Aiding In Legitimising Business

While many feel that demonetisation has hit the Indian economy between the eyes, it does have a silver lining. Even as everyone experienced short-term pain, it allowed or forced individuals to legitimise their businesses and do better record-keeping and invoicing as well as reduce the use of black money in their everyday transactions.

When the dust finally settled, the number of companies with formal documentation had expanded. Historically, there has always been a large pool of individuals and businesses and it is difficult to discern and verify the ‘earning capacity’ which serves as a critical element for decision-making on lending money. This had led to Non-Banking Financial Companies (NBFCs) using surrogate estimates – how much would one earn based on their spending pattern, surveys to determine average income and personal interviews to assess the real income levels of a business. This is India’s reality. But it has improved due to the joint effects of demonetisation and GST that have given rise to more formalised businesses which, in turn, have allowed a larger number of them to be underwritten.

India has had an abysmal record of tax paying – as per CBDT data, a miniscule 1.7 per cent of 120 crore Indians paid taxes in 2015-16. However, as per the Economic Survey 2017-18, after November 2016, 10.1 million filers were added compared to an average of 6.2 million in the preceding six years. The level of tax filers by November 2017 was 31 per cent more - this translates into about 1.8 million additional tax payers. This is due to demonetisation-cum-GST, which represents three per cent of existing taxpayers. We must welcome all efforts to increase such regularisation and increase the pool of people who are tax compliant. Only then will the long-term prospects of NBFCs improve. This is because verifiable and reliable tax data not only strengthens our ability to reach out to customers and serve them far better, but also increases the speed with which we can deliver our services and reduce bureaucracy and paperwork. This regularisation of businesses driven by demonetisation and GST has had an overall positive impact. For instance, in the textile sector, the entire value chain has come under a stricter purview. This has exposed large value transaction in the industry and impacted  cotton suppliers to textile and ready-made garment sellers. Now, with the abolition of the inter-state sales tax (central sales tax) and entry tax, the Indian textile market became a genuine all-India market without fiscal barriers. The value chain under GST is now fully traceable. As a result, Input Tax Credit claims are now backed by full information chain of purchases and sales. Not only this, the B2C segment (textile retail) has also become more lendable as most of them have started using card swipe machines (POS) for their sales.

Similarly, the restaurant and hospitality sector saw a drastic increase in use of cards post demonetisation, which led to creating digital footprint in terms of sales and expenses. All digital data created in the process help in underwriting and understanding the customer to underwrite quickly and with ease. Introduction of low cost POS machines by some aggregators has helped even the smaller food joints to adopt POS technology. In the past, restaurants as a segment was difficult to underwrite because there was no data transparency.  But now NBFCs can underwrite this segment entirely on their digital financial data reducing the turnaround time to get a loan. In some cases, this segment is even getting pre-approved loans from NBFCs and banks who have tied up with POS providers.

If the number of people who pay taxes, pay records and declare their information to relevant regulators grows, it increases transparency thereby benefitting the country. The impetus given by demonetisation and GST for promoting regularisation must continue to convert India’s cash economy into a more formalised economy. We must continue to explore diverse ways of encouraging higher tax compliance using analytics and looking deeper into spending patterns and ownership of assets that can play a pivotal role into converting the informal into the formal sector.

The author is Chairperson, Clix Capital