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Demonetisation

This document is a term paper submitted by Raj Kapoor Bhardwaj for the degree of B.com (Hons) at Rajdhani College, University of Delhi under the supervision of Miss Jyoti Kasana. It discusses the impact of the Indian government's 2016 demonetization of Rs. 500 and Rs. 1000 banknotes. In the acknowledgment and declaration sections, Bhardwaj thanks his supervisor Miss Kasana and declares that the paper represents his original work. The paper then discusses the meaning, background, purpose, operational guidelines, impacts in the short and long term, effects on the economy and key sectors, and overall impact of demonetization in India.

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DEMONETISATION
ACKNOWLEDGEMENT In completion of this term paper I owe debt of gratitude to my supervisor Miss Jyoti kasana for her continuous encouragement and valuable guidance. I am grateful for the time devoted by her for guiding and improving me at every stage of writing this paper. Her expertise, kindness, patience and experience have greatly helped me in completion of the paper. I express my deep and sincere gratitude to her. I also extend my thanks to all teachers of the Department of commerce, Rajdhani College for their sincere guidance. (Raj Kapoor Bhardwaj) B.Com (Hons.) Batch 2014-17
DECLARATION This is certify that the material embodied in this study is based on my original research work done under the guidance of Miss Jyoti Kasana and has not been submitted in part or full for any other degree of diploma of any university. The work of other has been duly acknowledged at the relevant places. (Raj Kapoor Bhardwaj) B.Com (Hons.) Batch 2014-17 (Miss Jyoti Kasana) Assistant professor Department of commerce Rajdhani college, university of Delhi
Demonetization Researchprojectsubmitted to department of commerce Rajdhani College, Delhi University In partial Fulfillment of Requirement for the Degree of B.com (hons) SUBMITTED BY: RAJ KAPOOR BHARDWAJ B.COM (HONS) BATCH 2014-2017 UNDER THE SUPERVISION OF: MISS JYOTI KASANA DEPARTMENT OF COMMERCE RAJDHANI COLLEGE UNIVERSITY OF DELHI
INDEX  Meaning……………………………………………………………………………………………..........5  Definition………………………………………………………………………………………………5  Background………………………………………………………………………………………………..6  Some statistics……………………………………………………………..……………………….7 o Purpose/need for demonetization………………………………..……………7 o Your money will be yours……………………………………………………………8  Operational Guidelines……………………………………………………………………………10  Impact of Demonetization……………………………………………………………………….11  Major Benefits……………………………………………………………………………………12  Directs…………………………………………………………………………………………………13  IndirectImpacts………………………………………………………………………………….13  ImpactAnalysis………………………………………………………………………………………..14  ShortTerm………………………………………………………………………………………….14  Long Term…………………………………………………………………………………………..14  Impacton Economy………………………………………………………………………..………..17  Sector Wise………………………………………………………………………………………..17  OverallImpact……………………………………………………………………………...............18  Short……………………………………………………………………………………………………18  Long…………………………………………………………………………………………............18  Key Consideration……………………………………………………………………………………19  Declaration in IDS……………………………………………………………………………….21  Cyber Crimes………………………………………………………………………………………21  What next??.................................................................................................23  On the Radar……………………………………………………………………………………………24  Conclusion………………………………………………………………………………………………25
Meaning of Demonetization Definition:- Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new currency. The opposite of demonetization is Remonetization, in which a form of payment is restored as legal tender.  November 8, 2016 a day when the Indian Government launched a “surprise attack”/Surgical strike”/Surgery against black money in the economy  The hon’ble Prime Minister of India in an unscheduled live televised address to the nation on November 8, 2016 at 20:15 Indian standard time (ST) declared circulation of all INR 500 and 1000 banknotes of the mahatma Gandhi series as invalid with immediate effect.  Issuance of new INR 500 and INR 2000 banknotes of the Mahatma Gandhi new series in exchange for the old banknotes was announced.  With the exchange of new denomination notes of INR 2000 and not INR 500, the conversion of black money would be curbed.  Denomination has been done in an effort to: I. Stop counterfeiting of the current banknotes allegedly used for funding terrorism II. Crack down on black money in the country Steps taken by the Government: In 2016, the Indian government decided to demonetize the 500- and 1000- rupee notes, the two biggest denomination notes. These notes accounted for 87% of the country’s cash supply. The government’s goal was to eradicate counterfeit currency, fight tax evasion, eliminate black money gotten from money laundering and terrorist financing
activities, and promote a cashless economy. By making the larger denomination notes worthless, individuals and entities with huge sums of black money gotten from parallel cash systems were forced to convert the money at a bank which is by law required to acquire tax information from the entity. If the entity could not provide proof of making any tax payments on the cash, a tax penalty of 200% of the tax owed was imposed. Background  Similar denomination had been done in the past in India it has been done.  In January 1946, wherein banknotes of INR 1000 and INR 10000 were withdrawn  In January 1978, wherein banknotes of INR 1000, INR 5000 and INR 10000 were demonetized.  In 2012, central board of direct tax (CBDT) had recommended against demonetization considering demonetization not to be a soluti9on for tackling black money or economy, which is largely held in the form of benami properties, bullion and jewelry.  Difference with respect to demonetization in 2016 with that of earlier once obviously is the size  Previous ones barely impacted common people but this one is huge 85% of currency out of the system  Demonetization has been embraced in the past by several other countries. They include: Country Year Denomination United state 1969 $10,000 and $1,000 Ghana 1982 50cedis Zimbabwe 2010 One hundred trillion dollar Myanmar 1987 25-,35-, and 75- kyat notes Australia 1996 Full series of polymer bank notes  Some of the country have met the purposes and whereas have failed  In 1996, Australia become the first country to have a full series of circulating polymer bank notes after replacing all paper based notes
