The devil of demonetization

To understand the devil of demonetization we have to go back a little beyond the date of demonetization. The Govt had announced an Income Declaration Scheme ( IDS ) which closed in September 2016. This scheme was a failure as it did not bring out even a miniscule of black money in the economy. There were some obvious reasons for the failure of this scheme. For a long time now, there is a section on the Income Tax statute called Section 115BBE. Under this section you could declare any amount of income without showing any source or identity and pay 30 % tax. This section was there even when IDS was introduced. Why would someone pay 45 % tax under the IDS and declare income when he could do that anytime he liked at 30 % tax under the above section. And therefore, IDS failed.

Come November and the Govt announced Notebandi. The Govt gave strong warnings that everyone with black money should come out and pay taxes. But no proper route was shown for this. At this point the Govt realized that there is this Section 115BBE under the Income Tax Act and people can still pay only 30 % tax and come clean. After this awakening, the Govt brought in a retrospective amendment to this Section increasing the tax rate from 30 % to 75 %. This was made effective from April 01, 2016.  Thus,  this route of declaring undisclosed income was totally blocked.  This was a very wrong move. This was something like waking up from slumber and doing whatever comes to mind at that point, without giving it a proper thought.

After the demonetization the Govt gave stern warnings to people hoarding black money asking them to come clean.  The Govt. came out with another scheme. This time pay 50 % tax, deposit 25 % in Pradhan Mantri Gareeb Kalyan Yojana which will not get any interest and would be locked in for 4 years. The tax payer would be left with only 25 % of the total declared amount. This was also unattractive. The Govt. should have given an exit route for the black money hoarders which was practical. This particular scheme was totally impractical. If you push a person to the wall and don’t give an exit option, he would do whatever is possible, wherever possible and to whatever extent possible. This is what exactly happened. Everyone found some way of depositing money in bank accounts. At that point people did not bother to weigh the risks of such deposits as they simply wanted to get rid of the old demonetised notes.

If the Govt had given an exit option even at 45 % tax, people would have come forward. Why they did not opt for the earlier 45 % IDS scheme, as explained earlier, was under different circumstances. At that time Section 115BBE was an option available at 30 % tax. At that time people were not cornered. After the demonetization people were cornered. The results would have been, undoubtedly, highly successful.

The Government’s calculations in not giving an exit option at 45 % were perhaps entirely different. The Govt thought that atleast Rs 3 lakh crore would not be deposited and the Govt would gain 100 % of this amount i.e. entire Rs 3 lakh crore. If the money doesnot reenter the system it would be 100 % gain. Unfortunately, this did not happen. Did not happen for the reasons discussed earlier. This shows that the Govt got overconfident on this. If an exit option was given at 45 % the Govt would have got Rs 1.35 lakh crore as taxes, perhaps more also as the black money hoarders were panic stricken. This would have been a clean exercise.

Now that the  Rs 3 lakhs crore have already been deposited, as a face saving declaration, the Govt  says that about Rs 2.89 lakh crore of deposits are of suspicious nature. How much time and effort will be required to tax this amount and recover revenue ?. Given the bureaucratic style of functioning and the corruption involved I have doubts on recovery of tax even on 50 % of these deposits.

 

How much money was deposited ?

Now let us move to the question of how much money was deposited.  After almost 8 months of the closure of the demonetization exercise the RBI has comeout saying that 99 % of the money was deposited and only about Rs 16,000 crores remained undeposited. As late as July 13, 2017 when the RBI Governor appeared before a Finance Standing Committee of the Parliament, he said the notes are still being counted. Why did it take the RBI 8 months to make this announcement. If you have carefully gone through the data put out by the RBI, it says even now the counting is not over and uncounted cash is still lying in its currency chests at various locations. Then what is this announcement about 99 % deposits. This figure has been arrived at after giving credit to the depositing banks based on a ‘subject to confirmation basis’.  If this announcement has been made on this basis, these figures were already available as early as January 2017. The RBI has also stated that some of the notes accepted by Cooperative Banks have not yet been accepted by it and obviously, these will add to the figure of 99 %.  It raises a lot of doubts in the minds of public at large. Is this 99 % figure correct. Does the figure exceed 100 %. And if it does, why the Govt is shy on announcing this. Let it be investigated. At least, the present Govt. is not responsible for this. Let people ask this question to the UPA Govt. If facts are not made public, everyone will draw his own conclusion.  Is there much more to this than meets the eye. If yes, what is it ?