Taxing the untaxed? The Lasting Effects of India's 2016 Demonetization on Tax Collection

Da-Kai Wu and Yi-Chun Ko

No 2025-16, AGI Working Paper Series from Asian Growth Research Institute

Abstract: This paper evaluates the lasting impact of India's 2016 demonetization on tax collection. Using the synthetic control method and cross-country panel data from 2005-2022, we find a statistically significant and persistent increase in sales and production tax revenues, but no comparable change in income and profits tax collections. Mechanism tests suggest that cash usage fell and digital payments rose during 2016 and 2017, but both returned to pre-demonetization levels from 2018 onward. The size of the informal economy remained unchanged. These findings cast doubt on demonetization's effectiveness as a tool for broadening the tax base and reducing informality. The sustained rise in indirect tax revenues is more plausibly attributable to concurrent structural reforms, particularly the Goods and Services Tax, rather than to demonetization itself. By distinguishing between short-term payment disruptions and long-term revenue effects, this study provides new evidence on the limits of one-off policy shocks in achieving lasting tax compliance.

Keywords: JEL classfication: E02; H26; O23; India demonetization; tax collection; tax compliance; digital payment; synthetic control method (search for similar items in EconPapers)
Date: 2025-09
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