SOME STATISTICS  Quantum of bank notes in circulation vis-à-vis high denomination notes in circulation Particulars In numbers Quantum of Total Bank Notes 90,226 Quantum of High denomination bank notes 22030 million (i.e. 24% approx)  Value of bank notes in circulation vis-à-vis high denomination notes in circulation as on march 31, 2016(as per annual reports of reserve bank of India) Particulars Amount in INR Value of total bank notes 162.2 lakh million Value of high denomination bank notes 141.8 lakh million (86%)  Value of bank notes in circulation as on October 28, 2016 in India was INR 177.7lakh million PURPOSE/NEED FOR DEMONETIZATION We knew terrorism is a frightening threat, but who funds these terrorists? Our enemies they use the fake currency to sponsor terror-this was proven many a times. Corruption and black money are the major obstacles in our country. It is weakening the efforts to remove poverty. Our country is rapidly increasing in terms of growth and we are in No.1 position in terms of growth but we are ranked 76 in Global Corruption Perception ranking. It clearly shows how corruption and black money have spread their tentacles.  High denomination notes are known to facilitate generation/circulation of black money  Total number of bank notes in circulation rose by 40% between 2011 and 2016  Increase in number of notes of INR 500 denomination was 76% and for INR 1000 denomination was 109% during this period
 Infusion of new series bank notes will be monitored and regulated by RBI  The World Bank in July, 2010 estimated the size of the shadow economy for India at 20.7% of the GDP in 1999 and rising to 23.2% in 2007  A parallel shadow economy corrodes and eats into the vitals of the country’s economy resulting in:  Inflation adversely affect the poor and the middle classes  Depriving the government of its legitimate revenues  Forged cash used to fund terrorist activities against India Accordingly, steps have been taken to demonetize the high denomination notes and help to: 1. Curb financing of terrorism through the proceeds of fake Indian currency notes (FICN) 2. Curb the use of FICN funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India and 3. For eliminating black money which casts a long shadow of parallel economy on our real economy ‘Your money will be yours’ It is a transformational decision taken by the government to ban Rs.500 and Rs.1000 notes from circulation in the market. The decision was taken to minimize the black money and corruption. The RBI is issuing Rs.500 and Rs.2000 notes. They have released a statement by saying that all the Rs.500 and Rs.1000 notes are to be deposited at nearby banks or post-offices. This will be a regular currency circulation all throughout India. All those people who are panicked with this move by the government need not worry at all as the government has assured that ‘Your money will be yours’. You will not lose anything so there is no point in being scared. There will be no restrictions on non-cash payments by cheques, demand draft’s, and electronic fund transfer.
Percentage share of Denominations before Demonetization
OPERATIONAL GUIDLINES In order to implements the above decision of the Government and keeping in view the need to minimize inconvenience to the public, several operational guidelines had been issued: i. Old high denomination bank notes may be deposited up till December 30, 2016 ii. Old high denomination bank notes can be exchanged as per the limits fixed by the RBI iii. No limit on the quality or value of old high denomination bank notes to be credited to the account of the tender maintained with the bank on complying with extent know your customer(KYC) norms and valid proof of identity iv. Old high denomination bank notes tendered can be credited to a third party account on submission of specific authorization along with proof of identity v. Limits in cash withdrawal and ATM withdrawals vi. No restriction on the use of any non cash method of operating the account which includes cheques, demand drafts, credit/debit card, mobile wallets and electronic fund transfer mechanisms Old high denomination bank notes (Rs.500) would continues to be accepted at certain places for public utility such as Government Hospitals and pharmacies in these hospitals/railways ticketing counter/ ticket counters of government/Public Sector Undertaking buses and airline ticketing counter at airports for purchases at consumer co-operative societies, at milk booths, at crematoria/burial ground, at petrol/diesels/gas station of public sector oil marketing companies and for arriving and departing passengers at international airports and for foreign tourists to exchange foreign currency at airports up to a specific amount for a specific period. Withdrawal up to INR 2.5 lakhs by families with upcoming weddings subject to certain compliances. i. Special provision for famers and traders for buying agricultural products has been introduced from time to time with respects to withdrawal and use of old high denomination notes.
