The government expects the entire money in circulation in the form of currency notes of Rs 500 and Rs 1,000 which have been scrapped to come back to the banking system so that the tax authority can trace the transactions and tax black money hoarders, Revenue Secretary, Hasmukh Adhia said on Tuesday. This, effectively, undermines the prospect of any windfall gains accruing to the government arising out of part of the demonetised currency remaining outside the banking system.
Soon after the government had announced the note cancellation, some experts had projected that a part of the demonetised currency notes — of a value of Rs 14.17 lakh crore at the end of March 2016 — would not return to the banking system.
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In a report, the SBI estimated that Rs 2.5 lakh crore may not return to the system. Based on such calculations, reports emerged that this would lead to substantial gains to the government considering that this would lower the liabilities of the RBI. This, in turn, it was argued could transfer a higher surplus to the sovereign, opening up the prospect of spending on infrastructure, or capitalisation of banks.
An estimated Rs 11 lakh crore has been deposited in banks so far and if the all the high-value notes in circulation comes back to the banking system as the Revenue Secretary indicated today, more questions are bound to be raised as to the cost and impact of the exercise of demonetisation spread over 50 days.
That’s because the Centre for Monitoring the Indian Economy or CMIE, an economic forecasting agency, has pegged the cost of demonetisation for 50 days from November 8 to Dec 30 at Rs 1,28,000 crore which includes loss of business or sales, cost to households, the expenses for printing fresh currency notes to the government and the RBI besides for banks. The onus will be on the government to show that the gains, including in the form of stiff penalties on those found violating rules, negate the cost of the exercise.
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“Do you think that by simply depositing money in the bank account makes black money into white? It doesn’t. It will become white when we charge taxes, when the Income Tax department can reach up to them by issuing a notice and questioning them…The expectation is that the entire money which is in circulation has to come to the banking channel so that we can trace the transactions and trace the entire money, who does it belong to and has tax been paid on it. This being the idea, some money has come back in the banking system and we still have time to go,” said Adhia on the sidelines of a conference in Mumbai.
“No black money hoarder will be spared. If someone has deposited Rs 50,000 in the accounts of 500 people each, he will also be caught,” said Adhia.
At the end of November 27, Rs 8.44 lakh crore in abolished notes have already come back to the banking system.
Adhia said that government agencies will also take action against bankers and others who are colluding with black money hoarders to illegally convert the abolished currency into legal tender. On the ongoing investigations into the Panama Papers leaks, Adhia said all BRICS countries are finding it difficult to source information from certain advanced countries that house the bank accounts of companies registered in Panama.
“The problem that each country is facing that while the registration of entities are in Panama, most of these entities are not having their bank accounts or their business enterprises in Panama. Most of the bank accounts of these entities are in some other advanced countries, so all of us are trying to get information from those countries. We are invoking the information exchange agreements. In some cases the response is quite good and in some other cases…there is a time lag in the response of some countries. That is the difficulty that we all are facing,” said Adhia.
Clarifications & corrections:
In response to the December 7 front page report “Expect all demonetised money to come back to system: Revenue Secy”, Dr Hasmukh Adhia, Revenue Secretary, Ministry of Finance, said:
It is very strange that only Indian Express has reported this statement in the headlines while no other newspersons who were present there have reported this.
I would like to emphasise that I did not make any such prediction that the Government expects all demonitised money to come back to the system. The question asked was that ‘what happens if all the money is coming back to the banks’. In response, I said that ‘merely bringing money to banking channels does not make it white until tax is paid on the same’. I, therefore, mentioned that even if all the old money comes to the banking channels, Income Tax Department would be able to see the trail of money coming from various individuals and we would be able to recover tax on the same along with penalty, wherever applicable.
While all other newspapers, including PTI, have reported this as the main substance of my reply, only Indian Express seems to have drawn a different conclusion of this reply and has put this in form of a headline as if the Government has already concluded that the entire money is going to come back. I may like to point out that it is not possible for me to make such a prediction and there is no reason why I should make such prediction prematurely.
Our Correspondent replies:
The report was based on Revenue Secretary Hasmukh Adhia’s response to a reference by a journalist to media reports that the entire demonetised money would come back to the system. Adhia told journalists on the sidelines of a conference in Mumbai: “Do you think that by simply depositing money in the bank account makes black money into white? It doesn’t. It will become white when we charge taxes, when the Income Tax department can reach up to them by issuing a notice and questioning them… The expectation is that the entire money which is in circulation has to come to the banking channel so that we can trace the transactions and trace the entire money, who does it belong to and has tax been paid on it. This being the idea, some money has come back in the banking system and we still have time to go.” This quote was accurately reproduced in the news report. Adhia had also said, “We can only know the final position when the scheme closes on December 30.”