A wide view on #Demonetization : Cause and effect chain of the decision

Reinforcement of Demonetization

A bitter pill:

The announcement of demonetization on November the 8^th, 2016, was not merely a routine announcement of a government decision. It was the culmination of a prolonged battle between the government authorities on the one hand and the black marketers, the counterfeit currency traders, the terrorists’ financers, the corrupt officials and non-officials and the tax evaders on the other hand. The known and the unknown offenders had been given a long rope to mend their ways since the Independence. It was certainly not a small decision to implement over a large subcontinent like region with a population of over 1.2 billion across the length and breadth. The expanse of the decision encompassed several dozen important government ministries and departments thereunder involving tens of thousands of the junior and the senior civil servants and of course, an infinite number of the commercial private establishments doing another innumerable number of businesses in the country.

A key focus area of the government has been governance. The list of measures includes the end to bureaucratic paralysis, streamlining of environmental clearances, improving the ease of doing business, self-certification of true copies of diplomas and degrees, repeal of 1175 redundant laws, close monitoring of projects, ranking of states in health, education and water, end of plan and non-plan distinction in budget, merging of railway and national budget and advancing of date of budget presentation to cut delays in disbursement of funds to ministries and states.

During the Lok Sabha elections of 2014, almost all political parties had vowed to eradicate black money and corruption from the economy of the country. Tall promises were made and several deadlines of the actions in this regard were pronounced. During the preceding regime, the entire country was engulfed in several scams, briberies, manipulations and mutual accusations between high profile personalities in the field of party politics, media meddlers and instigators and tax evader-businessmen. Therefore, it was but natural that the expectations of the law-abiding citizens in India had reached zenith point and all of this esp. the poor, the deprived ones and the downtrodden layers of the society restlessly expected fastest possible measures and actions. The beneficiaries of the chaos were quietly waiting to get rid of it. The hype made out by the present ruling party had been under the same pressure to act fast. It did.

Why demonetization? …...The Nation first!

Demonetisation is considered as a revolutionary step where entire nation would come together to uproot corruption, black money, and terrorism, breaking the backs of the corrupt and those who threatened national security. The government maintained that the demonetization move was an effort to stop counterfeiting of the current banknotes allegedly used for funding terrorism, as well as a crackdown on black money in the country.[1]

The Prime Minister while announcing the decision of demonetization in a special national telecast on 8^th November 2016, referred to three major reasons which led to the decision viz., (a) black money, (b) eradication of corruption, and (c) financing of terrorism and counterfeit currency[2]. Later, according to an official release by the Press Information Bureau dated 30^th August 2017, the following were considered as the objectives of demonetization[3]:

(i) flushing out black money,

(ii) eliminate Fake Indian Currency Notes (FICN),

(iii) to strike at the root of financing of terrorism and left-wing extremism,

(iv) to convert non-formal economy into a formal economy to expand tax base and employment, and

(v) to give a big boost to digitalization of payments to make India a less cash economy.

The Union Minister of State for Finance is on record to have explained the legal status of the decision as saying that ‘the legal tender character of banknotes of the Specified Bank Notes in the denominations of Rs. 500 and Rs. 1000 in circulation as on the 8th November, 2016 was cancelled by the Central Government, on the recommendation of the Central Board of RBI, with effect from the expiry of the 8th November, 2016 in exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934 (2 of 1934), with the objective to eliminate black money and to curb the infusion and circulation of Fake Indian Currency Notes (FICN)’.[4]

Currency is a medium of any transaction made in a place where goods are sold or purchased, conducted generally in the form of cash and which has the approval of the state. In almost all parts of the world, most of the transactions are made in cash and India is no exception to it. Cash currency transaction in India had always been a normal living for times immemorial which inadvertently generated its side effects like excessive unaccounted saving by evading payment of taxes or paying fewer taxes by bribing the tax collecting authorities. All periods of the history have evidenced these tendencies. Black money makes a beginning here. However, there is no uniform definition of black money. The then Union Finance Minister Pranab Mukherji’s report on the black money of 2012[5], has defined the term ‘black money’ as ‘assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession’. The Report further states, ‘such wealth may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and corruption’. The Report explains further that any legal income which is concealed from public authorities is considered as black money.

