On November 8, 2016 the Indian government announced the demonetization of Rs. 500 and Rs. 1000 currency notes to curb corruption, terrorism, and black money. This led to a cash crunch that temporarily impacted sectors like agriculture and transportation that rely on cash transactions. In response, the government implemented new tax policies like the Goods and Services Tax (GST) and income tax amendments along with initiatives like Operation Clean Money to identify suspicious cash deposits post-demonetization. While demonetization and the new policies adversely impacted some sectors in the short-run, they are expected to increase transparency and tax revenues in the long run by moving India towards a less cash-based, digital economy.

1. VISHAL MALPANI 1
Demonetisation + GST Law + Income tax = combating black money and
demonetisation Impact on Indian Economics: An Overview
On 8th November, 2016, the Government had announced for demonetisation of 500 and 1000
denomination bank note from the Indian economy by terminating their legal tender, in order to
combat the corruption, terrorism, and smuggling and flush out the black money from the economy
and to move towards digital economy to bring transparency in the system. This fierce move had
received a lot of criticized by opposition parties but it was also acknowledged as a great move by
general public at large.
Demonetisation is not the only step of government to curb corruption and black money, GST and
new amendments in Income tax will be another steps towards it, if Demonetisation was bad for
black money, GST and new amendments in Income tax will be much worse for it.
This Article describes the correlation between the Indian Taxation and GST law with the
Demonetisation for moving towards the cashless economy and demonetisation impact on the Indian
Economy in an easy and understandable manner.
Demonetisation
GST Law
Income Tax

2. VISHAL MALPANI 2
Introduction:
Demonetisation is the act of stripping a currency unit from its status as legal tender, by replacing the
old currency note with a new currency unit.
This was not first time that world was witnessing the demonetisation, previously also many other
countries like Zimababwe, North Korea, Myammar, Nigeria and Ghana had practiced this act. Even
India has done this before, In 1946, all 1,000 and 10,000 rupee notes were recalled. In 1978, 1,000,
5,000, and 10,000 rupee notes were demonetized.
In terms of value, the annual report of reserve bank of India of 31st March,2016 specifies that total
bank notes in circulation valued to ₹16.42 trillion of which nearly 86.4% were 500 and 1000
banknotes.
A well Planned Initiative
Demonetisation so called the surgical strikes on the black money holder was a well-planned action
for withdrawal of high denomination currency notes, Firstly the “Jan Dhan Scheme” to open the Bank
account of Millions of people and linking with the Aadhar card, then declaration of IDS ( Income
declaration scheme) and finally the scrapping of currency notes, so that general public should not
face problem of not having the bank accounts for depositing old currency note and should not blame
the government about not giving any chance to self-declare the black money
Income tax:
1) Operation Clean Money: issuing of Income tax notices:
After demonetisation general public was forced to deposit their 500 and 1000 high denomination
currency note in to their bank accounts , and IT department has asked from different banks about
details of deposit made by the depositor in the bank account post demonetisation and after going
through deposit records It has come to notice of IT department that many deposits are suspicious
which includes the deposit more than 5 Lakh, money had been deposited in dormant account and in
some cases cash had been put in account by unknown non account holders.
The government has launched operation clean Money under which The income tax department has
identified 18 Lakh people who have the suspicious cash deposit post demonetisation, department is
sending the emails and SMSs seeking explanation about the sources of funds and these ‘suspicious”
Account holders have to register themselves and explain sources of fund to IT department through
Jan Dhan
Scheme
IDS (Income Tax
Declaration
Scheme)
Demonetisation

