Demonetization - An Angel in the garb of a monster
Prime Minister of India Narendra Modi announced demonetization in an unscheduled live televised address at 20:00 Indian Standard Time (IST) on 8th November 2016. After this, there was hue and cry from different sectors against this action.
- It was sudden, unplanned and no notice was given.
- There were many questions about the effectiveness of the action as it attacks only cash and no other unaccounted assets.
- Indian Economy would collapse as cash transactions are affected. It will downgrade the GDP projections for 2016.
- Hardships to common man due to scarcity of cash.
Let us now see the various earlier steps that were taken to make this demonetization successful. These points given below would be in response to the first three criticisms.
Steps taken by the Government prior to demonetization
- Constituted a Supreme Court-Monitored Special Investigation Team (SIT) on Black Money In 2014,
- Jan Dhan accounts - In August 2014, GOI launched Jan Dhan Yojana. Over 15 crore bank accounts were opened in last one year. The Main focus has been on reaching every household to provide credit facility, pension and insurance to account holders. Paperwork was minimal.
1. Account holders will be provided bank accounts with no minimum balance.
2. RuPay debit cards will be issued.
3. Accidental insurance cover of INR 1 lakh.
4. After six months of opening of the bank account, holders will be eligible for â‚¹5,000 overdrafts from the bank.
5. With the introduction of new technology by National Payments Corporation of India (NPCI), people can transfer funds, check balance through a normal phone which was earlier limited only to smart phones.
6. Mobile banking for the poor would be available through National Unified USSD Platform (NUUP) for which all banks and mobile companies have come together.
7. Payment of subsidies and Mahatma Gandhi National Rural Employment Guarantee wages through direct cash benefit facilities into the accounts of intended beneficiaries through Aadhar. This resulted in the opening of Lakhs of Jan Dhan accounts as beneficiaries need to have Bank accounts to avail benefit of schemes like Gas subsidy and Guaranteed wages. Middle men were eliminated and leakages were plugged.
8. Renegotiation of Tax Treaties and Automatic Information Exchange Agreements with Tax Havens
9. India has completed negotiating 17 new tax information exchange agreements (TIEA) and already signed TIEA with seven jurisdictions. India is part of peer review group of the Global Forum on Transparency and Exchange of Information for Tax Purposes, as well as the Financial Action Task Force, the Task Force on Financial Integrity and Economic Development, and the Eurasia Group. A dedicated computerized cell for exchange of information is created in the CBDT’s Foreign Tax and Tax Research Division. It has also adopted a three-pronged approach to tackle the black money issue.
10. The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 was introduced in Lok Sabha on March 20, 2015 by the Minister of Finance, Mr. Arun Jaitley. The scheme was launched to bring back black money stashed in foreign countries and tax havens. The scheme ended on 30 September, 2015. The Act also had various stringent provisions for penalty and prosecution of foreign black money holders unearthed during future investigation by the tax department.
The Income Declaration Scheme (IDS) which opened on June 1 gave a chance to black money holders to come clean by declaring the assets by September 30 and paying tax and penalty of 45 per cent on it. Income Tax department had identified 90 lakh high value transactions without PAN, the final disclosure of black money was to the tune of Rs 65,250 crore. The outcome was not satisfactory, though the IT department had issued unprecedented number of Advertisements for the scheme.
Penalty on Real Estate Transactions undertaken in Cash exceeding INR 20,000
Black Money Bill was passed in the Lok Sabha in 2015. In this Bill, very stringent punishment was mentioned for those who transact in Black Money. Income Tax Dept. brought a penalty provision in budget 2015-16 for transactions of immovable property in Cash and made amendments in sections 269SS, 269T, 271D and 271E of the Income Tax Act. This was to ensure more transparency in Real Estate Sector including dealings in Agricultural land.
Tax Collection at Source on Cash Sales exceeding INR 2 lakh with effect from 1.6.2016
Another important step to check high value cash transactions and create an audit trail was to impose Tax Collection at Source at a nominal rate of 1 per cent on cash purchases exceeding INR 2 lakh.
- Sale of any goods or any services (other than bullion or jewellery)
- Consideration for goods or services exceeds INR 2,00,000 in a single bill
- Out of such consideration, any amount is received in cash
- The seller will collect tax at the rate of 1% of sale consideration
- No. Tax collection at source will not be levied if the cash receipt does not exceed two lakh rupees even if the sale consideration exceeds two lakh rupees.
