Why didn't government think of this to tackle black money?

India's black economy is estimated at 30-40 per cent of GDP, according to various estimates and economic studies. Thus the black money is roughly estimated at Rs 50 lakh crore. The income tax department's raids across the country in the last five years show that unaccounted cash consists of 6-10 per cent of undeclared wealth.

So, basically, unaccounted cash of total black money is estimated between Rs 4-5 lakh crore. It was this amount that the government wanted to arrest by demonetisation, on the presumption that those who have unaccounted cash will either not deposit it in banks or pay tax at higher rates. In both cases, the government believed it would gain.

But what about money laundering?

Did the government not think that once demonetisation is announced, those who have unaccounted cash will try to launder it and convert it into white money, and as usual a black market will emerge overnight for converting black cash into gold, bullion or property, or exchange it for new currency or back-dated billing in cash?

This is how unaccounted cash has started getting laundered and is making its way to banks.

So can the government prevent this money laundering? Of course. I-T raids have been conducted but only to a limited extent, and that too on tip-offs.

One simple step could have prevented money laundering to a large extent.

The government could have asked people to file a declaration of cash-in-hand, along with the denomination, as on November 8, 2016. The could have been applicable for those having more than Rs 2.50 lakh in cash, and three days' time could have been provided to file the simple declaration.

The declaration could be filed online or manually at the nearest income tax office along with one's PAN. Any amount deposited more than the amount declared would be considered as black money and liable to tax at higher rates.

Simultaneously, the government could have announced that those declaring more than Rs 10 lakh (for individuals) and more than Rs 1 crore (for companies) would have to go for compulsory scrutiny by the I-T department for FY2016-17. Also, the government could issue internal orders that those declaring more than Rs 5 crore in cash will be raided immediately and their books of accounts and cash would be checked and verified.

Three days is too short a time for anyone to launder money, as there would hardly be new currency in circulation in the market to launder the unaccounted cash - so much so that even bank managers or black marketeers wouldn't have been able to do it.

Given the limited time of three days, those holding unaccounted cash would have had no option but to declare it, or pay tax if they deposited it later without declaring it. In both cases, the government would have gained.

Currently, the government has asked banks to report cash deposits above Rs 2.50 lakh for individuals and above Rs 12.50 lakh for companies. But what about those having multiple accounts in multiple banks?

It's but natural that anyone having a huge amount of cash would also have multiple banks accounts.

Suppose an individual has Rs 6 lakh in cash and three accounts. He would deposit Rs 2 lakh in each and this would go unreported to the I-T department. Similarly, a company having 10-15 current accounts in various banks can easily deposit 10 lakh in each account. Thereby, Rs 1 crore would go unreported.

But if a declaration would have been filed, the person would have had to reveal the total amount with PAN and that would not have gone unreported.

The I-T department now will have to wait till December 31, after which it can get the final data from banks about cash deposits till that date and then collate it to get the big picture. After that, the department will have to issue notices and an assessment will have to be done, which itself will take several months.

Thereafter, the assesee will have the right to appeal to the commissioner of appeals and further to the Income Tax Appellate Tribunal and then to the high courts and Supreme Court - resulting in lengthy tax disputes.

The I-T department will have to fight its case all through and it may be a few years before it can finally recover the tax amount. And imagine the number of notices and assessment and cases. Does the department have this kind of time and manpower?

Currently, it has manpower to scrutinise only 1 per cent of the total tax returns filed every year.

This humongous task could have been easily avoided – with the suggested filing of a declaration in three days - and the I-T department would not even have had to wait for data from banks.

Also read: How one month of demonetisation has impacted India