3. VISHAL MALPANI 3
Online and need not to go IT offices within 10 days of email or SMSs in case no reply from the IT
department will inspect the suspicious deposit.
2) Pradhan Mantri Garib Kalyan Yoajan,2016
Demonetisation were having good impact by nullifying bulk of the black market’s currency and had
an immediate stoppage of all sorts of illegal activities. Even though the black money can be kept in
other forms also like the immovable property, but at least due to demonetisation liquid black money
is getting out of system and circulation. But black money holder have used different type of medium
by every crook or by unfair means to generate the same black money in the new currency notes
which they had in the old expired currency notes, and even many of the persons have succeeded in
this conversion. After witnessing these all, the Modi Government has decided to form the Pradhan
Mantri Garib Kalyan Yoajan,2016, Main features are :
 Declaration can be made by any person in respect of undisclosed income in form of cash or
deposit in an accounts with the bank or with post office or specified entity.
 Tax Surcharge & Penalty totaling upto 49.90% of the undisclosed income to be paid.
 Mandatory deposit of 25% of the undisclosed income to be made in the Prdhan Mantri Garibo
Kalyan Deposit Scheme, 2016.
 Deposit are interest free and have lock-in-period of 4 years.
 Total confidentiality is ensured by the government.
 Income declared under the scheme shall not be taxable under the income tax Act,1961.
 Immunity shall be granted in respect of declaration made under the scheme.
This is one more way or hurdle to stop these skipper or to make them slow.
3) Finance bill, 2017
Finance minister on his budget speech announced that on the recommendation of SIT ( Special
Investigation team) on black money, the government have decided not to allow cash transaction
above Rs. 3 lakh (section 269ST). No person shall receive an amount of Rs. 3 Lakh or more from
another person in a single day and if any, assessee crossing that limit have to pay the penalty of
equivalent amount which exceeds the limit, that would be inadmissible expenditure, this will lead
towards payment by the mode of other than cash i.e. through Net banking and will help the
government to keep track of higher value transactions and bring transparency.
And Indian Government has set a target of Rs. 2,500 crores digital transaction for 2017-18 through
UPI (unified payment interface), USSD (unstructured Supplementary service data) Aadhar Pay, IMPS
(immediate payment service) and debit card.
4) BTT (Banking transaction tax).
In Latest Finance bill on 1st February,17, finance minister Mr. Arun Jaithely” said that India’s Tax to
GDP ratio is very low. And we are largely a tax non compliance society when too many evades the
taxes burden falls on those who are honest. Out of 3.7 Crores who filed tax returns in 2015-16, only

4. VISHAL MALPANI 4
24 Lakh person showed income above Rs. 10 lakh and out of 76 Lakh individuals reported more than
5 Lakh, 56 lakh are salaried individuals.
So Indian Government is also considering to replace the current income taxation system with the
Banking Transaction Tax (BTT) from very soon. Although no confirmation from the government
official was received till the date.
BTT means the tax levied on the debit/credit transaction in bank accounts and can be automatically
collected while settling down of transaction by bank, will leads to greater pellucidity in direct taxation
system, and will end up in making the economy more honest. And resultant to demonetisation more
money is in banking system and will help government to keep an eye on every transaction with more
transparency, and help for ease implement of BTT as well.
As mentioned by the finance minister Mr Arun Jaithley only 1% of total population pays the taxes,
because current taxation system works on what the Assessee is disclosing its income and its reliability
and relevance needs to be verified by the Income tax authorities, that requires manual intervention
of both the parties Income tax authorities and Assessee, but under BTT the tax will be collected
automatic from the debit and credit transaction in bank accounts which will reduce the manual
intervention and helps the government to collect the more tax revenue will be more effective in
cracking down the black money, corruption and to lead towards the digital economy, By this new
policy all persons who were not covered under Income tax act to pay the tax, will now be under its
ambit and will be subjected to tax.
Goods and Service Tax
1) There is need for more simplification and rationalization of tax system. The government is
working more on plugging the loopholes in tax administration.
So GST Law is a need for hour, GST is not only meant for the “one nation one tax” it is more than
that, it will eliminate all the tax complexities which were there in the old tax system to curb the black
money transactions and will increase the total revenue inflow to government in terms of tax. The bill
will consume almost all the multiple indirect taxes levied by the different authority to create a single
rate of tax and make the India as a single market will help to control the corruption to a certain level.
Jaitley said that Demonetisation and GST both will fetch more revenue to government
2) Illustration demonstrating ambiguity in the existing tax administrative systems (Service tax,
Excise Duty or Value Added Tax).
In existing Indirect taxation acts, assessee needs to declare his input tax credit amount based on the
service and goods received as per his books, after complying of law and assessing officer should ask
the assessee about the reliability of ITC availed data, if he has any reasonable ground of belief that
data filed is not accurate or reliable. And meanwhile assessee should also take reasonable steps to
verify that the payment of tax has been paid by the vendor or Subcontractor to the government. In
these all compliances, there are might some cases, where Assessing officer have not objected the
ITC availed by the assessee (buyer), however data was not accurate or seller might have not paid the
tax amount to department as there is no track of ITC invoice wise or monthly tax return wise will

5. VISHAL MALPANI 5
result into loss to revenue and even may promote the corruption and black money transactions.
Under GST regime these all the loopholes were plugged out, In GST Input tax credit can only be
availed by the assesee if the seller have been submitted his return and he has disclosed assessee
name as buyer, then only ITC shall be credited to buyer (assessee)‘s E ledger, which may be seen
after login to site (section 16(1) input tax credit under GST Law ). So ITC will be supervised digitally
and no ITC can be availed unless and until tax was paid by the seller will upshot into less revenue loss
to government, because of more digitally working environment will lead towards combating the
black money and corruption
Conclusion
Both the GST and demonetisation may impact adversely to some of the sector in short run but will
have the long term benefit. Demonetisation and GST & Income taxation are more targeting in to
making the transaction more transparent and leads towards the digital economy. Post
demonetisation Almost every bank today is receiving larger number of applications for issue of credit
cards, debit cards, e-wallet facilities. So the move towards legal channels of transaction is already
happening.