ii. Special provision for weddings with respects to withdrawal of cash has been introduced in order to minimize the inconvenience to the public large iii. Special provision for receipts of advance salary by central government employees up to level of Group C and equivalent level in defense Para Military Forces, Railways and Central Public Sector Enterprises. iv. Expansion of Banking Correspondents Networks (BCs) for rural areas v. Option for withdrawal of new currency from debits cards has been allowed from petrol pumps, Big Bazaar and select petrol pumps (using pos machines) vi. Increase in use of digital wallets Impact Of Demonetization Inflation: It will cause deflation in the market as people who have earned money through illegal ways would be afraid to declare the money as they may be prosecuted by the Income tax department on the legitimacy of their income. Reduction in Monetary Circulation: This will lead to reduction of money circulation in the economy leading to deflation. Value of money will be increasing which we have because the total money supply will be going down but the commodities and things available in the market have not gone down. It will lead to inflation slowly but not overnight. Cash Deposits in Banks: A lot of cash which are legally earned will be deposited in the banks and now the banks with more deposits will be able to do more lending. Easy Loans: Loans will become easier and interest rates may come down. As banks will have more money so more loans will be given out which will increase the money supply in the market and it will create inflation. Will Demonetization in India Impact Your Loan Burden?  Rates are already on the decline
After the demonetization announcement on November 8, Indian banks saw a rise in deposits. Banks also saw a rise in term deposit accounts since the demonetization. Due to these factors, commercial banks sharply reduced their deposit rates.  Loan burdenwill also fall Apart from cutting deposit rates, banks reduced their lending rates as well. In India, loans sanctioned from April 1,2016 are with reference to the MCLR (Marginal Cost of funds-based Lending Rate), instead of the Base Rate, which was used earlier. It will translate into lower interest rates on existing floating rate loans and new loans. Will Demonetization in India Impact Your Loan Burden?(Contd.)
MAJOR BENEFITS Demonetization of high denomination notes would have leap in long term benefits which could be classified as directs and indirect impacts in the economy Directs Impacts: 1. Face currency-out of circulation in one stroke 2. Hawal sources dried up-funding stops to terrorist Novelties and underworld 3. Real estate prices dip to be in the long run 4. Reduction in inflation 5. Reduction in fiscal deficit 6. Reduction in lending rates 7. Increase in GDP Indirect Benefits: 1. Kashmir moved to normalcy- Blow of Insurgency, no more schools being and no stone patters found 2. Use of apps and cards- Initial step towards digitalization in India with the involvement of small leading to transparency in the system 3. Gold Stock- Declaration in the stock maintained by the jewelers on a day to day basis, which if continued would have control over generation of wealth from black money 4. Increase in revenue collection by the government authorities 5. Simplification in tax policies and reduction in tax rates in the upcoming years
IMPACT ANALYSIS-SHORT TERM 1. Scarcity of cash due to demonetization 2. Sporadic violence wherein people attacked bank premises and ATM with no major injuries 3. Large chunk of population especially at the bottom of the pyramid and rural population highly impacted due to poor banking facilities and extremely higher dependence on hard currency 4. Various tribal areas living in isolation and illiteracy have been impacted adversely in the short run 5. Certain sectors necessitating frequent use of cash on a daily basis including hospital, households, roadside vendors, domestic workers, cab drivers doctors, transfer likely to face interim disruptions 6. Farmers may face financial difficulties to pay wages to labors in small denomination and manage other farming expenses 7. Slowdown in consumer spending due to limited availability of cash IMPACT ANALYSIS-LONG TERM  Real state, jewelry and luxury products:- (i) Downward revaluation (ii) Indirect reduction in price of cement and steel  Politics and elections:- (i) Transparency (ii) Appropriate utilization of central exchequer  Online transaction:- (i) Substantial increase leading to transparency (ii) Increase in revenue collection by there revenue authoritie
Electronic Paymentis a financial exchange that takes place online between buyers and sellers. The content of this exchange is usually some form of digital financial instrument (such as encrypted credit card numbers, electronic cheques or digital cash) that is backed by a bank or an intermediary, or by a legal tender. • All Central Government Departments and Public Sector Enterprises are being instructed to use the method of e-payments to the maximum extent possible. • RBI has advised National Payments Corporation of India (NPCI) to waive its transaction charges on transactions settled through National Financial Switch(NFS) till 31st December, 2016. • Banks are also being advised to waive similar charges currently levied by them.
