The pains and gains of demonetisation

The country is busy finding ways to recover from the shock of demonetisation, so much so that matters like Jayalalithaa’s health, Pakistan-sponsored terror attacks etc,which used to be the headlines, are hardly finding any place in mainstream media.

There is a clear feeling that this exercise should have been carried out with proper planning, and people are getting impatient with every passing day. Despite all efforts to increase the supply of currency, banks are running out of cash and the noteban drive is certain to impact agriculture. The common man is facing misery everyday as ATMs run dry and banks remain overcrowded.

However, such a massive exercise will not be totally futile and we as a country expect to get some benefits after its completion. Such benefits are expected to be both tangible and intangible, and leave a long-lasting impact.

There has been criticism of the recently introduced amnesty scheme, but it should be noted that the scheme provides relief in case the untaxed income relates to legitimate activity. Section 199-O read with Section 199-L of Taxation Laws (Second Amendment) Act, 2016, clearly provides that there will not be any immunity from prosecution if the declared money was generated out of illegal sources (like corruption, smuggling, drug trafficking or any other criminal activity).

If the government is providing an opportunity to come clean after charging tax at a much higher rate (effective tax rate will be 57 per cent since 25 per cent of the declared amount will be locked-in for four years without any interest and hence fair value of money received by the declarant will be less), then it’s a win-win situation for both the taxmen and assessee.

As far as tangible benefits coming out of this exercise are concerned, they will be in the form of demonetisation of old currency notes which will not come to the RBI by December 30. Minister of State for finance Arjun Ram Meghwal said in the Rajya Sabha that of 15.44 lakh crore of banned notes, 8.45 lakh crore have already been received by banks till November 27, and going by this trend a sum of a little over Rs 1 lakh crore is expected to come in the government kitty.

Apart from this, deposits in bank accounts will help increase the tax base because taxmen can now review the records of declarants or depositors. Had the government not made this demonetisation move, nothing would have been received and whatever amount comes to the exchequer is a gain.

Intangible benefits can’t be quantified but these have long-lasting impact on society, such as:

1) High denomination counterfeit currency will be driven out of the system. The volume of such notes is not known and therefore it can’t be quantified but it will be eliminated in toto.

2) Idle cash will come into the proper banking channel which will be used for capital formation.

3) We will move towards a cashless society and this process has already begun, which is evident from the increased volume of online transactions.

Time will tell the final outcome of this economic disruption on comparative cost-benefit parameters because demonetisation has affected usual business activity and rating agencies have revised India's GDP growth estimates.

If those who have ill-gotten wealth are able to change its colour by depositing and converting it through the proper banking channel, then it is more dangerous because it is another kind of money laundering. Those who are using bank accounts of others to deposit small sums of banned notes are using the age-old technique of money laundering (placement, layering and integration) and despite government measures, all such cases can’t be detected.

Now the onus is on intelligence and tax authorities to go through voluminous records of all depositors and identify the potential evaders. In the absence of digitised records, the fight against black money is not going to be easy, even after passing the benami property law.

Also read: Every day is a new negotiation: Demonetisation is a cruel joke on India