A Research paper on Impact on Demonetization of Finance sector with regard to tax collections and perceptions of Chartered Accountants regarding the same.

1. “A STUDY TO UNDERSTAND THE IMPACT OF DEMONETIZATION
ON TAX COLLECTIONS IN INDIA AND ITS PERCEPTION AMONG
CHARTERED ACCOUNTANTS”
BY
SANDESH S. CHIMBALKAR
TY B.Com (B&I)
KSD‘s MODEL COLLEGE, DOMBIVLI
Email:sandeshchimbalkar76@gmail.com

2. Abstract
Demonetization is the act of stripping a currency unit of its status as a legal tender. The
current form(s) of money is pulled from circulation and retired, often to be replaced with new
notes or coins which is usually carried out as an ambush on black money. In India
demonetization has occurred thrice - 12th
January 1946, 16th
January 1978and 8th
November
2016. The aim of the bold action taken last year was fourfold: to curb corruption,
counterfeiting, the use of high denomination notes for terrorist activities and especially the
accumulation of ―black money‖ that has been generated through incomes not declared to tax
authorities. This paper primarily aims to study the implications of demonetization on tax
collections and understand the perception of Chartered Accountants in this context
Key words:Demonetization, effects on tax collections, perceptions of Chartered Accountants.
Introduction
The process of removing a currency from circulation is known as demonetization. The recent
move to demonetize Rs 500 and Rs 1000 is not new. The highest denomination notes ever
printed by the Reserve Bank of India(RBI) was the Rs 10,000 note in 1938 and again in 1954
which were demonetized in January 1946 and again in January 1978.On 8th
November 2016,
the Government of India announced the demonetization of high denomination currency notes
Rs 500 and Rs 1,000 with an aim to check undisclosed black money, corruption and fake
currency. A redesigned Mahatma Gandhi series of Rs 500 and Rs 2,000 is in circulation since
10th
November 2016.
The government has asserted that there was a background to this decision. As a first step, it
urged people to create bank accounts under the Jan DhanYojana (JDY).The second step was
the Income Declaration Scheme (IDS) with a deadline of October 30, 2016. Through this
method, the government was able to mop up 62,250 crore of black money in cash and other
assets.
Review of literature
Mr Brijesh Singh and Dr. N. BabithaThimmaiah (January 2017) in their research paper
studied the effect ofdemonetization in terms of ―Won or lost‖. They tried to explain the

3. concept of cashless economy by taking the reference of Woodford (2003). They showed the
mixed effect of demonetization in areas like, cash rush, stock market, transportation,
agriculture, banking, business, income tax, railways etc.
According to the Economic Survey Report 2016-17 ―Demonetization: To Deify or
Demonize‖,income tax collections rose because of increased disclosure and payments to local
bodies saw a spike because demonetised notes remained legal tender for tax
payments/clearances of arrears. Further the report states that indirect taxes and corporate tax
would increase in the long run as formalization expands and compliance improves.
The report also discusses about the presence of anecdotal evidence with respect to active
money laundering going on during demonetization period. One such laundering mechanism
involved ―retiming‖ accrual of income by constructing receipts that made it seem as if the
black money has been earned in the period immediately before November 8th
2016. Such
schemes might have allowed black money to have been deposited in bank accounts—but only
if the income was reported and taxes paid on it. In this way, demonetisation would have
brought black money into tax net. The other means requiredblack money holders to pay a
percentage to private intermediaries as a price forconverting it into white. For example,
someholders reportedly paid individuals to queueup at banks to exchange or deposit
moneyfor them. Bank accounts were being screened for suspicious transactions which meant
that those whoengaged in laundering run the risk of punitive taxes and prosecution, in
addition to the feesor taxes already paid.
During the course of this study, the following noteworthy points were collated:
1. On November 8, 2016, there were 1,716.50 crore pieces of Rs 500 and 685.80 crore
Rs 1,000 notes in circulation which accounted for 86 % of the cash in circulation.
2. A finance ministry statement has said that the tax revenue rose up by 18% to 17.1
trillion for the year ended 31st
March 2017.
3. In a press release dated 7th
August 2017, the CBDT has said ―As a result of
demonetization and Operation Clean Money, there has been 25% growth in the
number of IT returns filed in the current fiscal and Advance Personal Income Tax
collections are up by 41%.

