1. Announcement of Demonetisation

The demonetisation of Rs. 500 and Rs. 1000 banknotes was a step taken by the Government of India on 8th November 2016, ceasing the usage of all Rs. 500 and Rs. 1000 banknotes of the Mahatma Gandhi Series as a form of legal tender in India from 9th November, 2016. The announcement was made by the Prime Minister of India, Narendra Modi, in an unscheduled live televised address to the nation at 20:15 Indian Standard Time (IST) on the same day. In the announcement, Modi declared circulation of all Rs. 500 and Rs. 1,000 banknotes of the Mahatma Gandhi Series as invalid and announced the issuance of new Rs. 500 and Rs. 2,000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes.

2. Purpose, aims and objects

The banknote denominations of Rs. 100, Rs. 50, Rs. 20, Rs. 10 and Rs. 5 of the Mahatma Gandhi Series continued to remain as legal tender and were unaffected by the announcement/policy. The demonetisation was done in an effort to stop counterfeiting of the current banknotes allegedly used for funding terrorism, as well as a crack down on black money in the country. The move is also aimed at reducing corruption, drug menace and smuggling.

3. Effect of demonetisation

Within a fortnight after the demonetisation it is evident that the agricultural markets are collapsing, trucks are getting stranded and economic activity is slowing down. The Prime Minister firmly states that, this phenomena is temporary and the same is justified on the ground that we need to bear this in the interest of the nation. This statement is partially true. While it may affect people having unaccounted wealth, it disproportionately affects the honest taxpayer.

4. Importance of currency

The importance of currency is in its fungibility or interchangeability. All other assets are specific assets – they have a way of identifying ownership. From a mobile phone to a motorbike, there are identity markers that establish the ownership of the asset. Currency is owned by the bearer, which gives it the nature of fungibility. The sudden move by the Government is making a fungible asset into a specific asset, even if it is for a short period, by identifying currency with the bearer’s identity and income. In fact, the currency bears the promise of the Government. This move has broken that promise to pay the bearer a sum written on the currency and signed by the RBI Governor. A loan that is not repaid when it is due is a default. The RBI is defaulting on its promise by not paying the bearer the amount. Even if it is for a brief time, it is bad enough not to honour the currency for a brief period. Former member of the erstwhile Planning Commission Ms. Saumitra Chaudhuri, has shown calculations to indicate that the printing and distribution could take all the way up to May 2017 to replace the stock of currency notes that was removed with a single announcement. The basic problem is that there is no enough currency to circulate. Therefore, it can be said that there was no proper planning by the Union Government to consider the situation of hardship that may be caused to honest tax payers, poor village dwellers and farmers. The cash stashed away by a poor housewife is struggling to find an outlet because she does not have identity papers or a bank account. The ‘secrecy’ was the word used by the Union Government to justify the mess. Now, we know that the veil of ‘secrecy’ ensured that there was no sane advise or inputs to the decision makers. No one can deny the situation is in a mess. As per the scheme announced by the Union Government the citizens are required to stand in big queue/s for exchanging the old Rs. 500 and Rs. 1,000 currency notes and for withdrawing a small amount from their Bank Accounts as may be permitted by the Government as per its policy declared from time-to-time. West Bengal Chief Minister Mamta Banerjee, has claimed on 22nd November, 2016 that, due to the immense hardship caused by the demonetisation move of the Centre, more than 68 lives lost due to currency ban across the country. Further, as reported in Newspapers, by 10th December, 2016 more than 100 lives lost due to currency ban across the country.

5. Justification of the demonetisation

The Prime Minister Narendra Modi has asserted and asked the ordinary person to “put up with difficulties for some days”. “Now, we again have an opportunity where every citizen can join this mahayojna against the ills of corruption, black money and fake notes. The more help you give in this campaign, the more successful it will be.” “On the one hand is the problem of terrorism; on the other is the challenge posed by corruption and black money.”

6. Citizens can deposit the notes in their bank accounts

(i) While celebrating the opening of ‘Pradhan Mantri Jan-Dhan Yojana’ (Zero Balance Bank Account/s), the financial inclusion drives and technology roll out, all of which were for helping the poor and Government claimed that about 25.58 crore accounts were opened across the country under the Jan Dhan Yojana. However, deposits in Jan Dhan accounts soared sharply by around Rs. 27,200 crore across the country in just 14 days from the date of demonetisation of Rs. 500 and Rs. 1000 currency notes. It is expected that such deposits may increase day by day up to 30th December, 2016. Therefore, it is apparent that there is a misuse of this account and Union Government has doubted that, such a huge amount may be representing ‘black money’ belonging to others. Hence, the Government may take appropriate steps in the matter in future and may punish the wrong doers.

(ii) Under the Income Disclosure Scheme, 2016 during the period from 1st June, 2016 till 30th September, 2016 the assessee/citizen was required to pay aggregate of 45% of the income disclosed, by way of tax and penalty. Therefore, the Union Government may levy more than 45% tax and penalty on unexplained cash deposited by citizens in their respective Bank Accounts during the 50 days i.e. from 10th November, 2016 to 30th December, 2016 under the Demonetisation Scheme. However, the relevant sections 68 & 69 of the
Income-tax Act, 1961 are applicable up to the Assessment Year 2016-17 only. Thereafter, the new Section 270A is inserted under the I.T. Act, 1961 and the same is made applicable w.e.f. the Assessment Year 2017-18 instead and in place of sections 68 and 69 of the Act.

