(GIST OF YOJANA) Demonetisation - A Look Back at the Last Two Months

 (GIST OF YOJANA) Demonetisation - A Look Back at the Last Two Months

More than two months have passed since the Prime Minister announced the decision that high denominational currency notes would cease to be a legal tender. Subsequently those notes have been demonetised. When 86 per cent of a country's currency constituting 12.2 per cent of its GDP, is squeezed out of the market and sought to be replaced by a new currency, there would obviously be significant consequences of that decision. Now that the remonetisation has moved ahead, it would be worthwhile to analyse the rationale behind the decision and its impact.

Steps against Black Money

The present Government had absolute clarity from day one that it would move against the shadow economy and black money. Its first decision was to constitute SIT under the directions of the Supreme Court. The Prime Minister had proposed to the G-20 at Brisbane that international cooperation in sharing information with regard to base erosion and profit shifting should be expedited. The arrangement with the United States furthered this object. The Government completed its agreement with Switzerland that w.e.f. 2019, details of assets held by Indian citizens in Switzerland and vice versa would be provided to each other. Since 1996, the Double Taxation Avoidance Treaty with Mauritius was being renegotiated. The treaty effectively incentivised round-tripping. It was renegotiated. Similar treaties with Cyprus- and Singapore have also been renegotiated. The Black Money Law dealing with illegal assets outside India opened a-window for disclosure with 60 per cent tax and provides a ten year imprisonment.

The Income Declaration Scheme (IDS) 2016 was highly successful with a 45 per cent tax. The PAN card requirement for cash transaction beyond rupees two lakhs put hurdles on expenditure through black money. The Benami law was legislated in 1988 and never implemented. It was amended and has been put into action. The GST, which is scheduled to be implemented this year, will provide for better indirect tax administration and being a more efficient law will check tax evasion. The demonetisation of high denominational currency notes was the big step in the same direction.

In the year 2015-16, 3.7 crore assesses of the total population of over 125 crores, filed income tax returns. Out of these, 99 lakhs declared income below Rs.2.5 lakhs and paid no taxes; 1.95 crores declared income less than Rs.5 lakhs; 52 lakhs declared income between Rs.5 to 10 lakhs, and only 24 lakhs declared income above Rs.10 lakhs. No better evidence is required to substantiate that both in the matter of direct and indirect taxes India continues to suffer being a hugely tax non-compliant society.

Expenditure required for poverty eradication, national security and economic development have to be compromised with on account of tax non-compliances. For seven decades the Indian "normal" has been to undertake transactions partly in cash and partly in cheque. "Pucca" and "Kachha" accounts are a part of the business language. Tax evasion has been considered as neither unethical nor immoral. It was just a way of life.

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Courtesy: Yojana