IMPACT ANALYSIS-LONG TERM Fear of high costs associated with tax revasion should lead to higher tax compliances which could lead to reduced overalltax rates by the Government Reduced interest rates inflation and strengthening of the currency marginally Parallel economy to a great extent consolidates with the main economy, as targeted by the demonetization move Positive bearing on Governments’ fiscal deficit
IMPACT ON ECONOMY-SECTOR WISE Banking About 3 trillion rupees in the form of old INR 500 and INR 1000 banknotes deposited in the banking system 500 billion rupees dispensed via withdrawals from accounts, ATM’s as well as exchanges over the bank counters Spike in the usage of debit card and credit card post domestication was also reported Business By the second week after demonetization sale of cigarettes witnessed a fall in 30-40 percent Ecommerce companies saw up to a 30 percent decline in cash on delivery (COD) order E-payment option like PayTM and PayUMoney saw a rise Real estate- primary transaction may not be impacted, secondary sales may some extent Municipal and local taxes Allow ability of use of INR 500 and INR 1000 notes to pay municipal/taxes resulted in increase in revenue collections Agriculture Adverse impact in input output channels in agricultural sector Sale, transport, marketing and distributing of ready produce to wholesale centre’s or mandis, adversely impacted Disruption breaks in supply chains feedback to farmers as sale fall Increased wastage of perishables Lower revenues that slow up as trade dues instead of cash in hand
OVERALL IMPACT Short Run Whooping increase in cash deposits at banks and reduction in bank money No affect on stock of black money which had been invested and held in other forms of assets like benami properties in land and real estate. Gold, diamonds. Precious gems, foreign currency, artifacts, paintings, etc Increase in the proportion of other assets in which black money is held with different level of difficulties challenges to trace the same Long Run The thought remains unanswered/un-warranted whether there is any way to prevent the generation of black money again and not re-enter the system? Psychological impact on the society on account of this overall move would result in reconsidering before indulging into generation of black money Greater level of scrutiny at various levels and digitization coupled with sharing information between various departments of the governments would help to keep a check on the parallel economy Introduction of Goods and Services Tax (GST) to pay a key role to keep checks and balances
KEY CONSIDERATION For demonetization to be successful and to meet it purpose it is important that certain cautionary steps are taken before and after the introduction of the demonetization scheme. Considering the above, the government of India, had considering the following steps: Details o f all bank accounts in the income tax Linking of pan and aadhar number Income declaration scheme Introduction of jan dhan yojana Revised treaty of most of the country Passing of benami transaction act and Demonetization
KEY CONSIDERATION (CONTI…..) The government of India had given an opportunity for disclosing the black money and payment of taxes in the income declaration scheme (IDS) 2016. Total amount in bank accounts may swell beyond the INR 65000 crore collected under the IDS. Declaration In IDS 2016 No requirement to declare the source of income One – time immunity from penalty and prosecution under the income tax Act, 1961 and wealth tax Act 1957 Secrecy of declaration would be maintained and the government would not furnish a copy of the declaration to any other government agency or department If part of sale proceed of property is received off-record, the same could be declared without attracting section 269SS and penalty under section 271D of income tax act, 1961 Total tax liability would be only 45% without liability for interest under section 234B and 234C of the income tax Act, 1961 Allowed payment by installments-At least 25% by November 30, 2016, not less than 50% by March 31, 2017 and entire amount by September 30, 2017 Declaration of cash deposits in ITR as currentsyear’s income Sources of income and manner of deriving income period in which it was derived may need to be substantiated Wealth tax proceedings could be reopened income escaping assessment (section 147) could also be resorted Details of cash deposits would be made available by Govt. to other agencies. Departments dealing with indirect taxes-VAT/Services Tax/excise duty dept may launch proceedings for suppression of sales and evasion of indirect taxes
If property sale proceed received in black is declared section 269SS would be attracted and assesee could liable to penalty under section 271D of the income tax act 1961 One could incur huge interest penalty if declared amount cannot be proved as current income and founds as past income Entire amount of advance tax on amount deposited in bank and to be declared will have to be paid latest by March 31, 2017 (self-assessment tax) Apart from the above measure, steps should have been taken to improve/meet the safety aspects of the online transactions, e-wallet transactions etc wherein the privacy terms are set in place before digitization of transactions Modificationof Privacy norms beforeDigitalization The e-wallet apps, taxi apps, business apps collect the personal details such as IP address, travel details, transaction details etc as per the privacy policy The privacy policy of the various apps is subject to change from time-to-time Steps were required to be taken to modify the privacy policies as Indian laws protect only sensitive personal data such steps are to be taken at the earliest possible Cyber Crimes Instances of cyber crimes such as duplication of debit/credit card and leakage of confidential details such as card number, account number, ATM’s have increased in the recent past. Considering the move for depositing of cash with the bank accounts, the privacy norms security of the money in the bank accounts and steps to monitor and eliminate the cyber frauds had to be initiated before the introduction of demonetization scheme. Through preliminary steps have been taken before the introduction of the demonetization scheme, considering the quantum of high denomination notes in circulation in Indian economy (i.e. 86 percent), certain additional steps were required to be taken. They include:
 Recalibration of ATM’s  Substantial amount of new currency notes has to be pre-printed to meet the demand  Expand the safety measures at Bank’s ATM’s and other sensitive places  Time-to-time guidance on the scheme  Increase the quantum of banking staff to manage the chaos  Clarity on tax and penal provisions.
WHAT NEXT?? After demonetization of high denomination notes, the other forms of wealth generated through black money would have to be taken note of Details of Swiss/foreign bank account holders, foreign asset holders, forex etc Jewelry, bullion purchased and hoarded from black money Benami properties Digitization of Indian economy and maintain transparency in the long run Transforming India into a cashless economy
ON THE RADAR  Sudden spurt in Jan Dhan accounts (INR 21000 crores already deposited in 25 crores Jan Dhan accounts within a fortnight, source may examined)  IT Lens on big cash deposits, to use data analytics tools to examine investment and consumption pattern  Lens on high value RTGS transactions  Jet, set, cash-in-northeast states  Donations by charitable institutions and trusts  Real estate, jewelry, forex businesses  Sliding rupee despite central bank’s best efforts (records low; near 69/dollar)  Rainbow unity of the opposition staging vociferous protest
CONCLUSION The advantages are much dominating and it will be in the long term interest of our country comfortably outweighing the disadvantages. Government need to take all the necessary steps so as to ensure that there will be a smooth flow of currency exchanges. It would turn into chaos if government takes no necessary steps to circulate money correctly. It will make a massive change in our economy. We congratulate the entire government and those hidden brains of our democracy who brought this decision.
