India’s tax take continues to grow as digitalisation increases

The withdrawal of R1,000 and R500 notes from circulation in 2016 has led to a rise in the amount of tax collected and increased digitalisation in the wider economy.

That’s the view of RBI Monetary Policy Committee member Ashima Goyal, who said that the demonetisation “will help the nation move towards the ideal situation where low taxes are levied on a large base”.

Prime Minister Narendra Modi announced the withdrawal of the two denominations in November 2016, saying at the time it was to starve the black economy of money and promote digital payments at the same time.

Goyal said that while the withdrawal of the notes had created short-term costs, enhanced digitisation in the economy and reduced tax evasion were among the long-term benefits. “It contributed to the buoyancy in taxes the country is benefitting from today. This helps us move towards the ideal of low tax rates on a large base,” she said.

India’s tax department said that the gross collection of tax on corporate and individual earnings has risen by almost 24% so far in the current fiscal year to R8.98 lakh crore ($110bn).

Goods and Services Tax (GST) collections remained above R1.40 lakh crore for the seventh month in a row at R1.47 lakh crore in September, a 26% increase over last year.


Digital currency pilot commences

Goyal also said that India’s Central Bank Digital Currency (CBDC) would also reduce the cash economy, as well as providing additional functionality to the existing banking systems.

The Reserve Bank of India (RBI) launched a pilot scheme for the digital rupee for “specific uses” on 1 November 2022, in the Wholesale sector. The initiative makes the RBI one of the first major central banks in the world to start a pilot project with its own virtual currency.

The RBI also confirmed that it will start a second pilot scheme in the retail sector “in select locations in closed user groups of customers and merchants within a month”.

The central bank also said that nine banks are participating in the pilot – the State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC.

“The use case for this pilot is settlement of secondary market transactions in government securities. Use of [the digital currency] is expected to make the inter-bank market more efficient,” RBI said in an official statement.

It added: “Going forward, other wholesale transactions, and cross-border payments will be the focus of future pilots, based on the learnings from this pilot.”

The RBI said the e-rupee will bolster India’s digital economy, make payment systems more efficient and tackle money laundering. However, it also said the digital currency was to complement rather than replace current forms of money, and will provide an additional payment option to users, not to replace traditional payment systems.

“The introduction of CBDC in India is expected to offer a range of benefits, such as reduced dependency on cash, lesser overall currency management cost, and reduced settlement risk,” the RBI has said.

Ashima Goyal commented: “CBDC can certainly meet new needs in the digital age, reach remote areas and enhance financial inclusion, and save costs since cash is expensive and cumbersome.”

Like many other central banks, the RBI has been exploring the pros and cons of the introduction of CBDCs for some time.

CBDC is the digital form of a country’s sovereign currency. Its records will be maintained using a distributed ledger technology (DLT) like Blockchain. The RBI has said that all CBDC transactions would be traceable, with “no scope of anonymous transaction”.

The central bank recently released a ‘Concept Note’ on specifically on CBDC for India. The Note discusses key considerations such as technology and design options, possible uses of the digital rupee, and how it is issued, among other factors.