Impact of Demonetization on Common Man | Demonetization Effect on Income Tax Payers| Motilal Oswal
Impact of Demonetization on Common Man | Demonetization Effect on Income Tax Payers| Motilal Oswal

Is Demonetization Good News for the Tax Payers in India?

The move of demonetization though was opposed by many from the political field, the common man is indeed gleeful. The stashes of cash that was stored in suitcases, store rooms or mattresses went worthless in no time and this was indeed a deserving punishment given by the government to all those who stacked crores worth of black money.

The cash economy has done harm to many of us as we end up storing money. There are two kinds of cash economies, the grey economy and the black one. The grey economy is all about legitimate business but as most of the transactions happen through cash, it can conceal income. The black economy refers to the illegal businesses which include bribes, protection money and ransom.

The common intent in both these systems is to hide one’s earnings and to avoid tax. As the grey economy uses cash to buy goods, the prices are inflated. With demonetization, our country is heading towards digital economy which in turn is good news for the regular tax payer and also the common man.

Impact of Demonetization on the Income Tax Payer
 
Most of the income tax in our country is paid by the salaried class who mostly are left with no choice but to pay the tax. Most of the people who pay tax are those who earn the amount of Rs. 5 lakhs and above and the government with the demonetization move is trying to bring more people under the taxation net as this would reduce the income tax rate.

Many financial experts feel that the move of demonetization is indeed a welcoming move and with a little thought, you as a tax payer would know what’s coming your way in the near future.

What one can expect due to demonetization?

Drop in Income Tax Rates: It can be said that one of the hidden motives of demonetization is to reduce the income tax rates. It would ensure better tax compliance as more people will start to pay taxes. As the number of people paying taxes would increase, this would lower the income tax rates. The same was stated by our Finance Minister who quoted that the government is ready to lower the income tax rates if more people start paying taxes.

If the expected results of demonetization are achieved, the tax payers can also expect a single digit rate for income tax in the next couple of years. This is possible if the government scraps all the taxes and just implements the transaction tax which will make everyone in country a tax payer.

Zero Tax Harassment: The income tax rate and tax compliance are indirectly proportional and also tax compliance and the tax harassment are indirectly proportional. As one can expect high tax compliance, it virtually means zero compliance. For example, if the income tax is more, there are chances that the taxpayer can evade tax. If there is low tax compliance, it gives the IT department more cases of tax evasion and in many cases, even a simple notice sent for the clarification is considered by many as tax harassment.

Simple Rules and Regulations: Many of the tax payers feel that the tax rules and regulations are quite hard to understand. The IT rules can get simplified as the tax compliance increases. It can hence be said that demonetization is indeed the first step towards making IT rules simple. Tax implications due to demonetization will do more good to tax-payers than harm.

The tax payer will have a simplified structure if the transaction tax becomes a reality. For it to become a reality, it is important for our country to have a cashless economy. The reason for this is that the government cannot implement transaction tax on cash payments; the payments have to be digital.

Conclusion:
With many discussions going about the impact of demonetization on the Indian economy, it can be said that this move would show a major impact on Indian taxation. It is the first step taken by the government to clean up our economy and to bring new tax reforms.

The lower rates of Income tax will mean more money saved for the income tax payer and which again means more spending. This will, in turn, boost the economic growth of our country. As per our Prime Minister, if the transaction tax becomes a reality, it means equal tax burden on all of us. In simple terms, the more you earn the more tax you pay and the question about tax evasion will thus not arise in such scenarios.

 

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