THANK YOU

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Demonetisation

  • 1.
  • 2.
    ACKNOWLEDGEMENT In completion ofthis term paper I owe debt of gratitude to my supervisor Miss Jyoti kasana for her continuous encouragement and valuable guidance. I am grateful for the time devoted by her for guiding and improving me at every stage of writing this paper. Her expertise, kindness, patience and experience have greatly helped me in completion of the paper. I express my deep and sincere gratitude to her. I also extend my thanks to all teachers of the Department of commerce, Rajdhani College for their sincere guidance. (Raj Kapoor Bhardwaj) B.Com (Hons.) Batch 2014-17
  • 3.
    DECLARATION This is certifythat the material embodied in this study is based on my original research work done under the guidance of Miss Jyoti Kasana and has not been submitted in part or full for any other degree of diploma of any university. The work of other has been duly acknowledged at the relevant places. (Raj Kapoor Bhardwaj) B.Com (Hons.) Batch 2014-17 (Miss Jyoti Kasana) Assistant professor Department of commerce Rajdhani college, university of Delhi
  • 4.
    Demonetization Researchprojectsubmitted to departmentof commerce Rajdhani College, Delhi University In partial Fulfillment of Requirement for the Degree of B.com (hons) SUBMITTED BY: RAJ KAPOOR BHARDWAJ B.COM (HONS) BATCH 2014-2017 UNDER THE SUPERVISION OF: MISS JYOTI KASANA DEPARTMENT OF COMMERCE RAJDHANI COLLEGE UNIVERSITY OF DELHI
  • 5.
    INDEX  Meaning……………………………………………………………………………………………..........5  Definition………………………………………………………………………………………………5 Background………………………………………………………………………………………………..6  Some statistics……………………………………………………………..……………………….7 o Purpose/need for demonetization………………………………..……………7 o Your money will be yours……………………………………………………………8  Operational Guidelines……………………………………………………………………………10  Impact of Demonetization……………………………………………………………………….11  Major Benefits……………………………………………………………………………………12  Directs…………………………………………………………………………………………………13  IndirectImpacts………………………………………………………………………………….13  ImpactAnalysis………………………………………………………………………………………..14  ShortTerm………………………………………………………………………………………….14  Long Term…………………………………………………………………………………………..14  Impacton Economy………………………………………………………………………..………..17  Sector Wise………………………………………………………………………………………..17  OverallImpact……………………………………………………………………………...............18  Short……………………………………………………………………………………………………18  Long…………………………………………………………………………………………............18  Key Consideration……………………………………………………………………………………19  Declaration in IDS……………………………………………………………………………….21  Cyber Crimes………………………………………………………………………………………21  What next??.................................................................................................23  On the Radar……………………………………………………………………………………………24  Conclusion………………………………………………………………………………………………25
  • 6.
    Meaning of Demonetization Definition:-Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new currency. The opposite of demonetization is Remonetization, in which a form of payment is restored as legal tender.  November 8, 2016 a day when the Indian Government launched a “surprise attack”/Surgical strike”/Surgery against black money in the economy  The hon’ble Prime Minister of India in an unscheduled live televised address to the nation on November 8, 2016 at 20:15 Indian standard time (ST) declared circulation of all INR 500 and 1000 banknotes of the mahatma Gandhi series as invalid with immediate effect.  Issuance of new INR 500 and INR 2000 banknotes of the Mahatma Gandhi new series in exchange for the old banknotes was announced.  With the exchange of new denomination notes of INR 2000 and not INR 500, the conversion of black money would be curbed.  Denomination has been done in an effort to: I. Stop counterfeiting of the current banknotes allegedly used for funding terrorism II. Crack down on black money in the country Steps taken by the Government: In 2016, the Indian government decided to demonetize the 500- and 1000- rupee notes, the two biggest denomination notes. These notes accounted for 87% of the country’s cash supply. The government’s goal was to eradicate counterfeit currency, fight tax evasion, eliminate black money gotten from money laundering and terrorist financing
  • 7.
    activities, and promotea cashless economy. By making the larger denomination notes worthless, individuals and entities with huge sums of black money gotten from parallel cash systems were forced to convert the money at a bank which is by law required to acquire tax information from the entity. If the entity could not provide proof of making any tax payments on the cash, a tax penalty of 200% of the tax owed was imposed. Background  Similar denomination had been done in the past in India it has been done.  In January 1946, wherein banknotes of INR 1000 and INR 10000 were withdrawn  In January 1978, wherein banknotes of INR 1000, INR 5000 and INR 10000 were demonetized.  In 2012, central board of direct tax (CBDT) had recommended against demonetization considering demonetization not to be a soluti9on for tackling black money or economy, which is largely held in the form of benami properties, bullion and jewelry.  Difference with respect to demonetization in 2016 with that of earlier once obviously is the size  Previous ones barely impacted common people but this one is huge 85% of currency out of the system  Demonetization has been embraced in the past by several other countries. They include: Country Year Denomination United state 1969 $10,000 and $1,000 Ghana 1982 50cedis Zimbabwe 2010 One hundred trillion dollar Myanmar 1987 25-,35-, and 75- kyat notes Australia 1996 Full series of polymer bank notes  Some of the country have met the purposes and whereas have failed  In 1996, Australia become the first country to have a full series of circulating polymer bank notes after replacing all paper based notes
  • 8.
