Editorial Notes

[Editorial Notes] Data on demonetisation’s link to economic slowdown

It is clear that demonetisation announced in 2016, had a hard blow on informal sector of India but the report submitted by a Task Force for drafting a New Direct Tax Legislation provides factual evidence for the debilitating impact of demonetisation on the formal corporate sector.
By IASToppers
August 24, 2019

Contents 

  • Introduction
  • Key points of the report
  • GDP growth Estimates
  • Conclusion
  • IT’s Input

Data on demonetisation’s link to economic slowdown

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Introduction

  • In 2017, a 6-member Task Force was constituted by the Government to review the existing Income-tax Act, 1961 and to draft a new direct tax law in consonance with economic needs of the country.
  • The convenor of the Task force was Arbind Modi, who was then superseded by the Akhilesh Ranjan. Mr. Ranjan submitted his report to the Finance Minister on August 19, 2019.
  • However, these reports are still not in the public domain and requires to be put for discussion and comment.

Key points of the report

  • The aggregate corporate investment during the FY 2016-17 (during which demonetization was announced) decreased to 60% from the previous year.
  • In the last five financial years, the aggregates of investments (in the percentage of GDP) were 10.2%, 9.8%, 9%, 7.5% and 7%. The fall in investment percentage is quite visible in the demonetisation year.
  • Only about 50 per cent of the companies registered filed their income tax returns for the financial year 2016-17.
  • The share of loss-making companies has increased from 42% (2013-14) to 45% (2017-18).
  • There has been a decline in the number of corporate filers from the manufacturing sector from 2013 to 2017.
  • The share of manufacturing in the profits before taxes has marginally declined from 47.3% (2013-14) to 46.4 (2017-18) %.
  • The equity returns declined (from 16.4% in 2013-14 to 15.5% in 2017-18), while the corporate tax liability increased (from 19% in 2013-14 to 21% in 2017-18).
  • The Dividend Distribution Tax (DDT) increased from 1% (2013-14) to 2 % in 2017-18.
  • The productivity of the corporate income tax is extremely low i.e.7.5% (2013-2017), which is the lowest compared to other select countries. The productivity of tax shows some important factors such as tax concessions or overall levels of non-compliance etc.
  • Given the fiscal limitation of Government, economic growth has to be driven by private investment. However, corporate investments have remained stagnant despite the availability of sufficient retained earnings.

GDP growth Estimates

  • In the report, the effect of downward trend of aggregate corporate investments can be seen in the official GDP estimates for 2011-12 onwards.
  • However, during the demonetisation year (2017), the government revised the GDP growth estimate from 7.1% to 8.2%.
  • Now, above revised GDP growth is the best GDP growth in the first term of the current government, despite the fact that every industry association reported sharp drops in sales in 2017 on account of the note ban.

Conclusion

  • Earlier, the government had challenged the validity of the National Sample Survey Office’s (NSSO) periodic labour force survey results.
  • It showed the unemployment rate to reach a 45- year high in 2017-18. However, as the results were politically unsuitable, they were released after 2019 elections.
  • Similarly, the task force’s report could take a long time to be put for public discussion and it is to be seen that, if made public, these reports retain the data from corporate annual tax returns or not.

IT’s Input

  • The productivity of a tax system is the ability of the tax system to yield maximum revenue for the government without placing a difficult economic burden on the taxpayer.

 

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