- The income-tax department notified the provisions of the Benami Act with effect from 1 November 2016, reinforcing the fight against tax evasion.
The Benami Transactions (Prohibition) Amendment Act, 2016 seeks to give the government powers to confiscate benami properties—assets held in the name of another person or under a fictitious name to avoid taxation and conceal unaccounted-for wealth. This Act, along with the stringent Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, to penalize those with unaccounted wealth abroad, will help the government in its fight against black money both within and outside the country.
Imposition of Excise Duty on Gold - In Budget 2016, a nominal excise duty of 1% [without input tax credit] and 12.5% [with input tax credit] was imposed on articles of gold jewellery.
Real Estate (Regulation and Development) Act,2016 - The Real Estate Act makes it mandatory for all commercial and residential real estate projects where the land is over 500 square metres, or eight apartments, to register with the Real Estate Regulatory Authority (RERA) for launching a project, in order to provide greater transparency in project-marketing and execution.
Implementation of GST in 2017
- GST will replace 17 indirect tax levies and compliance costs will fall
- Better compliance rate due to Input credit
- Ease of logistics in case of Inter State trade
Story of Demonetization
It was year 2014. In a remote village of India, Ram got a shock when he got to know that in order to get the benefit of MNREGA wage scheme, he needs to have Bank Account and Aadhar card. Immediately he approached a nearby bank and was in for a pleasant surprise when he could open a Jan Dhan account quickly. Without any hitch, from that month on he started receiving the benefits of the scheme in his account. In 2015, Ms. Sumati in another village also opened Jan Dhan account in order to avail her gas subsidy through Direct Cash transfers. Banks employees were given targets and incentives to open more Jan Dhan accounts in rural areas which resulted in Millions of new Jan Dhan accounts being opened in 2014, 2015 & 2016.
Around the same, time Mr.Rich who was in to Real estate business was in for some troubling times with the introduction of Benamy Act, Penalty on Real Estate Transactions undertaken in Cash exceeding INR 20,000, Tax Collection at Source on Cash Sales exceeding INR 2 lakhs etc. He also had a huge unaccounted wealth which was worrying him. It came as a relief when the IT Department came out with the Income Disclosure Scheme, he used it to declare all his unaccounted wealth and paid taxes on the same. He also made sure to do minimal cash transactions from then on.
So when Demonetization was announced, Ram, Sumati and Rich were more or less unaffected. They had their share of grievances as they had to stand in long queues but that was soon forgotten. They were aware that this was being done to improve their country.
Badly affected were those who were into illegal businesses, those who had not declared their unaccounted wealth, Terrorists and those dealing in fake currency. Many of them were unconcerned about the drastic steps that were promised to be taken once the Income Disclosure Scheme was over. After all, what is the maximum that could be done? But November 8th saw them performing search and seizure of their own unaccounted wealth and hurrying to deposit in their bank accounts instead of IT Authorities having to take any trouble. That was a master stroke.
Results of Demonetization till 31st January 2017
1. IIP grows 5.7% in November 2016 despite Demonetization. All three components of IIP posted strong growth in November 2016. Electricity generation registered the fastest growth at 8.9% followed by a 5.5% jump in manufacturing output and 3.9% rise in mining production. Some of this growth can be attributed to the base effect.
2. Consumer Price Index continues high at 130+ range.
3. Most states witnessed a sharp increase in sales tax collections, with those of Nagaland, Meghalaya and Jammu & Kashmir surging by 133%, 84% and 82%, respectively. According to VAT collection data for November and December 2016, the manufacturing states of Maharashtra and Tamil Nadu showed growth in both the months over the same period a year earlier. Maharashtra’s VAT collections grew 25.99 % in November and 16.73 % in December against 4.74% in October. Tamil Nadu’s VAT collections grew 5.96%, 9.72% and 11% in October, November and December, respectively. Karnataka also registered an increase in VAT for December.
4. Indirect Taxation is up by 25% and Direct Tax by 12%. - Update released by the Finance Ministry.
5. The trade deficit in India narrowed to USD 10.37 billion in December of 2016 from a USD 11.5 billion gap a year earlier. Exports jumped 5.7 percent year-on-year to USD 23.88 billion, reaching the highest value since March of 2015 as non-petroleum sales went up 5.4 percent.