    SOME STATISTICS  Quantumof bank notes in circulation vis-à-vis high denomination notes in circulation Particulars In numbers Quantum of Total Bank Notes 90,226 Quantum of High denomination bank notes 22030 million (i.e. 24% approx)  Value of bank notes in circulation vis-à-vis high denomination notes in circulation as on march 31, 2016(as per annual reports of reserve bank of India) Particulars Amount in INR Value of total bank notes 162.2 lakh million Value of high denomination bank notes 141.8 lakh million (86%)  Value of bank notes in circulation as on October 28, 2016 in India was INR 177.7lakh million PURPOSE/NEED FOR DEMONETIZATION We knew terrorism is a frightening threat, but who funds these terrorists? Our enemies they use the fake currency to sponsor terror-this was proven many a times. Corruption and black money are the major obstacles in our country. It is weakening the efforts to remove poverty. Our country is rapidly increasing in terms of growth and we are in No.1 position in terms of growth but we are ranked 76 in Global Corruption Perception ranking. It clearly shows how corruption and black money have spread their tentacles.  High denomination notes are known to facilitate generation/circulation of black money  Total number of bank notes in circulation rose by 40% between 2011 and 2016  Increase in number of notes of INR 500 denomination was 76% and for INR 1000 denomination was 109% during this period
  • 9.
     Infusion ofnew series bank notes will be monitored and regulated by RBI  The World Bank in July, 2010 estimated the size of the shadow economy for India at 20.7% of the GDP in 1999 and rising to 23.2% in 2007  A parallel shadow economy corrodes and eats into the vitals of the country’s economy resulting in:  Inflation adversely affect the poor and the middle classes  Depriving the government of its legitimate revenues  Forged cash used to fund terrorist activities against India Accordingly, steps have been taken to demonetize the high denomination notes and help to: 1. Curb financing of terrorism through the proceeds of fake Indian currency notes (FICN) 2. Curb the use of FICN funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India and 3. For eliminating black money which casts a long shadow of parallel economy on our real economy ‘Your money will be yours’ It is a transformational decision taken by the government to ban Rs.500 and Rs.1000 notes from circulation in the market. The decision was taken to minimize the black money and corruption. The RBI is issuing Rs.500 and Rs.2000 notes. They have released a statement by saying that all the Rs.500 and Rs.1000 notes are to be deposited at nearby banks or post-offices. This will be a regular currency circulation all throughout India. All those people who are panicked with this move by the government need not worry at all as the government has assured that ‘Your money will be yours’. You will not lose anything so there is no point in being scared. There will be no restrictions on non-cash payments by cheques, demand draft’s, and electronic fund transfer.
  • 10.
    Percentage share ofDenominations before Demonetization
  • 11.
    OPERATIONAL GUIDLINES In orderto implements the above decision of the Government and keeping in view the need to minimize inconvenience to the public, several operational guidelines had been issued: i. Old high denomination bank notes may be deposited up till December 30, 2016 ii. Old high denomination bank notes can be exchanged as per the limits fixed by the RBI iii. No limit on the quality or value of old high denomination bank notes to be credited to the account of the tender maintained with the bank on complying with extent know your customer(KYC) norms and valid proof of identity iv. Old high denomination bank notes tendered can be credited to a third party account on submission of specific authorization along with proof of identity v. Limits in cash withdrawal and ATM withdrawals vi. No restriction on the use of any non cash method of operating the account which includes cheques, demand drafts, credit/debit card, mobile wallets and electronic fund transfer mechanisms Old high denomination bank notes (Rs.500) would continues to be accepted at certain places for public utility such as Government Hospitals and pharmacies in these hospitals/railways ticketing counter/ ticket counters of government/Public Sector Undertaking buses and airline ticketing counter at airports for purchases at consumer co-operative societies, at milk booths, at crematoria/burial ground, at petrol/diesels/gas station of public sector oil marketing companies and for arriving and departing passengers at international airports and for foreign tourists to exchange foreign currency at airports up to a specific amount for a specific period. Withdrawal up to INR 2.5 lakhs by families with upcoming weddings subject to certain compliances. i. Special provision for famers and traders for buying agricultural products has been introduced from time to time with respects to withdrawal and use of old high denomination notes.
  • 12.
    ii. Special provisionfor weddings with respects to withdrawal of cash has been introduced in order to minimize the inconvenience to the public large iii. Special provision for receipts of advance salary by central government employees up to level of Group C and equivalent level in defense Para Military Forces, Railways and Central Public Sector Enterprises. iv. Expansion of Banking Correspondents Networks (BCs) for rural areas v. Option for withdrawal of new currency from debits cards has been allowed from petrol pumps, Big Bazaar and select petrol pumps (using pos machines) vi. Increase in use of digital wallets Impact Of Demonetization Inflation: It will cause deflation in the market as people who have earned money through illegal ways would be afraid to declare the money as they may be prosecuted by the Income tax department on the legitimacy of their income. Reduction in Monetary Circulation: This will lead to reduction of money circulation in the economy leading to deflation. Value of money will be increasing which we have because the total money supply will be going down but the commodities and things available in the market have not gone down. It will lead to inflation slowly but not overnight. Cash Deposits in Banks: A lot of cash which are legally earned will be deposited in the banks and now the banks with more deposits will be able to do more lending. Easy Loans: Loans will become easier and interest rates may come down. As banks will have more money so more loans will be given out which will increase the money supply in the market and it will create inflation. Will Demonetization in India Impact Your Loan Burden?  Rates are already on the decline
  • 13.
