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.
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?
Please listen to PM s first address after demonetization and his thsughts on taxation I am vindicated for saying hardly 1 % patpay I. Tax.
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 ? )
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.
?? Mahesh