virtues of a cashless society.28
To Expand the Tax Base
It is a commonly held misconception that only a small percentage of Indians pay taxes. In fact, every single Indian pays tax, albeit indirect taxes in the form of GST (formerly VAT, Sales Tax, Excise Duty, etc.) on the goods and services we consume.29
The tax base that the Finance Minister was hoping to expand through the demonetization exercise was the Direct Tax base. More specifically, the objective was to get more people to pay income tax.
Data on income tax payers shows that this is a very fair objective. Only 40.7 million (4.07 crore) Indians (representing approximately three per cent of the population) filed income tax returns in Assessment Year (AY) 2015–16. However, only 20.7 million (2.07 crore) or half of those who filed returns, actually paid income tax. The rest filed nil returns.30 This effectively means that only approximately 1.5 per cent of the Indian population pays any income tax.
Of these, there were only 57,399 people who declared incomes greater than `1 crore. Given that 36,207 luxury cars, costing approximately `50 lakh each, were sold in 2015 alone (and a total of 1,40,396 luxury cars in the past four years),31 this certainly seems to indicate a lot of people are not declaring their true incomes.
Of course, we should consider that agricultural income in India is exempt from tax and that approximately 800 million Indians depend on agriculture for their income. In addition, as per the 2011 Census, 41 per cent or approximately 525 million Indians are below the age of 20, and therefore not earning any income or paying any taxes.
Notwithstanding the above caveats, the tax base in India is still too small. In a thoughtful analysis, author and economist Vivek Kaul32 points out further revealing data:
18 million tax payers paid an average income tax of `24,000.
Only two million tax payers paid an income tax greater than `1.5 lakh.
1,88,000 people accounted for 76.3 per cent of all income tax paid.
Only 0.16 per cent of India pays 76.35 per cent of the entire income tax collected.
Clearly, there is a case for more people to be brought into the tax net and to declare and pay taxes more honestly.
One of the main reasons attributed to the low tax compliance in India has been high tax rates.33 Though tax rates in India have been lowered quite significantly over the years, the tax base has not increased correspondingly.
On the basis of the Wanchoo Committee’s recommendation, the highest marginal rate of individual income tax was reduced from 97.75 per cent to 77 per cent in 1974–75 and to 66 per cent in 1976–77 and then increased to 69 per cent in 1977–78 and further to 72 per cent in 1979–80. But it was again reduced to 66 per cent in 1980–81 and further to 50 per cent in 1985–86. In 1992–93, the highest marginal tax rate was further reduced to 40 per cent and in 1997–98 to 30 per cent, which is the current rate. Of course, successive governments have added various cesses and surcharges making the effective tax rate higher (for instance in 2017–18, the effective rate is 35.54 per cent).
Individual tax rates in India are presently lower than tax rates in several developed countries, but are slightly higher than taxes in most emerging markets. A report by Kotak Institutional Equities in January 2017 suggested, ‘The general disgruntlement among Indian tax payers (the ones with salaries in the organized sector) despite the relatively low individual tax rates in India versus other countries can be ascribed to two reasons: (1) Poor quality of public services (such as education, healthcare, infrastructure such as electricity, roads and water and sewage) provided by governments (Central, state and local) and (2) large evasion of taxes by huge sections of the population in the informal economy, which puts the entire burden of public services on the narrow base of law-abiding tax payers.’
Successive governments have introduced Voluntary Disclosure Schemes to encourage more honest tax compliance, but with poor overall results.
There have been 10 Voluntary Disclosure Schemes between 1951–2017, as shown in the table below.
Table 12: Voluntary Disclosure Schemes Since 1951
Year and Name of VDS Scheme Income Disclosed
(`crore) Additional Tax Collected
(` crore)
1951 Tyagi VDS Scheme 70.20 10.89
1965 VDS 60/40 scheme 52.18 30.80
1965 Black scheme 145.00 19.45
1975 Emergency VDS 744.00 248.70
1985 Amnesty Circulars 10,778.00 495.00
1991 Foreign Remittance Scheme 2200.00 200.00
1997 VDIS 33,000.00 9729.00
2015 VDIS Compliance Window 4147.00 2488.00
2016 IDS (Income Declaration Scheme) 65,250.00 29,362.00
2017 PMGKY (Pradhan Mantri Garib Kalyan Yojana) 4900.00 2451.00
At the time of VDIS in 1997, the All-India Federation of Tax Practitioners, stating that such a practice was discriminatory against those who paid their taxes regularly and dutifully, filed a petition in the Supreme Court.
