The ripple effect of the Centre’s recent move to demonetise high-denomination currency notes is being felt in hitherto-unforeseen areas, including in the apparent readiness of more and more businesses to stop evading taxes — and voluntarily bring themselves onto the taxman’s radar.

Tax-filing e-portal ClearTax, for example, has witnessed a six-fold spike in the number of tax-related queries on its platform since the government announced the scrapping of the ₹500 and ₹1,000 notes on November 8.

This isn’t just academic interest. Archit Gupta, founder of the Bengaluru-based portal, told BusinessLine he expects the demonetisation to lead to a 200 per cent growth in the number of people paying taxes in the next 18 months as small businesses scramble to get their earnings on the right side of the tax law. The number of tax filings will also go up dramatically, he believes.

The rush to come clean

“We have seen enquiries from gym trainers, housewives, salon owners, coaching centre owners, among other small and medium businesses, who have legitimate enterprises but were not paying any taxes or were evading tax payments,” said Gupta, whose company is educating people on tax laws and the impact of demonetisation on their busineses.

With the government nudging small businesses to migrate to digital payment processes, more of these small busiesses will come onto the taxman’s radar. “There will be a greater inclination to pay taxes as digital payments become the preferred option,” Gupta said.

At least six tax lawyers and chartered accountants to whom BusinessLine spoke acknowledged that their client base has increased in recent days. “Demonetisation is primarily intended to curb cash hoarding and tackle counterfeit notes, but it will also solve a larger problem of under-reporting of taxes as more transactions are made through e-wallets and mobile banking, where the money trail can be established,” said a Mumbai-based tax advisor.

How the digital push helps

Pritam Mahure, founder of Pune-based tax advisory firm Lawgical Consultants, noted that only about 3-4 per cent of the Indian population comes under the direct tax net (sales and income tax), and that even within this subset, there is under-reporting of income to the extent of 40-50 per cent of their income. “As digital transactions take off, as they will, more of these under-reported incomes will be brought above the board. Tax compliance will go up,” he adds.

In Mahure’s view, the perception that the cash crunch will last for 6-8 months if the government imposes limits on monthly cash withdrawals will likely incentivise businesses to embrace digital payments for fear of losing customers.

“There is also a widely held belief that the government has more measures in the pipeline to stamp out black money. Small businesses and individuals may opt to come clean on their taxes rather than risk harassment,” he said.

The new normal

Rohit Lohia, Co-Founder of fintech marketplace CoinTribe, said tax collections could increase on two counts: first, from the tax and penalty on hitherto-undeclared incomes that are now being flushed out into the open; and second, from higher reporting of income in the remainder of the financial year to account for the disproportionately high cash deposits that some businesses may end up making.

“This higher reporting will also reset the levels at which these businesses will move in the future,” he said. In this context, he pointed out, the larger impact will be from the introduction of a goods and services tax (GST): in an environment where much of the black money has been flushed out of the systeml, this will lead to more accurate tracking and, therefore, reporting of sales, which in turn will positively impact tax collections going forward.

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