6. VISHAL MALPANI 6
Demonetisation Impact on Indian Economy
Almost 3 months after India’s scrapping of high demonetisation currency note, Long queues are
getting shorter, but still queue spew out of ATMs, some sectors of economy continues to struggle
with cash crunch and lack of readily available cash, some grassroots businessmen are using the
revolutionary way of doing the business with the electronic payment capabilities and general public
started to use the digital banking for paying for the goods and services.
Demonetisation has caused the sudden breakdown in the commercial ecosystem, cash centric
business were temporarily halted due to insufficient liquid cash in the economy, like Agriculture,
fishing, Transportation and informal market. There are many transient impacts on economy both
adverse and encouraging, some of impacts are mentioned below:
1) Inflation:
 Introduction :
Inflation reflects the reduction of purchasing power that each currency unit holds. Inflation is a
sustained increase in the general price level of goods and service in an economy over a period of
time resulting in a loss of value of currency,
The RBI (Reserve Bank of India) measures the inflation of Indian Economy considering its primary and
main tool i.e. CPI (consumer price index). Prior to this, another measure of inflation used by RBI was
the WPI (wholesale price index).
CPI measures changes in the price level of consumer goods and services purchased by the
households.
CPI : Updated Cost# /Base Period Cost## * 100
# : Updated cost means the price of an item in the given period of time
## :Base period of India is year 2012
The Central Statistics Office publishes the CPI index on a monthly basis. It also comes out with
separate numbers for the rural and urban population.
 Impacts
The RBI has CPI growth targets to adhere to while deciding its monetary policy stance. By January
2016, it was supposed to keep inflation below a target of 6%, which it was able to do. Its next target
is to keep inflation at or below the 5% mark by March 2017.

7. VISHAL MALPANI 7
After the flushing out the large denomination currency note from Indian market since November 9,
there is lower demand for the products and services due to shortage of liquid cash to spend are
resulting in to a negative impact on inflation. Consumers are refraining from making any purchases
except essential items from.
Activity in the real estate sector, which includes a lot of cash and undocumented transactions, slowed
down significantly,
Due to cancellation of legal tender of 86.4% of the value of the currency notes, but because of re-
monetization being slow, the supply and demand of food items fell. It will puts more downward
pressure on Food item inflation which accounts for 47.3% of the overall CPI.
 Graphical Representation ( Source Ministry of Statistics and Programme Implementation)
5.69
5.263
4.285
5.468
5.757 5.772
6.068
5.048
4.386 4.203
3.63
3.41
0
1
2
3
4
5
6
7
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16
Inflation Rate

8. VISHAL MALPANI 8
2) GDP (Gross Domestic Product)
 Introduction
As per IMF (International Monetary fund) GDP measures the monetary value of goods and services
– that is, those are brought by the final user – produced in a country in a given period of time (Quarter
and Year), so we can sum up the entire definition in a simple formula that would define the GDP
would be : GDP = GVA# + taxes on products – subsidies on products
# : GVA (Gross Value Added) is the production value of goods and service in a sector or an industry
of an economy.
Demonetisation has triggered the temporary halt in the informal segments which are more cash
centric sector due to the cash crunch, if they are not going to able to sell the products and services,
they are not able to purchase from the supplier, which will commence one chain reaction. Informal
which accounts for the 40% of the Indian economy have come to provisional halt for some period,
will results in to the downward fall of Indian GDP.
 Impacts
IMF (international monetary fund) cuts down the India’s GDP growth forecast for the 4th quarter of
2016 to 6.6% on due to demonetisation. According to IMF the downward trend in Indian economy
due to demonetisation could last from two to three quarters. As a result, GDP and GVA growth in the
quarters from October to December 2016 and January to March 2017 could be significantly lower
than previous years. Some upward trend can be seen in the first quarter of fiscal year 2017–2018.
Market expectation of Indian GDP went down to 6.5% year on year in the 4th quarter of 2016 ,
followed by the market consensus of GDP of 7.5% of 3rd quarter of 2016.
126.3 126 126
127.3
128.6
130.1
131.1 131.1 130.9
131.4 131.2
130.4
122
124
126
128
130
132
134
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16
CPI