    After the demonetizationannouncement on November 8, Indian banks saw a rise in deposits. Banks also saw a rise in term deposit accounts since the demonetization. Due to these factors, commercial banks sharply reduced their deposit rates.  Loan burdenwill also fall Apart from cutting deposit rates, banks reduced their lending rates as well. In India, loans sanctioned from April 1,2016 are with reference to the MCLR (Marginal Cost of funds-based Lending Rate), instead of the Base Rate, which was used earlier. It will translate into lower interest rates on existing floating rate loans and new loans. Will Demonetization in India Impact Your Loan Burden?(Contd.)
  • 14.
    MAJOR BENEFITS Demonetization ofhigh denomination notes would have leap in long term benefits which could be classified as directs and indirect impacts in the economy Directs Impacts: 1. Face currency-out of circulation in one stroke 2. Hawal sources dried up-funding stops to terrorist Novelties and underworld 3. Real estate prices dip to be in the long run 4. Reduction in inflation 5. Reduction in fiscal deficit 6. Reduction in lending rates 7. Increase in GDP Indirect Benefits: 1. Kashmir moved to normalcy- Blow of Insurgency, no more schools being and no stone patters found 2. Use of apps and cards- Initial step towards digitalization in India with the involvement of small leading to transparency in the system 3. Gold Stock- Declaration in the stock maintained by the jewelers on a day to day basis, which if continued would have control over generation of wealth from black money 4. Increase in revenue collection by the government authorities 5. Simplification in tax policies and reduction in tax rates in the upcoming years
  • 15.
    IMPACT ANALYSIS-SHORT TERM 1.Scarcity of cash due to demonetization 2. Sporadic violence wherein people attacked bank premises and ATM with no major injuries 3. Large chunk of population especially at the bottom of the pyramid and rural population highly impacted due to poor banking facilities and extremely higher dependence on hard currency 4. Various tribal areas living in isolation and illiteracy have been impacted adversely in the short run 5. Certain sectors necessitating frequent use of cash on a daily basis including hospital, households, roadside vendors, domestic workers, cab drivers doctors, transfer likely to face interim disruptions 6. Farmers may face financial difficulties to pay wages to labors in small denomination and manage other farming expenses 7. Slowdown in consumer spending due to limited availability of cash IMPACT ANALYSIS-LONG TERM  Real state, jewelry and luxury products:- (i) Downward revaluation (ii) Indirect reduction in price of cement and steel  Politics and elections:- (i) Transparency (ii) Appropriate utilization of central exchequer  Online transaction:- (i) Substantial increase leading to transparency (ii) Increase in revenue collection by there revenue authoritie
  • 16.
    Electronic Paymentis afinancial exchange that takes place online between buyers and sellers. The content of this exchange is usually some form of digital financial instrument (such as encrypted credit card numbers, electronic cheques or digital cash) that is backed by a bank or an intermediary, or by a legal tender. • All Central Government Departments and Public Sector Enterprises are being instructed to use the method of e-payments to the maximum extent possible. • RBI has advised National Payments Corporation of India (NPCI) to waive its transaction charges on transactions settled through National Financial Switch(NFS) till 31st December, 2016. • Banks are also being advised to waive similar charges currently levied by them.
  • 17.
    IMPACT ANALYSIS-LONG TERM Fearof high costs associated with tax revasion should lead to higher tax compliances which could lead to reduced overalltax rates by the Government Reduced interest rates inflation and strengthening of the currency marginally Parallel economy to a great extent consolidates with the main economy, as targeted by the demonetization move Positive bearing on Governments’ fiscal deficit
  • 18.
    IMPACT ON ECONOMY-SECTORWISE Banking About 3 trillion rupees in the form of old INR 500 and INR 1000 banknotes deposited in the banking system 500 billion rupees dispensed via withdrawals from accounts, ATM’s as well as exchanges over the bank counters Spike in the usage of debit card and credit card post domestication was also reported Business By the second week after demonetization sale of cigarettes witnessed a fall in 30-40 percent Ecommerce companies saw up to a 30 percent decline in cash on delivery (COD) order E-payment option like PayTM and PayUMoney saw a rise Real estate- primary transaction may not be impacted, secondary sales may some extent Municipal and local taxes Allow ability of use of INR 500 and INR 1000 notes to pay municipal/taxes resulted in increase in revenue collections Agriculture Adverse impact in input output channels in agricultural sector Sale, transport, marketing and distributing of ready produce to wholesale centre’s or mandis, adversely impacted Disruption breaks in supply chains feedback to farmers as sale fall Increased wastage of perishables Lower revenues that slow up as trade dues instead of cash in hand
  • 19.
