By: Eram Tafsir

New Delhi, May 2: The debate on the success or failure of Narendra Modi’s demonetisation may again gain steam, with the recent data from income tax department showing a fall in income tax e-filing, which the government expected to increase post demonetisation.

The number of returns filed in the last financial year FY19 were at 66.8 million against 67.5 million in FY18, according to the e-filing website of the Income Tax Department. The fall in returns might throw challenges for the Modi government which has shifted its focus to compensatory expenditure in the recent budget 2019, said a Kotak Economics Research report

The data raises the question whether compliance was weaker in the latter part of FY19 given that the number of registered filers has continued to see steady growth, said the report. If the fall in return filing is due to weak compliance, the new government coming to power post general elections in 2019 should aim to increase the tax base and collections, the report added.

Out of the 23.5 lakh persons, total 4.15 PANs had never filed income-tax returns, Financial Express has reported earlier in January based on an RTI response.

A relatively muted tax filing growth may pose fiscal challenges for the government if it needs to fulfil its budget promises of direct transfers, while simultaneously sticking to its fiscal consolidation path. The debt markets are already burdened with heavy government and public sector enterprises’ borrowings.

Since the 55 percent of the central government expenditure is fixed in nature, the eventual impact could be on further lowering capital expenditure, the report noted.

While the missing tax collections will hurt the overall tax buoyancy, the continued high borrowing costs for financial institutions and companies (given crowding out by the government sector) will weigh on the near-term aggregate demand in the Indian economy, according to the report.

Therefore, the report suggested the government to gear up its efforts to improve the tax base, without which the medium-term growth path will be at risk.

Using a more moderate fiscal policy, an investment-led growth (and a lower consumption rate) would help the economy to keep the savings-investment gap in check, said the report.

Moreover, given the slowdown in a range of economic activities, the report further suggested to reduce the government pressure to spur savings in order to make room for higher investment rate without impacting macro balances.

Source: FE