Demonetisation: From bang to whimper
by Punarvasu Parekh on 01 Dec 2016 5 Comments

Demonetisation, Prime Minister Narendra Modi’s most daring initiative so far, looks all set to end up as just another amnesty scheme. With the latest modifications, it will certainly garner tonnes of money for the government as tax revenue and, more importantly, offer those sitting on loads of black money and desperately looking for an escape route to salvage at least a portion of their ill-gotten wealth.

 

However, ordinary citizens who have cheerfully borne the ordeal of spending hours in serpentine queues, farmers who could not sell their kharif produce or buy inputs for rabi sowing, small businesses and transporters who have taken severe hits on their cash-based operations, and yet have loudly and consistently supported the prime minister may feel betrayed. They thought it was all about hitting terror funding, contrived separatist movements run on counterfeit currency, drying up funds for Maoist insurgency, disarming crooked politicians of their armoury and dishonest businessmen of their illicit wealth.

 

They stood by the government and cold-shouldered opposition leaders and media-mafias who sought to encash their post-demonetisation hardships to malign the government. They did so in the hope that the move will help cleanse the system of black money, corruption will come down, prices and interest rates will be tamed, and scourge of fake currency notes will be put down, even as those who had plundered the country for decades will be expropriated.

 

To appreciate what has been compromised, it is necessary to recount what the move aimed at. The demonetization of Rs. 500 and Rs. 1000 notes, which accounted for nearly 86 per cent of the total currency in circulation, dealt a body blow to terror outfits, separatists, crime gangs, corrupt politicians, dishonest businessmen and, last but not the least, the bureaucrats. At a time when elections are looming large in several states, political parties and leaders found that the piles of cash assiduously collected to fund the campaign turned into worthless paper.

 

Dishonest businessmen and bureaucrats lost illicit wealth worth crores. Those who masterminded terrorist acts and contrived separatist movements suddenly found themselves without the fuel to run their nefarious activities: not just the fake currency notes helpfully printed by the friendly neighbour, but even the genuine ones in their possession had become useless.

 

This inevitably involved considerable hardship for the people, especially the poor and the middle class, farmers, casual workers, transporters and other service providers, and small businesses that operated largely in cash. Yet to their credit, even the ordinary citizens living in remote far flung places deep in the hinterlands fully appreciated the stakes involved and stood solidly behind the government in general and Prime Minister Modi in particular. They expected, not without reason, that after short-term initial tribulations this far-reaching move will help bring down corruption, reduce inflation, lower interest rates and clean public life.

 

The beauty of the whole situation was that those who had been really hit hard deserved it and were in no position to complain. Like a thief’s mother, they had to hide their tears. They sought to berate the government by highlighting the plight of the common man in exchanging the notes etc., but found to their dismay that people refused to endorse them.

 

On its part, the government could look forward to a windfall running into crores of rupees. It was estimated that around 20 per cent of the bills of Rs. 500 and Rs. 1000, valued at Rs. 3 lakh crore, would not return to the banks since their owners were not in a position to declare them. To that extent, the Reserve Bank of India would be able to extinguish liability in its balance sheet in the form of ‘notes issued’, leading to an increase in reserves. The RBI could transfer this surplus to the government as a special dividend or in some other way. The government could use this money to bridge the fiscal deficit, retire debt, purchase arms, fund infrastructure projects or welfare schemes or just distribute it among the Jan Dhan account holders. Shorn of technicalities, it would be money expropriated from wrongdoers and used for the benefit of the country and the poor. Sound politics, isn’t it?           

 

But now the government has amended the income tax laws to bring in two crucial provisions. One, those who have deposited (or will deposit) black (unexplainable) money in banks will pay 50 per cent tax on it. In addition, 25 per cent of the amount deposited will remain with the government for four years without earning any interest. The remaining 25 per cent can legitimately come into the formal economy. Secondly, those who fail to disclose their black money even now and are later caught by Income Tax officers will have to pay an effective tax of 85 per cent.

 

The Income Tax Department will not ask for the source of funds deposited in banks from November 10 if the entire income is offered to tax and 50 per cent tax is paid on it. The disclosures will enjoy immunity from wealth tax, civil and other taxation laws, but there will be no immunity from Prevention of Money Laundering Act, FEMA, benami laws and black money Act.

 

This is all that the moneybags were waiting for. They were running around offering 30-40 per cent discount on the old notes. Now they can laugh their way to the nearest bank. The government is offering to launder their money, at 50 per cent. Not a bad deal considering they were set to lose all. Sarvanashe samutpanne ardham tyajati pundit: (faced with loss of everything, a wise man forgoes half) says Hitopadesha.

 

It is hard to fathom the government’s motive in bringing about these amendments. Now its tax revenues will get a boost, but as noted above, it was set to receive a windfall anyway. One possible explanation is that about 56 per cent of the demonetized notes have come back into circulation, but the government is unlikely to get much tax revenue from it. This prospect of a much higher than expected money finding its way back into system, prompted the Centre to come out a law that will garner revenue for the treasury.

 

If this is indeed the case, it shows the government in a poor light. For one, it is a tacit admission of its failure to correctly anticipate the responses of the moneyed to the scheme. Did it not know that the crooks will try every trick in the book to bypass the roadblock? Secondly, since this amendment will come into effect retrospectively, it will erode the credibility of the government among policy watchers and investors who will question the stability of its tax policies.

 

What is most disappointing, however, is the wholly needless favour shown to the filthy rich to launder their money. When the income disclosure scheme was in force, the prime minister and his colleagues repeatedly announced that this was the last chance for the black money holders to come clean, that failure to declare concealed income now would cost them heavily. And now, just two months after that, they are given one more (‘last’) opportunity to convert white money into black. 

 

The finance ministry will argue that this is not an amnesty scheme since there is no tax reduction. However, the income tax act provides for a penalty of 300 per cent of the tax sought to be evaded. It says that in a case where there is a willful tax evasion exceeding Rs. 1 lakh, the tax evader will face imprisonment up to seven years, besides fine. These provisions have been diluted by the latest amendments. Is that not amnesty?

 

Common people suffered and are still suffering untold hardships to ensure that holders of illicit wealth are separated from it. They are likely to feel disappointed, if not deceived.

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