4. 4. A research paper posted on RBI website, ‗Demonetisation and Bank Deposit Growth‘,
stated that ‗unusual‘ cash deposits of about Rs.1.7 lakh crores were made in specific
accounts that are usually less active.
5. The RBI on 30th August, 2017 revealed in its annual report that Rs 15.28 lakh crore,
or 99 per cent of the Rs 15.44-lakh-crore scrapped currency notes, had come back to
the central bank. This indicates that notes worth only Rs 16,000 crore had not come
back into the system owing to concealment.
6. Further, the annual report mentions that Rs 7,965 crore was spent on printing new
currency notes in 2016-17. This is nearly half of Rs 16,000 crore not returned amount.
7. The report also stated that the overall currency in circulation into the system had come
down by 20.2 % on a year-on-year basis as at the end of March 2017.
Criticism about Demonetization
The withdrawal of notes created a liquidity shortage in the country with long queues outside
banks for new notes and severe hardship for the masses. The former Prime
Minister Manmohan Singh had termed the move as a case of ―monumental mismanagement
by the RBI‖ since it would hurt the small industry, the farm sector and the informal sector
and would lead to a decline of 2% of GDP. The large liquidity surplus with the banking
system was a formidable challenge to the RBI‘s liquidity management operations.
Need for the study
The decision ofdemonetization last November took the Indian society by shocking surprise.
There have been contradictory views on the achievements of its aims. It is also unclear
whether it was an effective reform measure toincrease the tax returns and revenues. It was in
this background that it was deemed necessary to gather the views of C.A.s on the subject. It is
expected that the survey would set the objective thinking process into motion.
Objectives of the study
The study has been undertaken with the following objectives in mind:
a) To study demonetization in the context of tax collections.
b) To explore the perception of Chartered Accountants about demonetization.

5. Research methodology
The present study is mainly based on primary data and is descriptive in nature. Primary data
was collected from 40 Chartered Accountants in Mumbai city using a structured
questionnaire. Due to time constraints,a small sized and convenient sampling design was
adopted. The results are merely indicative and so cannot reflect theviews of the larger C.A.
fraternity. For analysing the data, percentage method is used. The relevant secondary data is
gathered from research papers, news articles and websites.
Demographic profile of sample respondents
Age group:
AGE PERCENTAGE
21-30 35%
31-40 32.5%
41-50 27.5%
51-60 5%
Above 60 -
Gender:
GENDER PERCENTAGE
Male 72.5%
Female 27.5%
Occupation:
OCCUPATION PERCENTAGE
Professional Practice 55%

6. Employed 42.5%
Business 2.5%
Data analysis
Perception about Demonetization and its implications on taxcollections among
Chartered Accountants.
Perception among C.A.s Yes
%
Somewhat
%
Not at all
%
Can’t
Say
%
Total
Genuineeconomic reform
62.5 32.5 5% - 40
Demonetisation slowed the
economic growth
30 42.5 17.5 10 40
It provided opportunities for
money laundering
30 42.5 17.5 10 40
It led to sharp increase in
demand for tax planning
52.5 37.5 7.5 2.5 40
It increased direct tax
compliance among people
67.5 27.5 5 - 40
It was a needed precursor to
GST to increase taxpayer base
52.5 30 10 7.5 40
Efficient tracking of new tax
payers by tax authorities
57.5 27.5 7.5 7.5 40
Its benefits exceeded its
monetary cost
25 40 20 15 40

7. Need for a better and
integrated tax system
82.5 15 - 2.5 40
Perception
among C.A.s
Short-term
deterrent
impact.
%
Medium to Long
term deterrent
impact
%
Minimal
impact
%
Don’t
know
%
Total
Caused deterrent
impact among
the tax evading
persons
42.5 47.5 10 - 40
Perception
among C.A.s
Significant
increase
%
Moderate
increase
%
Minimal
increase
%
Don’t
know
%
Total
Helped GOVT. to
increase tax base
30 55 15 - 40
The findings of the survey to understand the perception of Chartered Accountants are herein
given below:
1) When asked whether demonetization was a genuine economic reform, a whopping 62.5%
of C.A.s replied in affirmative and 5% of them replied ―Not at all‖ which shows that majority
of C.A.s are in favour of this historic move of GOVT.
2) When asked about slowing down of economic growth nearly 30% of C.A.s replied in
affirmative and 42.5% replied ―Somewhat‖ which shows that most of the C.A.s believed that
demonetization to some extent have affected the economic growth of our country.

8. 3) With regard to incidence of money laundering during demonetization period, nearly 30%
of C.A.s replied in affirmative and 42.5% of C.A.s replied ―somewhat‖ which confirms the
belief that some people did engage in money laundering.
4) A positive effect of demonetization was that it led to sharp increase in demand for tax
planning and it also led to increased direct tax compliance among people ( A whopping
52.5% of C.A.s confirmed the same.)
5) Moreover 52.5% of C.A.s are of the opinion that demonetisation was a much needed
precursor for GST to increase tax base and through this (demonetization) tax authorities
would be efficiently able to track the tax payers.
6) When asked whether demonetization has caused a deterrent impact on tax evading persons
a mixed response was received were 42.5% C.A.s of the opinion that it caused short-term
impact and 47.5% were of the opinion that it caused medium to long term deterrent impact.
7) When asked whether demonetization needs to be followed by a better and integrated tax
system to continue its taxpayer base, a whopping 82.5% of C.A.s replied in affirmative which
confirms that India does need a much better taxation system to continue with its growth
objectives.
Suggestive measures
 The tax department should keep a 360-degree watch on transactions to encourage
people to be more tax compliant.
 The tax collections should be correctly reported and channelized into welfare
schemes.
 Changing people's relationship with cash requires a cultural revolution
and hence the government must work relentlessly towards nurturing a
digital eco-system.
Conclusion

