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

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. results suggest demonetization may have had positive ef-fects on ﬁrms’ reporting behavior, the economic cost of the policy should be kept in mind while assessing its overall eﬀect.