Does going cashless make you tax-rich? Evidence from India’s demonetization experiment

Abstract

This paper investigates the tax compliance effects of India’s demonetization policy, which limited cash availability for a short period of time. Using administrative data on firms’ tax returns and variation in the strength of the demonetization shock across local areas, we find that demonetization increased sales reported to the tax authorities and tax payments. Investigating mechanisms, we show that demonetization led to a large increase in the use of electronic forms of payments. We argue that this likely strengthened tax authorities’ capacity to observe tax liabilities and enforce compliance.