Why the Strike against Black Money Faltered so Quickly
Municipal council elections in Gujarat and Maharashtra seem to suggest that prime minister (PM) Narendra Modi and the Bharatiya Janata Party (BJP) have scored big with the strike on black money through demonetisation of Rs500 and Rs,1000 notes. At least, that is what the Party believes, as is apparent from their social media messages.
 
However, a series of rapid-fire actions by the government indicate a dawning realisation that the rollout of the demonetisation plan is riddled with errors, misjudgement and big blunders such as printing new Rs500 and Rs2,000 notes in different sizez (which rendered 220,000 ATMs until they are painstakingly recalibrated),  complete lack of preparedness and leadership at the Central government presses at Nashik and Dewas, shortage of Rs500 notes and failing to anticipate the problem of having no currency between Rs100 and Rs2,000 after demonetisation and lack of understanding about the extent of India’s cash economy.
 
But the PM has not admitted to any problem with the rollout. Instead, as is his style, he is leading a massive campaign to persuade people to switch to electronic transactions, using his personal charisma and good will to great effect.  Unfortunately, all the positive actions are being undermined by two factors. 
 
One, the constant change in regulations, policies and decisions of the government seem to suggest that the government is shooting in the dark on the black money issue and is clueless about the contours of the problem and the solutions. Two, daily reports of large cash seizures in new notes. As much as Rs4.7 crore in new notes were seized from government officials in Bengaluru; a BJP district secretary was caught with over Rs20 lakh in cash in Tamil Nadu; and Rs95 lakh has been seized in Hyderabad. This leads to the chilling conclusion that the enormous pain and turmoil faced by ordinary people has not even shaken the confidence of the corrupt who continue to manipulate the banking system to corner new currency. 
 
The government and its diehard supporters will argue that it is too early to pass any judgement. After all, the frequent policy changes are being announced, precisely to plug every new leak that is detected. Unfortunately, the atmosphere of uncertainly and confusion is causing a new set of problems. For starters, it is fuelling rumours and fanning fears of an authoritarian State that encroaches on our rights in the name of fighting corruption. On 1st December, the finance ministry had to clarify that it was not planning to change the law to clamp down on the amount of gold that Indians can hold, or which the government can seize during tax raids. It is not clear if the clarification has, indeed, allayed fears. The Reserve Bank of India (RBI) also issued a press release asking people not to believe anything that is not officially announced on its website. But, remember, the rumours had found wide acceptance because of a pattern of policy announcements and legislative changes. Fears of intrusive government  and tax terrorism are not without a basis. It is important to understand the sequence. 
 
Nikhil Vadia, a well-regarded chartered accountant, told Moneylife Foundation members, at a recent workshop, about how Rule 12E was introduced on 16 November  2016, under what is known as the scrutiny Section, allowing an income-tax officer (ITO), the first level in the hierarchy, to order a tax scrutiny. This has the potential to unleash tax terrorism all over again and reverses the earlier efforts by this very government to end the harassment of genuine taxpayers.
 
On a recent trip to Delhi, we were told by a very senior official in one of the government agencies about plans to recruit thousands of retired tax officers to scrutinise all the deposits made between 8th November and 31 December 2016. While people were still trying to understand these changes, the government hurriedly passed the Taxation Laws (Second Amendment) Bill, 2016, announcing another opportunity to come clean on undisclosed income or face steep penalties. 
 
This change, which is seen as another income declaration scheme, also seems to suggest a drastic course-correction in the government’s plan to deal with black money. There are reports that over Rs11 lakh crore of demonetised currency has already been deposited into banks, signalling that black money hoarders were merrily depositing their stash of undeclared wealth without fear of punishment or coercive action. 
 
This is most plausible, because tax experts and retired income-tax commissioners have been confidently encouraging people to deposit their unaccounted money as this year’s income under Sections 68 and 69 of the Income-tax Act and get away by paying 30% tax. While there is a good chance that this may lead to litigation, case law from the two previous instances of currency demonetisation in India (1946 and 1978) may support this stand. Nikhil Vadia cited several examples where even the most egregious cases of conversion were decided by the apex court in favour of the taxpayer, after protracted litigation. People with large amounts of unaccounted money would clearly prefer to take their chances with our slow legal system than allow the currency to turn worthless. Will such declarants be willing to make this money legitimate under the new amendment? It remains to be seen and depends on what else the government does to end corruption and expropriate black money. 
 
