Currency notes may swell Govt’s coffers: Experts

The Reserve Bank of India's move to completely withdraw from circulation all banknotes issued prior to 2005 may prompt those holding black money to aggressively look for ways, including selling banknotes at a discount and showing higher turnover and profits in business, to get rid of their stash of tax-evaded money, say experts.

Those with black money could become desperate and sell higher denomination banknotes such as ₹500 and ₹1,000 at a discount. In return, they could get banknotes (printed after 2005) amounting to, say, ₹400 and ₹800, respectively, said a chartered accountant.

The discount could get deeper in the run up to the day (July 1, 2014) from when non-customers will be required to furnish proof of identity and residence to the bank branch in which she/he wants to exchange more than 10 pieces of ₹500 and ₹1,000 notes.

The RBI’s move could also swell the Government’s coffers (and help bring down the fiscal deficit) as those with black money may suddenly show higher turnover and profits in their business, thereby paying more excise, sales tax and income tax, said Shravan Sharma, chartered accountant. Further, the RBI will also benefit as money (black) that was otherwise unproductive will get back in circulation.

According to an economist with a state-run bank, “Besides supply-side bottlenecks, black money and counterfeit banknotes are also responsible for the price rise.

This move to withdraw the banknotes prior to 2005 will help the Government as well as the RBI.”

Experts say ‘hawala’ (sending money overseas and receiving money from overseas through illegal channels without actual movement of cash) transactions could also be hit as banknotes without the year of printing on the reverse side may no longer be acceptable.

What is more, temples, churches, gurudwaras and other places of worship may even see a spurt in cash offerings if the hoarders of black money are unsuccessful in converting their pile into white money (on which tax has been paid)!

In a bid to curb black money and counterfeit notes, the RBI on Wednesday advised banks that after March 31, 2014, it will completely withdraw from circulation all banknotes issued prior to 2005.

From April 1, 2014, the public will be required to approach banks for exchanging these notes.

The Reserve Bank also clarified that the notes issued before 2005 will continue to be legal tender. This would mean that banks are required to exchange the notes for their customers as well as for non-customers.

The RBI has appealed to the public not to panic but to actively co-operate in the withdrawal process.

According to a numismatist, withdrawal of banknotes of high denomination happened in the early 1970s when inflation was ruling high.

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