It will not be out of place if the Report is referred to ditto: ‘Black money arising from illegal activities such as crime and corruption has an underlying antisocial element. The ‘criminal’ component of black money may include proceeds from a range of activities including racketeering, trafficking in counterfeit and contraband goods, smuggling, production and trade of narcotics, forgery, illegal mining, illegal felling of forests, illicit liquor trade, robbery, kidnapping, human trafficking, sexual exploitation and prostitution, cheating and financial fraud, embezzlement, drug money, bank frauds, and illegal trade in arms……The ‘corrupt’ component of such money could stem from bribery and theft by those holding public office – such as by grant of business, leakages from government social spending programmes, speed money to circumvent or fast-track procedures, black marketing of price-controlled services, and altering land use regularizing unauthorized construction. All these activities are illegal per se and a result of human greed combined with declining societal values and inability of the state to prevent them. Factors leading to their generation are both social and administrative’.[6]

The steps taken before demonetization:

It will be interesting to refer to the statement issued by the Press Information Bureau on 10^th March 2017, explaining the ‘Steps taken by Government to curb the generation of black money’: The statement reads as follows: ( quote )

“Recent major steps in this regard include –

(i) Constitution of the Special Investigation Team (SIT) on Black Money under Chairmanship and Vice-Chairmanship of two former Judges of Hon’ble Supreme Court,

(ii) Enactment of a comprehensive law – ‘The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015’ to specifically deal with black money stashed away abroad,

(iii) Constitution of Multi-Agency Group (MAG) consisting of officers of Central Board of Direct Taxes (CBDT), Reserve Bank of India (RBI), Enforcement Directorate (ED) and Financial Intelligence Unit (FIU) for investigation of recent revelations in Panama paper leaks,

(iv) Proactively engaging with foreign governments with a view to facilitate and enhance the exchange of information under Double Taxation Avoidance Agreements (DTAAs)/Tax Information Exchange Agreements (TIEAs)/Multilateral Conventions,

(v) Proactively furthering global efforts to combat tax evasion/black money, inter alia, by joining the Multilateral Competent Authority Agreement in respect of Automatic Exchange of Information (AEOI) and having information sharing arrangement with USA under its Foreign Account Tax Compliance Act (FATCA),

(vi) Renegotiation of DTAAs with other countries to bring the Article on Exchange of Information to International Standards and expanding India’s treaty network by signing new DTAAs and TIEAs with many jurisdictions to facilitate the exchange of information and to bring transparency,

(vii) Enabling attachment and confiscation of property equivalent in value held within the country where the property/proceeds of crime is taken or held outside the country by amending the Prevention of Money-laundering Act, 2002 through the Finance Act, 2015,

(viii) Enactment of the Benami Transactions (Prohibition) Amendment Act, 2016 to amend the Benami Transactions (Prohibition) Act, 1988 with a view to, inter alia, enable confiscation of Benami property and prosecution of benamidar and the beneficial owner,

(ix) Initiation of the information technology-based ‘Project Insight’ for strengthening the non-intrusive, information-driven approach for improving tax compliance,

(x) Launching of ‘Operation Clean Money’ on 31st January 2017 for collection, collation and analysis of information on cash transactions, extensive use of information technology and data analytics tools for identification of high risk cases, expeditious e-verification of suspect cases and enforcement actions in appropriate cases, which include searches, surveys, enquiries, assessment of income, levy of taxes, penalties, etc. and filing of prosecution complaints in criminal courts, wherever applicable.[7]”

One has to keep in mind that each step requires to follow a laid down legal path beside several procedures and conditions are required to be complied with lest these be struck down by the court of law. It is essentially a lengthy and time-consuming process.