The government’s action also indicates that its surgical strike on black money has missed its target. An article on IANS offers a simple arithmetic: currency deposited in banks in the first 20 days after demonetisation (Rs8.45 lakh crore) plus the cash reserve ratio (CRR) as on 8th November (over Rs4 lakh), plus another Rs50,000 crore as cash-in-hand adds up to Rs13 lakh crore, which is just short of the Rs14.5 lakh crore worth of higher denomination notes that were demonetised. With another 30 days to go, “it stands to reason that Rs2 lakh crore or more would come into the system till 30 December, thus throwing to the winds all calculation of the government to tackle black money,”it says. In fact, there are jokes and memes circulating on social media about the attempt to trap unaccounted wealth through demonetisation. One, attributed to a tax official, says, “With amount of money already back in bank, I fear it may be like Black Label whiskey, more money may come back than has been printed by the RBI.” Whether this could actually happen was also posed as a serious question at a discussion organised by the Bombay Chartered Accountants’ Society a couple of weeks ago. 
 
It will be another 30 days before a clear picture emerges, but the government is clearly worried. The spate of tax notices and raids on hoarders is a sign; but it still does not include measures to root out the generation of black money and its illegitimate use in funding political parties and elections (unrealistic spending cap per candidate), or the sale of government appointments and postings with its consequence of rampant corruption in delivering public services. 
 
At the same time, it has put every single person in the entire country through enormous hardship, and at a great cost to the economy itself. After two consecutive years of drought, the economy was just beginning to pick up. Banks, which were struggling with losses, bad loans and shrinkage of lending opportunities, are now fully occupied only with exchanging currency; all other work has come to a standstill. Depositors are not only unable to withdraw their funds, but deposit rates are shrinking. Foreign investors are systematically pulling money out of our stock markets. If all this weren’t enough, oil prices, which have a significant impact on our economy, are gradually beginning to rise. 
 
PM Modi took a huge gamble with demonetisation and he will certainly work very hard to make it pay off; but at this point of time, it is anybody’s guess which way it will go. 
Comments
prakash pimparkar
6 years ago
All re-visit Govt no long talking about De Mon ?
tapan sur
Replied to prakash pimparkar comment 6 years ago
yes, washout. we will not change, the environment must be put in place for things to change!
prakash pimparkar
7 years ago
Economists in this country are no better than fortune tellers only explaing with jargon
Will anybody answer ?
Was there a mechanism to identify fake notes during note bandy
What is the additional interest burden on banks due to deposit s during note band
What is the final count?
Prakash Pimparkar
8 years ago

Please listen to PM s first address after demonetization and his thsughts on taxation I am vindicated for saying hardly 1 % patpay I. Tax.
Prakash Pimparkar
8 years ago
I have always held the view that high taxation rates without providing any social security network is the main rason for tax evation.Our rulers comapre tax rates in US and Europe to justify but fail to mention social security provided byb these advance economies.
The high Taxation of 30 to 34 % ( ?)
If the tx is uniform say 10-15 % flat people would pay willingly .
Also to encourage Tax should be linked to insurance .What I mean is can the tx payer be insured free by Govt in lieu of tax for an amount say 20 times the tax paid ?
Can portion of Tax be returned after say 20 years ( 60 % of Taxpaid )
Can Tax payers be given Previlage cards so that Govt officers give them due respect ? can they be classified as VIPs if they pay Tax above 10 Lacs
We seem to treat tax payers as criminals insted of tax dodgers
By the way Mr Bhat Hon PM has reiterated what I said and you strongly objected to ( less that 1 % pay I Tax , and rest rejoice ? )







