The effect of demonetisation on direct taxation has been complex. Despite obvious attempts at money laundering, it has yielded some positive outcomes: taxpayers are reporting higher incomes; the number of taxpayers have increased; and revenues have begun to grow at a faster clip.When demonetisation was announced, taxpayers with large unaccounted cash holdings of Rs 500 and Rs 1,000 notes had to make a choice: one option was to destroy these stocks, incur cash losses and avoid the prospect of facing huge additions, penalties and prosecution.Alternatively, they could risk depositing their cash stocks in their own bank accounts or those of others in a manner that might pass muster with tax authorities. If they exercised this choice, in the worst-case scenario, they would still be left with 15% of their existing cash stocks.A third choice emerged mid-December. The Taxation Laws (Second Amendment) Act, 2016, gave taxpayers the opportunity to surrender cash representing undisclosed incomes under the Pradhan Mantri Garib Kalyan Yojana . This scheme provided that for every Rs 100 the taxpayer declared he lost Rs 50 as tax, and had to pay another Rs 25 in interest-free deposit to the government for four years. Over this period, he lost another Rs 10 as interest, which he might have earned had he invested the deposited amount elsewhere at 10% per annum. Unsurprisingly, because it was so unattractive, this scheme proved unpopular.That by June 30 of the current fiscal, Rs 15.28 lakh crore of Rs 15.44 lakh crore (about 99%) of cash in circulation found its way back to banks reveals that most people exercised the second option and took the risk of depositing their cash holdings in banks.Meanwhile, the Income Tax department tightened enforcement. In January, it launched Operation Clean Money under which it scrutinised bank deposits above Rs 2.5 lakh, with the help advanced data analytic techniques, to identify suspicious deposits disproportionate to declared incomes. It raised 18 lakh queries; so far it has received replies from 9.72 lakh taxpayers involving 13.33 lakh bank accounts with deposits of Rs 2.89 lakh crore.These efforts revealed that taxpayers adopted a wide variety of stratagems to launder unaccounted cash holdings. Some people deposited money in banks through shell companies. Two lakh such entities have recently been struck off the records of the Ministry of Corporate Affairs. 5,820 of them, a limited investigation revealed, had 13,140 bank accounts in which deposits of Rs 4,574 crore had been made after demonetisation; 99% of these have since been withdrawn.A number of jewellers backdated sale or split bills so that they would not have to report PAN card details of buyers; some accepted cash against future sales. A number of petrol pump dealers were found having made deposits in excess of the sales actually made by them during the period selected for scrutiny. Many people made deposits in accounts of farmers, labourers, artisans and the like.Traders tried to explain the source of deposits as earlier cash sales and many employers gave huge advance salaries to their employees. The details of all such suspicious transactions have been passed on to their Assessing Officers who will, after considering the explanations of the assessees, examine whether they are acceptable or not. Aggrieved assessees will undoubtedly exercise their right of appeal before Appellate Commissioners and later the Income Tax Appellate Tribunal. The revenue at stake in these cases is Rs 2.45 lakh crore (85% of Rs 2.89 lakh crore). How much of this will actually be realised will be known sometime later.All that can be said at the moment is that the information available in such cases is qualitatively far superior to anything the department has been able to collect in the past.Demonetisation has had a favourable impact on revenues. In his Independence Day speech, Prime Minister Modi noted that between April 1 and August 5 this year, 56 lakh individuals had filed returns for the first time. This was in addition to 91 lakh new returns received in fiscal year 2017. The number of taxpayers currently stands at about 83.1 million. 6.28% of the total population now files returns as compared to 3.48% in fiscal year 2012; 25% of this increase has occurred in the current year. Simultaneously, consequent to demonetisation, existing taxpayers also began reporting higher current incomes.As a consequence, advance tax collections are running 41% higher than last year. Other benefits, though related to taxation, have been indirect. Cash holdings today, points out the recently published Economic Survey, are Rs 3.5 lakh crore (or 20%) less than what they would have been had demonetisation not taken place. Many people who kept their savings in cash have now transferred that to banks.The data gathered from seven major Indian cities indicates that after demonetisation, the demand for and prices of urban real estate declined, at least initially. Currently, both have recovered.Anecdotal evidence reveals that property deals typically now have lower cash components, largely on account of the reluctance of sellers to accept cash. They may resultantly report higher capital gains in future.The number of transactions however has declined. Overall, the experience with demonetisation has shown that Indian taxpayers, like taxpayers all over the world, do respond to economic incentives and disincentives.Through its recent crackdowns, the IT department has built up a good deterrent against tax evasion; it now needs to focus much more now on lowering the cost of compliance by simplifying laws and procedures and reducing litigation.The writer is a former Chief Commissioner of Income-Tax