Union Finance Minister Arun Jaitley on Thursday defended demonetisation and said it was “one of the key steps in a chain of important decisions” taken by the government to formalise the economy.
In a Facebook post on the second anniversary of the National Democratic Alliance government’s decision to demonetise currency notes of Rs 500 and Rs 1,000, Jaitley said the move led to an expansion in the tax base, which enabled the government to allocate more resources for the poor and for infrastructure development.
Until demonetisation, India’s cash-dominated economy enabled cash-holders to remain anonymous, bypass banking systems and evade tax, he claimed.
“Demonetisation compelled holders of cash to deposit the same in the banks,” said Jaitley. “The enormity of cash deposited and identified with the owner resulted in suspected 17.42 lakh account holders from whom the response has been received online through non-invasive method.” A large part of this money was diverted to mutual funds for further investments and became a part of the formal system, he added.
The Congress and several political parties have said that demonetisation’s effects proved to be disastrous to the economy, with former Prime Minister Manmohan Singh terming it an “ill-fated and ill-thought” move.
Confiscating currency was not one of the objectives of demonetisation and the criticism that almost all the cash got deposited in banks was “ill-informed”, claimed Jaitley. In its annual report published in August, the Reserve Bank of India said over 99.3% of the banned banknotes in circulation before demonetisation were returned to the central bank.
“Getting it [cash] into the formal economy and making the holders pay tax was the broader objective,” he said. “The system required to be shaken in order to make India move from cash to digital transactions.”
In the government’s first four years in office, the number of those filing income tax returns increased to 6.86 crore from 3.8 crore in May 2014. “By the time the first five years of this government are over, we will be close to doubling the assessee base,” Jaitley said.
The government has now made it tougher to evade the tax system by also implementing the Goods and Services Tax, said the minister. Despite an annual income tax relief of Rs 97,000 crore given to smaller tax payers and a relief of Rs 80,000 crore given to GST assesses, tax collections have increased, he said. The additional tax collection also led to the implementation of the recommendations of the Seventh Pay Commission and the One Rank, One Pension scheme for the armed forces.