The Effect of Demonetization on India\u27s Tax Base and Tax Revenues

In 2016, India demonetized its high denomination currency notes and introduced new bills in order to combat tax evasion via “black money” that was held outside the economic system. This paper aims to analyze the effect of demonetization on the tax base and tax revenues of India. Around the time demonetization happened, the Goods and Services Tax in India was enacted in 2017, a measure that also had a direct impact on the indirect tax revenues of the country. Since it is difficult to separate the effects of the two policies, I have analyzed GST’s impact on said variables as well. While there are ample studies on the general effects of demonetization on a country’s economy, there is little literature that has specifically performed an in depth analysis of GST and demonetization on taxes. Major findings of this paper include structural breaks in direct and indirect tax revenue collection as well as bank deposits, but no trend breaks in Gross Value Added (GVA) or the number of tax returns filed and the number of taxpayers in India