7. Rationalisation of penalty provisions

Under the existing provisions i.e. up to the Assessment Year 2016-17, penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under section 271(1)(c) of the Income-tax Act, 1961. In order to rationalise and bring objectivity, certainty and clarity in the penalty provisions, the provisions of section 271 shall not apply to and in relation to any assessment for the assessment year commencing on or after the 1st day of April, 2017 i.e. from Assessment Year 2017-18 and subsequent assessment years and penalty be levied under the newly inserted section 270A with effect from 1st April, 2017. The new section 270A provides for levy of penalty in cases of under-reporting and misreporting of income at the rate of 200% of the tax sought to be evaded. i.e. tax amount plus a penalty of 200% of the tax payable would be levied as per section 270A of the Income-tax Act.

8. Taxation Laws (2nd Amendment) Bill 2016

In the midst of disruptions and adjournments, the Lok Sabha on 29th November, 2016, passed a Taxation Laws (2nd Amendment) Bill 2016 that seeks to tax money deposited in bank accounts post demonetisation i.e. deposited during the period from 10th November, 2016 to 30th December, 2016. The aforesaid Bill was passed in the Lower House of Parliament without any debate, provoking strong protests from Opposition leaders. The Union Finance Minister Arun Jaitley said while moving the aforesaid Bill for passing, “I urge the House to accept the amendments,” adding that the Bill will enable the Government to implement schemes like the ‘Garib Kalyan Kosh’. The aforesaid Bill 2016, passed sans debate in the Lok Sabha, will entail a tax of 30 per cent of the income declared, an additional surcharge of 33 per cent of the tax amount, and a penalty of 10 per cent of the declared income. This adds up to a total liability of about 50 per cent. In addition, the amendment states that 25 per cent of the declared income is to be deposited in an interest-free deposit scheme with a lock-in of four years. If undeclared, then the unexplained amount will face a flat tax of 60 per cent, a surcharge of 25 per cent of the tax amount, and a possible 10 per cent penalty at the discretion of the Assessing Officer. This takes the total levy on
undeclared income or assets to as much as 85 per cent.

9. History of demonetisation in India

(i) The sudden move to demonetise Rs. 500 and Rs. 1,000 currency notes announced by Prime Minister Mr. Narendra Modi on 8th November, 2016, is not new. The first demonetisation of
Rs. 1,000 and higher denomination notes in India was made on 12th January, 1946, when the then Governor General of India, Field Marshal Archibald Wavell promulgated the High Denomination Bank Notes (Demonetisation) Ordinance of January 12, 1946 which also spelt out imprisonment of up to three years along with fine for violators.

(ii) 38 years ago, in the year 1978, right after emergency was lifted from India, Janata Party Government led by another politician from Gujarat, the then Prime Minister Morarji Desai, had decided to demonetise Rs. 1,000, Rs. 5,000 and Rs. 10,000 notes in a bid to combat corruption and black money. On January 16, 1978, the then Government announced that high value notes would cease to be legal tender at the close of banking hours on that day and that all banks and treasuries of Governments would remain closed for transactions of the next day on January 17. People coming to deposit currency in banks had to fill up forms, and if seen with huge amounts, the banks informed the IT cells. If the people could not explain their source of income, the IT department would levy taxes as huge as 90 per cent. It was further provided that a false declaration or even a partially true declaration will be punishable with a prison term extending up to three years or a fine or with both.

(iii) On 8th November, 2016, Narendra Modi, the second Gujarati PM announced the government’s decision to phase out currency notes of the denomination of Rs. 500 and Rs. 1,000 with effect from midnight of 8th November, 2016 in a bid to combat corruption, black money, to stop counterfeiting and to funding terrorism. While announcing currently circulated
Rs. 500 and Rs. 1,000 notes as invalid, Prime Minister Narendra Modi said new
Rs. 500 note and a Rs. 2,000 denomination banknote will be introduced from 10th November, 2016. Hence, this is the first time that Rs. 2,000 currency note is being introduced in the year 2016. Further, recently the Government has said in Parliament that the Government/
RBI is planning to print currency note of
Rs. 10/- made of plastic or polymer substrate.

(iv) However, in the Government’s 8th November, 2016 notification there is no penal provision. Instead the Government has moved a Taxation Laws (2nd Amendment) Bill, 2016 in Parliament to impose only a higher rate of tax coupled with some monetary penalty on those found to have deposited sums of money that were not previously accounted for. The said Bill is passed sans debate in the Lok Sabha on 29th November, 2016.

10. Demonetisation in other countries

In the year 1996, Australia became the first country to have a full series of polymer banknotes to replace paper based notes to stop counterfeiting. The other countries like Russia, Zimbabwe, Philippines, Myanmar, Libya, Pakistan, Fiji, European Union etc., have also made demonetisation in past in bid for counterfeiting, and for various other purposes.

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