9. VISHAL MALPANI 9
Indian GDP from the 4th Quarter of 2014 never dips down below 7.0% till now, but if as per Market
consensus and IMF it went down below 7.0% this will be the lowest GDP from the last 2 year’ GDP
data. All 3 factors (demonetisation, GST and income tax) are targeting more on the black money and
black money could be 30% of Indian GDP and in Rs. terms it is 28 Lakh crore, so there is direct hit on
the 30% of Indian GDP. Government have asked 3 institute to derive these statistics (National
Institute of Public Finance and Policy, National Institute of Financial Management and National
Council of Applied Economic Research). These 3 institute used different methodology for arriving
these figures.
 Graphical representation ( Source Ministry of Statistics and Programme Implementation)
3) Equity Market :
 Introduction
Equity Market are the barometer of the economy of the country, if wants to check up the real picture
of any country’s economy best way of this is to observe their equity market situations and
background.
In India major stock exchange is Bombay Stock Exchange and National stock exchange.
To know the relative prices of shares on Bombay stock exchange, Sensex is used. Sensex is a free
float market weighted stock market index of 30 well established, most actively traded stocks,
representatives of various industry sectors and financially sound companies listed in the Bombay
stock exchange. Sensex is considered as the pulse of Indian stock market.
NIFTY 50 index is a group of 50 stocks covering 22 sectors of Indian Economy. Companies in this group
are usually considered as most consistent in reference of earnings growth and High P/E ratio. Nifty
50 offers investment exposure to the Indian Market in one portfolio.
7.9
7.1
7.37.3 7.4
7.2 6.6
5.5
6
6.5
7
7.5
8
Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17
Apr-16 Jul-16 Oct-16 Jan-17
GDP % 7.9 7.1 7.3
IMF Forecast 7.3 7.4 7.2 6.6
GDP % IMF Forecast

10. VISHAL MALPANI 10
 Impacts
Equities over Indian stock markets have shown the falling trend after the midnight on November 8,
2016. The two benchmark of Indian Stock market equity indices—the Nifty 50 and the BSE Sense was
displaying downward trend on each trading day since the demonetisation except for November 10
and November 22. But later after 26 December,2016 we can see continuous upward trend in BSE
indices prices till date , SENSEX later again jumped above 27000 points. After witnessing this we can
say that, after the demonetisation Equities fall, but as prospects are better
Mid and small-cap indices have been hit much harder than broader market indices. The BSE Sensex,
the BSE Mid Cap and the BSE Small Cap indices fell 5.30 % 9.56% and 9.09%, respectively, in the
period from the 9th Nov,2016 to 26th Dec,2106 .
It had also have the impact on the INR/USD Exchange rate also. Because the value of money is getting
decreased due to elimination of fake currency and black money. USD/INR it went upto 68.80615 on
23rd November,2015, i.e. highest in 10 year period.
 Graphical Representation ( Source www.bseindia.com)
4) Reduction of bank interest Rates
 Introduction
The RBI uses monetary policy to maintain price stability and an adequate flow of credit. Rates which
the Indian central bank uses for this are the bank rate, repo rate, reverse repo rate.
24500
25000
25500
26000
26500
27000
27500
28000
28500
BSE - SENSEX

11. VISHAL MALPANI 11
The repo rate, or repurchase option rate is the rate at which RBI lends money to the commercial
bank and it is the key monetary policy rate for the RBI for injecting the liquidity in banking and Indian
economy , and it is used by to control inflation and Bank interest rate also. Current repo rate is 6.25%
The reverse of the repo rate—the rate at which RBI borrows money from the banks, RBI uses this
instrument when it feels there is more money in banking system to absorb the liquidity. Current
Reverse repo rate is – 5.75%
A modification in the repo rate directly impacts the in rates to commercial banks lending and
borrowing. Other rates, like the reverse repo rate are fixed against the repo rate.
 Impacts
After the announcement of demonetisation, Banks are flooded with the amount that was deposited
because of scrapping of 500 and 1000 currency notes, According to data from the Reserve Bank of
India released on November 21, Banks have received Rs. 5,44,571 crores . So Banks have already in
progress to reduce their deposit rates. Due to the expected fall in inflation, the RBI will expected to
undertake more cuts in the repo rate. So, Lending rates are expected to fall as well.
These rate cuts will aim to boost the business by lending public the money which will reduce the
impact of demonetisation. They will help to temporarily derailed economy to come back on track. A
cut in interest rates boosts economic activity, GDP and economic growth will again shows the upward
trend. After demonetisation ICICI, HDFC Bank cut FD rates by up to 0.25%.
It will translate into lower interest rates on existing floating rate loans and new loans. The reduction
in lending rates will tempt the consumers to take out loans for purchasing expensive consumer
discretionary items like vehicles and houses.