The impact:

The Union Ministry of Finance on 31^st August 2017, had issued a note on the impact of demonetization on black money, widening of tax base and direct tax collections, explaining the performance analysis of the demonetization. The note issued by Press Information Bureau reads as follows: ( quote )

The Government of India launched a concerted drive against black money with Demonetisation being an important step in that direction. Among the main objectives of Demonetisation was the flushing out of black money and also a conversion of the non-formal economy into a formal economy to expand the tax base. The impact of Demonetisation on black money, widening of tax base and Direct Tax Collections is summed up hereunder:

A] Impact on black money:

Following are the steps were taken and its consequent results:

The quantum jump in Enforcement actions based on Demonetisation data:

1] Searches all over India were carried out and the rise was as following:

a) 158% increase in the number of searches (from 447 to 1152 groups)

b) 106% increase in seizures (from Rs. 712 crore to Rs.1469 crore)

c) 38% increase in admission of undisclosed income (from Rs.11,226 crore to Rs. 1,54,96 crore)

2] Similarly surveys were conducted which indicated the following results:

a) 183% increase in surveys (from 4422 to 12520)

b) 44% increase in undisclosed income detected (from Rs. 9654 crores to Rs. 13920 crores)

3] Operation Clean Money: The Income Tax Department launched ‘Operation Clean Money’ (OCM) on 31^st January 2017 to analyze the data of the persons who deposited large sums of cash and whose returns of income were not in sync with such deposits. The operation was carried out in two phases as under:

Phase 1:

i) In the first phase of OCM, 18 lakh suspect cases were identified through the use of data analytics where cash transactions did not appear to be in line with the tax profile of depositors.

ii) Online verification in these cases was enabled and done in a record time of 4 weeks.

iii) The success of the first phase was also attributable to the massive taxpayers’ awareness and media campaigns on Operation Clean Money launched by the Department.

iv) The scale of the Operation may be gauged from the fact that response to 9.72 lakh persons in respect of 13.33 lakh accounts involving cash deposits of around Rs.2.89 lakh crore, as per pre-defined parameters on sources of the cash deposits was captured by the Income Tax Department within a short span of 3-4 weeks. Online queries were raised in more than 35000 cases and online verification was completed in more than 7800 cases.

Phase 2:

i) The Operation Clean money has since moved into the next phase that includes enforcement actions in high-risk cases, taxpayer engagement through a dedicated website in medium risk cases and close monitoring in low-risk cases.

ii) The high, medium and low-risk cases have been identified through the use of advanced data analytics, including integration of data sources, relationship clustering, and fund tracking.

iii) The exercise has also unearthed a large number of persons and clusters having suspect transactions. These include about 14,000 properties of more than Rs.1 crore each where persons have not even filed Income Tax Returns. The investigations are in progress.

B] Impact on Widening of Tax-base:

a) The number of e-returns of Individual taxpayers filed until 5^th August 2017 (due date of filing) increased to 2.79 crores from 2.22 crore returns filed during the corresponding period of last year, registering an increase of about 57 lakh returns (25.3%). This shows marked improvement in the level of voluntary compliance as a result of action taken by the Income Tax Department on the basis of data of cash deposits in the wake of demonetization.

b) The total number of all returns (electronic + paper) filed during the entire Financial Year 2016-17 was 5.43 crore which is 17.3% more than the returns filed during FY 2015-16.

c) For FY 2016-17, 1.26 crore new taxpayers (return filers + non-filers making tax payments) were added to the tax base (till 30.06.2017).

C] Impact on Direct Tax Collections:

The effect of Demonetization is also clearly visible in the growth in Direct Tax Collections. Collection of Advance Tax under Personal Income Tax (i.e. other than Corporate Tax) as on 05.08.2017 showed a growth of about 41.79% over the corresponding period in F.Y. 2016-2017. Collection of Self-Assessment Tax under Personal under Personal Income Tax showed a growth of 34.25% over the corresponding period in F.Y. 2016-2017.[8].

READ PART 1

A wide view on #Demonetization : Cause and effect chain of the decision

#Demonetization : The Social Context