6. Remittances in India increased to 9942.81 USD Million in the third quarter of 2016 from 9686.59 USD Million in the second quarter of 2016.
7. Tourist Arrivals in India increased to 891000 in November from 754000 in October of 2016.
8. In the first two weeks of demonetization, the total balance in no-frills accounts under the Pradhan Mantri Jan Dhan Yojana increased by 60% to Rs 72,834.72 crore. That is a jump of Rs 27,198.11 crore in 14 days. Income Tax Department has found that undisclosed amount of Rs 1.64 crore deposited by people who never filed income returns into Jan Dhan accounts.
9. The Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS) 2016 along with new income tax amendment is notified on 17th December, 2016. A Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS) is second income declaration scheme. Those who have declared black money under this scheme will be levied a charge of 50%, this charge consists of 30% tax, 33% Pradhan Mantri Garib Kalyan Cess and 10% penalty. This scheme ends on 31st March 2017.
10. Fake Currency circulation has reduced and so have illegal businesses.
11. Income Tax Department has unearthed many inconsistencies in Jan Dhan Account deposits and is investigating Cash deposits more than INR 2 lakhs. It has initiated notices particularly to jewelers who deposited crores of cash post demonetization.
12. The Demonetization has badly hit Maoist and Naxalites as well. The surrender rate has reached its highest since the demonetization is announced. It could be that the money these organizations had collected over the years were left with no value. It also led to a huge dip in Human trafficking as per Newspaper reports.
Demonetization is not the end; it is one of the steps taken to ensure transparency in the system. Some measures that could be taken in future are:
1. Emphasis on curbing unaccounted assets other than cash- Real Estate, Jewellery, Deposits outside the country to name a few. As discussed above some steps have already been taken in this direction.
2. Reduction in Banking transaction rates to incentivize digitalization of transactions.
3. Proper scrutiny of huge cash deposits done post demonetization by the Income Tax department including analysis of cash sales ratios and investigating any discrepancies particularly in the months of November and December 2016. Unprecedented increase of cash sales in these two months can be scrutinized.
4. Source of cash spent on elections to be scrutinized. Make the transactions as digital as possible.
5. Direct and Indirect taxes can be reduced to give additional incentive to go digital and to pay taxes honestly. In the Budget for 2017, FM has announced some reduction in taxes for both corporates as well as Individuals. Small businesses can rejoice as tax has been reduced to 25% for Companies having less than 50 crores Turnover and Presumptive Taxation has been reduced to 6% from the existing 8% for Digital transactions.
6. Improve the ease of doing business in India by amending various labour laws and other Acts where there is ambiguity.
Problems in Implementation
There were some inefficiencies in the implementation demonetization scheme. Enough notes were not printed by RBI in advance due to which common people had to face a lot of hardships in withdrawing their own hard earned money. Serpentine queues were seen in front of ATMs across the country. Travellers were stuck without cash for some days. Restriction on cash withdrawal led to practical payments for payments to laborers particularly in unorganized sector. There was a definite scope of improvement in implementation.
In spite of these short term problems, it has been a good measure which will give a boost to the economy in the long term. Some of the possible long term outcomes of demonetization are:
a. Illegal businesses, Corruption and Terror financing will deteriorate in the future as we place emphasis on a Less Cash economy.
b. More and more citizens are coming under the purview of taxes due to increase in digital transactions. This will also enable Banks to disburse more loans to the deserved. As more transactions become digital, even poor will have access to loans by providing the required data to Banks. Banks will also have the luxury of huge deposits which in turn go out as loans. In the long term, Agriculture and Industry will prosper due this measure.
c. Real Estate prices may come down to a reasonable level in the long term. Huge investments were done using black money in this sector. Now that the black money circulation has reduced, demand will go down and hence the price. Hopefully agricultural lands will not be converted for construction of buildings as demand for these will come down. Corruption is likely to reduce in this sector.
d. A number of welfare measures can be initiated from the huge taxes and penalties collected. Some measures were already announced by the PM on the New Year’s eve.
e. This also opens up a lot of avenues for Chartered Accountants. New business will require Audits to be done. Risk in Audits of existing business will reduce as most of the transactions will leave digital trail. There will more services required for small traders and businessmen as well.
f. Without demonetization, it would have taken us decades to achieve these benefits.
- The Hindu, Economic Times, Business Standard
The author has 13 years of post qualification experience in various Companies and is Currently working as Finance Controller with ADI Strategies.