The Supreme Court ruled that such schemes would demoralize honest tax payers and help tax evaders to get away from prosecution by merely paying a penalty. The government had to give an undertaking to the SC that the 1997 VDIS was the last of its kind. Any future scheme would need the prior approval of the SC. As a consequence, for each of the Voluntary Disclosure schemes initiated by the NDA Government (in 2015, 2016 and 2017), the name of the scheme was changed by omitting the word ‘amnesty scheme’ and putting ‘income disclosure scheme’ in its place!
As explained above, widening the direct income tax base is undoubtedly a good objective. The questions is, did demonetization succeed in doing so?
As in the case of the other demonetization objectives, there was a spate of statements by various senior government authorities claiming success on taxes. Unfortunately, most of the statistics quoted were contradictory and confusing, leading to the impression that data was being fudged.
The first off the block was the Finance Minister, who, on 17 May 2017, stated that 91 lakh tax payers had been added to the tax net as a result of action taken by the Income Tax Department.
In reply to Unstarred Question No 2017 in Rajya Sabha on 1 August 2017, it was stated that 33 lakh new tax payers were added to the tax net post-demonetization.
The Economic Survey, Vol. 2 released on 12 August 2017 mentioned that 5.4 lakh new tax payers were added post-demonetization.
And finally, the Prime Minister proclaimed in his 2017 Independence Day speech: ‘The number of new tax payers filing income tax returns from April 01 to August 05 is 56 lakh while in the same period last year only 22 lakh filed the returns. In a way it has more than doubled. This is the result of our fight against black money.’
Given the wide variance between 91 la
kh and 5.4 lakh new tax payers, there was considerable scepticism about the veracity of this data.
The MoF, scrambling to reconcile the information, put out a press release on 18 August 2017 ‘clarifying’ that there was no inconsistency in the data. They attempted to reconcile the varying statistics as follows:
91 lakh of the Finance Minister:34 ‘The statement of the Finance Minister regarding addition of 91 lakh tax payers to the tax-base referred to the total number of new returns filed during the entire FY 2016–17 and therefore, it is neither comparable to the data in Prime Minister’s speech nor with the data in Economic Survey (different period and different type of tax payers).’
This was a weak argument, given that media headlines on 17 May 2017 proclaimed that these were numbers post-demonetization, which was not clarified by the Ministry at that time. More importantly, the Economic Survey states that the total number of tax payers for the entire financial year 2016–17 as 80.7 lakh, not 91 lakh.
33 lakh in Rajya Sabha:35 ‘The reply to Unstarred Question No. 2017 in Rajya Sabha on 01.08.2017 mentioned that during 09.11.2016 to 31.03.2017 the number of ITR (income tax returns) filed was 1.96 crore as against 1.63 crore filed during the corresponding period of last financial year (2015–16). Therefore, the number of additional returns filed during this period works out to be 33 lakh. However, this data cannot be compared with the other data mentioned above. The data referred to in Economic Survey is with regard to new tax payers or first-time return filers only whereas the data provided in the Rajya Sabha Question was in respect of all returns filed.’
5.4 lakh in Economic Survey: ‘The analysis given in Table-6 on page 22 of the Economic Survey (Vol.2) is based on the data for the period of 9 November to 31 March of 2016–17 and corresponding periods of the last two financial years. Moreover, the growth in the number of tax payers discussed in the Economic Survey is based on the number of new tax payers assuming the previous year’s growth rate as the reference growth rate. On the other hand, the growth of Individual return-filers referred to in Prime Minister’s speech is with respect to new as well as old tax payers. Thus, the data used in Economic Survey is different from data referred to in Prime Minister’s speech in respect of the period of filing as well as the type of tax payers and the two are not comparable.’