Can’t say demonetisation has failed

It is now clear that about 90 per cent of the demonetised currency has found its way back to banks (both by over-the-counter transfer and deposits in bank accounts). Consequently, the expectation of a windfall profit for the Reserve Bank and the Government that could accrue from unreturned demonetised currency would remain unfulfilled.

The unreturned demonetised currency connotes 100 per cent taxation on the same. Does this mean the entire exercise of demonetisation failed miserably? What are the different ways in which the demonetised currency found its way to the banks?

The returned money belongs to three categories. The first category is what was returned over the counter. No bank account was necessary to convert the demonetised currency into valid currency, although there were upper limits stipulated at every attempt. It was reported that the total currency issued over the counter was about ₹35,000 crore, which would be about 2.3 per cent of the total demonetised currency.

Had the Government not introduced inking and stopped over-the-counter exchange within a fortnight, money laundering would have reached new heights and would have become the most-sought-after avocation for mercenaries, marking the utter failure of demonetisation well before December 30.

Despite all the hue and cry made by the media, the intelligentsia and economists, the Government put its foot down by stopping over-the-counter exchange. But two weeks were enough for money hoarders to convert part or all of their unaccounted currency into valid currencies fraudulently. The new 2000-rupee denomination currency worth hundreds of crores that has been seized by the income tax department in the last one month is testimony to this.

Of the ₹35,000 crore that was exchanged, it is not known how much was fraudulently exchanged. It is also a million-dollar question whether the I-T department can trace all such fraudulent over-the counter transactions in the shortest possible time, before the money begins to be used in such a way that the unaccounted currency becomes accounted currency or wealth. The I-T department has limited bandwidth in consolidating the umpteen tips they receive on hoarding of both demonetised currencies and new currencies, and acting upon the same. The raids and associated unearthing of undisclosed wealth may add to the I-T department’s kitty when the cases against unaccounted wealth are adjudicated.

The second category is money deposited in bank accounts. The exact figure on how much demonetised currency found its way back to banks as on December 30 2016 is to be released by the RBI. However, there are indications that out of demonetised currencies worth ₹15.44 lakh crore, about ₹14 lakh crore might have found its way back to banks. It was also reported that 60 lakhs bank accounts alone received about ₹7 lakh crore out of a total of 50 crore bank accounts.

Interestingly, of this amount, between ₹3 lakh crore and ₹4 lakh crore was deposited in individual accounts. Data on the spread of the deposits are not available. However, the average deposit made in these 60 lakh accounts was ₹11.7 lakh. It is true that, with proper justification for the deposited currency, the depositor would be allowed to use his money with no penalty. It may be easier for organisations to explain the rationale for huge cash deposits than for the individuals.

However, by revealing how much currency they have been using as operating cash, organisations would be forced to reveal the actual turnover of their businesses and thereby be forced to come under the tax net, if not there already, and be forced to pay corporate tax proportionate to their profits, in case they have been paying less. Direct tax includes both personal income tax and corporate income tax and the evasion of direct tax has been happening in India on both accounts.

In the absence of justification, if the depositor voluntarily discloses his unaccounted income, he will be charged 50 per cent tax on the deposited amount over ₹2.5 lakh, 25 per cent of the deposited amount beyond ₹2.5 lakh in the Pradhan Mantri Garib Kalyan Yojana (PMGKY) account with no interest and lock-in period of four years, and the remaining 25 per cent will be given to the depositor. If the I-T department catches hold of unaccounted income subsequently, the unaccounted income will invite an 85 per cent penalty on the deposited amount over ₹2.5 lakh.

It is too early to predict how much the Government could get by way of tax, penalty and the PMGKY fund from this category of deposits. However, there is a good chance for it to mop up huge tax and penalty revenues from these deposits for FY2016-17 and improve the tax collection. Therefore, the demonetisation exercise is not a failure as claimed on the basis of 90 per cent of the demonetised currency having found its way back to banks.

The third category covers 48 lakh Jan Dhan accounts, which attracted deposits worth ₹41,523 crore between November 8 and December 23. In addition deposits of ₹30,000-50,000 were made in 4.86 lakh accounts accounting for another ₹ 2,000 crore.

This data should be seen in the context of the rule that Jan Dhan account holders can deposit up to ₹50,000 in their accounts without a PAN card. These deposits could be of benami currency, with the Jan Dhan accounts being used to park the unaccounted money of other people. This is the trickiest case for the I-T department to follow up on because once the cash withdrawal limit is relaxed, the cash will evaporate from the accounts in no time. By hugely incentivising people who have allowed the parking of unaccounted money, the I-T department may be able to collate information and act quickly.

However, the issue goes beyond how the demonetised currency found its way and whether demonetisation is a success or failure. The most worrisome issue is how hoarders dared to deposit unaccounted currency, presumably at ₹7 lakh crore, in bank accounts. Indeed, they have opened a Pandora’s box as everything, not only wealth in the form of currency but also in other formats, will be under the scrutiny of the I-T department henceforth.

Still, we cannot underestimate the acumen of black currency hoarders. They may discover some loopholes to show their deposits, post-demonetisation, as legitimate cash. They may believe that the I-T department does not have the intention and bandwidth to bring all the unaccounted money holders to book in a time-bound manner. Or they may think I-T officials can be bribed. Hence, more than demonetisation itself, this attitude is a great challenge for the Government. Although the window for demonetisation closed on December 30, the battle of nerves between the Government and unaccounted cash holders does not look likely to end soon.

The writer teaches at TAPMI Manipal. The views are personal

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