Ajit Duge
8 years ago
Think its too early to say anything.... And Sucheta ji knows the role of RBI and some other Banks in the Share Market scam of 1992 and 2001.. Hope history does not repeat in remonetization..
vipul
8 years ago
I still wait and watch till March, 2017 before passing any comment on the issue. However, ground level, it appears at least 25% people want go for tax evasion and generation of cash that's for sure.
vipul
8 years ago
I still wait and watch till March, 2017 before passing any comment on the issue. However, ground level, it appears at least 25% people want go for tax evasion and generation of cash that's for sure.
Prakash Pimparkar
8 years ago
What is the mechanism of eliminating fake notes is it only at the cash counter ,if this fails for some reason the fake not gets into crores of discarded notes virtually impossible to detect bank in turn already paid for fake currency .BRI ends up more than notes canceled dreadful !
Prakash Pimparkar
8 years ago
While every body is concerned about black money.PSU banks NPA has reached 6,30,300 L crores ie half of money in circulation.Are we moving towards financial disastor ? How can a country cope with such a loot as the money in all probability will never be paid back and Gove seems to prepare for it by accumulating bank deposits by demonisation and short supply of notes and restricting withdrawals
Prakash Pimparkar
8 years ago
While every body is concerned about black money.PSU banks NPA has reached 6,30,300 L crores ie half of money in circulation.Are we moving towards financial disastor ? How can a country cope with such a loot as the money in all probability will never be paid back and Gove seems to prepare for it by accumulating bank deposits by demonisation and short supply of notes and restricting withdrawals
MUKESH AGARWAL
8 years ago
(A) All is behind no tax on agriculture income(B) Donation to Political parties less than 20000 in cash allowed. (c) for business cash payment allowed up to 20000/-
Action to be taken (a) All Agri income over 5 lacs to be taxed as per slab. (b) Donation to all political parties to be kept cash less. (c) business expenditure to be lowered from 20000 to 5000.
This should be applied to all Doctors. Doctors and hospital must accept over 500/- only in non-cash. Doctors /Hospitals/Builders/Businessmen are tax evaders with the help of CA and IT official nexus.
Subba Rao
8 years ago
No one can grudge the intention of the government in going for de-monetization. But the estimates made seem awfully away from reality and the implementation has just not been thought through -as has become apparent in the past 35 days.The government and the RBI keep repeating that the de-monetization move was well thought of and meticulously planned. But the chaos and the constant change in the rules around de-monetization betrays this assertion. Also, the objectives of this move are now unclear. It started off as a strike against black money and fake money. Somewhere in between the realization dawned that black money is still being generated and then the holy cow of "digitalization" was quickly adopted as the stated goal of this exercise. Suddenly, there are incentives for cashless transactions (by the way how are these incentives funded). Hoarders continue hoarding cash as the daily raids demonstrate. And we can safely say (based on our past experiences as honest citizens of our country) that for every 1 hoarder caught there would be a dozen escaping the glare of the authorities. And in the bargain, it is the people at the bottom of the economic pyramid who seem to have been the hardest hit on account of the de-monetization move. And it is surprising to keep hearing statements from the ruling party members that seem to portray a sense of euphoria among common people who are just not dis-affected by this move and continue cheering the grand strike against all the ills of our country !
Prakash Pimparkar
8 years ago
What about man hours lost in ques before ATM and Banks , assuming 1 % people spending 2 hours per day ? it is about 2.2 crore MH lost per day and what impact on GDP ?
Parimal Shah
Replied to Prakash Pimparkar comment 8 years ago
Even if it is ET report it is a biased one. Let us not forget that most of people in the line are NOT employed.We can not presume everyoneto have samelevel of productivity. In fact some unemployed guys earned money by standing proxy for some busy people and reduced unemployment.:))
Prakash Pimparkar
8 years ago
I have only quoted for news from ET does it make ET foolish,check your facts before calling names and by the way these taxes are not exempt to I.Tax payers and that is exactly my point it means more than 50 % goes as tax for 1 % of population and rest 50 % or so ( who should have paid I Tax ) enjoy black money correct Mahesh ?
Mahesh S Bhatt
8 years ago
I believe Prakash is ignorant and foolish when indirect taxes are there in Airwaves/Water/Entertainment even Garbage cleaning taxed 3 times by muncipality/state/ & now center So where is question of income tax paid by 2%
?? Mahesh
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