9. On the basis of the findings it can be said that this time, demonetization has proven to be
more successful than the earlier ones. People havebecome more conscious about proper tax
planning and timely filing of tax returns. Though total black money has not been fully
trapped by this tool, it has at least created fear in the minds of black money holders.The
rise in the number of tax filings is a promising sign. But clarity will emerge
only after the financial value of the revenues is reported. In a country of India's
size, complexity and (in)capacity, predicting the outcomes of anything presents
unique problems. Hopefully, next year the jury will be in a position to return a
balanced and independent analysis on Demonetization.
References
1) The Economic Survey Report (2016-17), ―Demonetization To Deify or Demonize‖.
2) Department of Revenue, Central Board of Direct taxes, Press Release (O7 August 2017),
―25% increase in number of Income Tax returns filed, Advance tax collections up by 41%‖
3) Mr Brijesh Singh and Dr. N. Babitha Thimmaiah (January 2017): ―Demonetization-Win or
Lost‖. International journal of management, social science and technology. ISSN-2320-2339,
2320-2793.
4) Prof Sandeep kaur (November 2016) ―Demonetization and its Impacts in India.
International Journal For Research, Vol 3 Issue 17.
5) https://www.civilserviceindia.com/current-affairs/articles/demonetization-of-currency.html
6) http://www.livemint.com/Politics/WRTgYztM2cSiT0deLmMWjN/Demonetisation-effect-
91-million-new-taxpayers.html
7) http://economictimes.indiatimes.com/news/economy/policy/demonetisation-effect-
advance-tax-given-by-individuals-in-june-quarter-rises-more-than-
40/articleshow/59480872.cms
8) http://www.livemint.com/Politics/C4Q8mpskSbfEzmG8ZWBY9H/Can-we-measure-
demonetisations-impact-on-income-tax-collect.html

10. 9) http://www.hindustantimes.com/india-news/demonetization-windfall-civic-agencies-
record-268-increase-in-tax-collection/story-O3YsryY0WtdefZy8vdBMFM.html
10) https://www.forbes.com/sites/timworstall/2017/02/10/indias-tax-collection-soars-belying-
demonetisation-fears/#454d24671ee7
11) http://indianexpress.com/article/business/demonetisation-impact-nearly-25-per-cent-
increase-in-income-tax-returns-filing-in-current-fiscal-year-says-cbdt-4786458/
12) http://www.asianage.com/opinion/interview-of-the-week/010117/demonetisation-will-
increase-tax-base-tax-revenue-in-the-long-run.html
13) https://www.bloombergquint.com/business/2017/01/11/what-explains-the-22-surprise-
rise-in-indias-tax-revenue

11. ANNEXURE
QUESTIONNAIRE FOR CHARTERED ACCOUNTANTS
Note:
1. The objective of this survey is to understand the perception of chartered accountants
about the impact of demonetization on tax collections
2. The information collected will be used for research purpose only and will be kept
confidential.
3. Giving the name is optional.
4. Please on the appropriate box.
Part A: Demographic profile
Name of the respondent: ______________________________________
Age group: 21 – 30 31 – 40 41-50 51 -60 above 60
Sex: Male Female
Qualifications other than C.A.: ________________________________
Occupation: Professional Practice Employed Business
Part B: Survey
1) Do you believe that demonetisation was a crucial reforms measure?
a. Yes b. Somewhat c. Not at all d. Can’t say
2) Do you think that demonetisation slowed the economic growth?
a. Yes b. Somewhat c. Not at all d. Can’t say
3) Do you demonetisation caused a deterrent impact among tax evading persons?
a. Short-term deterrent impact b. Medium to Long term deterrent impact
c. Minimal impact d. Don’t know
√

12. 4) Do you think demonetisation provided opportunities for several people to engage in
money laundering?
a. Yes b. Somewhat c. Not at all d. Can’t say
5) After demonetisation has there been a sharp increase in demand for tax planning and tax
advisory services?
a. Yes b. Somewhat c. Not at all d. Can’t say
6) Do you think that “direct tax” compliance increased among people after demonetisation?
a. Yes b. Somewhat c. Not at all d. Can’t say
7) Do you believe that demonetisation helped the Govt. to increase the tax base?
a. Significant increase b. Moderate increase c. Minimal increase d. Don’t know
8) Do you think that demonetisation was a much-needed precursor / antecedent to GST so
as to increase the taxpayer base?
a. Yes b. Somewhat c. Not at all d. Can’t say
9) Do you think that the gains of demonetisation exceeded its monetary costs?
a. Yes b. Somewhat c. Not at all d. Can’t say
10) Post demonetisation, do you think that the tax authorities would track and monitor the
newly added tax payers and improve government’s fiscal position in the coming years?
a. Yes b. Somewhat c. Not at all d. Can’t say
11) Do you agree that demonetisation has to be followed with a better and integrated tax
system to continue growth in tax base?
a. Yes b. Somewhat c. Not at all d. Can’t say
12) You are free to share any suggestions or ideas on this research topic
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I THANK YOU FOR YOUR VALUABLE VIEWS!