DP16891 Does going cashless make you tax-rich? Evidence from India's demonetization experiment

Author(s): Satadru Das, Lucie Gadenne, Tushar Nandi, Ross Warwick
Publication Date: January 2022
Keyword(s): Demonetization, electronic payments, tax compliance
JEL(s): H25, H26, O23
Programme Areas: Public Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16891

This paper investigates the effect of electronic payments technology on firms' tax compliance in a large developing economy. We consider India's demonetization policy which, by limiting the availability of cash, led to a large increase in the use of electronic forms of payments. Using administrative data on firms' tax returns and variation in the strength of the demonetization shock across local areas, we find that greater use of electronic payments leads to firms reporting more sales to the tax authorities. This effect is strong enough to explain roughly half of the large (11 %) increase in reported sales observed during demonetization.