    OVERALL IMPACT Short Run Whoopingincrease in cash deposits at banks and reduction in bank money No affect on stock of black money which had been invested and held in other forms of assets like benami properties in land and real estate. Gold, diamonds. Precious gems, foreign currency, artifacts, paintings, etc Increase in the proportion of other assets in which black money is held with different level of difficulties challenges to trace the same Long Run The thought remains unanswered/un-warranted whether there is any way to prevent the generation of black money again and not re-enter the system? Psychological impact on the society on account of this overall move would result in reconsidering before indulging into generation of black money Greater level of scrutiny at various levels and digitization coupled with sharing information between various departments of the governments would help to keep a check on the parallel economy Introduction of Goods and Services Tax (GST) to pay a key role to keep checks and balances
  • 20.
    KEY CONSIDERATION For demonetizationto be successful and to meet it purpose it is important that certain cautionary steps are taken before and after the introduction of the demonetization scheme. Considering the above, the government of India, had considering the following steps: Details o f all bank accounts in the income tax Linking of pan and aadhar number Income declaration scheme Introduction of jan dhan yojana Revised treaty of most of the country Passing of benami transaction act and Demonetization
  • 21.
    KEY CONSIDERATION (CONTI…..) Thegovernment of India had given an opportunity for disclosing the black money and payment of taxes in the income declaration scheme (IDS) 2016. Total amount in bank accounts may swell beyond the INR 65000 crore collected under the IDS. Declaration In IDS 2016 No requirement to declare the source of income One – time immunity from penalty and prosecution under the income tax Act, 1961 and wealth tax Act 1957 Secrecy of declaration would be maintained and the government would not furnish a copy of the declaration to any other government agency or department If part of sale proceed of property is received off-record, the same could be declared without attracting section 269SS and penalty under section 271D of income tax act, 1961 Total tax liability would be only 45% without liability for interest under section 234B and 234C of the income tax Act, 1961 Allowed payment by installments-At least 25% by November 30, 2016, not less than 50% by March 31, 2017 and entire amount by September 30, 2017 Declaration of cash deposits in ITR as currentsyear’s income Sources of income and manner of deriving income period in which it was derived may need to be substantiated Wealth tax proceedings could be reopened income escaping assessment (section 147) could also be resorted Details of cash deposits would be made available by Govt. to other agencies. Departments dealing with indirect taxes-VAT/Services Tax/excise duty dept may launch proceedings for suppression of sales and evasion of indirect taxes
  • 22.
    If property saleproceed received in black is declared section 269SS would be attracted and assesee could liable to penalty under section 271D of the income tax act 1961 One could incur huge interest penalty if declared amount cannot be proved as current income and founds as past income Entire amount of advance tax on amount deposited in bank and to be declared will have to be paid latest by March 31, 2017 (self-assessment tax) Apart from the above measure, steps should have been taken to improve/meet the safety aspects of the online transactions, e-wallet transactions etc wherein the privacy terms are set in place before digitization of transactions Modificationof Privacy norms beforeDigitalization The e-wallet apps, taxi apps, business apps collect the personal details such as IP address, travel details, transaction details etc as per the privacy policy The privacy policy of the various apps is subject to change from time-to-time Steps were required to be taken to modify the privacy policies as Indian laws protect only sensitive personal data such steps are to be taken at the earliest possible Cyber Crimes Instances of cyber crimes such as duplication of debit/credit card and leakage of confidential details such as card number, account number, ATM’s have increased in the recent past. Considering the move for depositing of cash with the bank accounts, the privacy norms security of the money in the bank accounts and steps to monitor and eliminate the cyber frauds had to be initiated before the introduction of demonetization scheme. Through preliminary steps have been taken before the introduction of the demonetization scheme, considering the quantum of high denomination notes in circulation in Indian economy (i.e. 86 percent), certain additional steps were required to be taken. They include:
  • 23.
     Recalibration ofATM’s  Substantial amount of new currency notes has to be pre-printed to meet the demand  Expand the safety measures at Bank’s ATM’s and other sensitive places  Time-to-time guidance on the scheme  Increase the quantum of banking staff to manage the chaos  Clarity on tax and penal provisions.
  • 24.
    WHAT NEXT?? After demonetizationof high denomination notes, the other forms of wealth generated through black money would have to be taken note of Details of Swiss/foreign bank account holders, foreign asset holders, forex etc Jewelry, bullion purchased and hoarded from black money Benami properties Digitization of Indian economy and maintain transparency in the long run Transforming India into a cashless economy
  • 25.
    ON THE RADAR Sudden spurt in Jan Dhan accounts (INR 21000 crores already deposited in 25 crores Jan Dhan accounts within a fortnight, source may examined)  IT Lens on big cash deposits, to use data analytics tools to examine investment and consumption pattern  Lens on high value RTGS transactions  Jet, set, cash-in-northeast states  Donations by charitable institutions and trusts  Real estate, jewelry, forex businesses  Sliding rupee despite central bank’s best efforts (records low; near 69/dollar)  Rainbow unity of the opposition staging vociferous protest
  • 26.
    CONCLUSION The advantages aremuch dominating and it will be in the long term interest of our country comfortably outweighing the disadvantages. Government need to take all the necessary steps so as to ensure that there will be a smooth flow of currency exchanges. It would turn into chaos if government takes no necessary steps to circulate money correctly. It will make a massive change in our economy. We congratulate the entire government and those hidden brains of our democracy who brought this decision.
  • 27.