The government is likely to bring an ordinance to the Union Cabinet on Wednesday to specify a date to end the legal character of the old currency notes. Putting a cap on deposit of old currency notes on December 30 will help bring certainty to the government’s estimates of the money coming back into the banking system and in turn, help it to make projections in the upcoming Union Budget for 2017-18, a senior government official said.
The three-month window, January 1-March 31, 2017 as announced by Prime Minister Narendra Modi earlier for deposit of old currency notes in specified offices of the Reserve Bank of India (RBI) after submitting a declaration form will remain open, but only for exigencies, the official added.
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“If we do not put an end date on the legal character of the old notes, then they can be infinitely valid as a legal tender. The government wants certainty on the estimate of the money flowing back into the system and a cut-off date for all deposits including retail deposits will help achieve this objective,” the official said.
When asked about the proposed penalty for holding of old currency notes beyond a specified limit, the official said: “The problem is not someone holding 10 notes in old currency beyond December 30, but if someone is holding, let’s say, Rs 5 crore, then it’s a problem and the person owes an explanation.”
The proposed ordinance will help expedite return of old notes in the remaining period of the deposit window, the official added.
In 1978, a similar ordinance was issued to end the government’s liability after Rs 1,000, Rs 5,000 and Rs 10,000 notes were demonetised by the Morarji Desai-led government. Government officials said the legal amendments are needed every time the government decides to scrap any legal tender to put an end to its promisory note.
Former chief statistician and chairman of National Statistical Commission Pronab Sen said that the Reserve Bank of India (RBI) by itself cannot refuse to exchange old currency notes and as long as such an Act is not passed by Parliament, the old currency notes will not stop to be a legal tender. “Government has the right to legislate and say that it (old currency notes of Rs 500 and Rs 1,000) carries no legal value. The RBI then does not have to replace. If the ordinance is effective December 30, then the old currency will turn into scrapped paper and the three-month RBI window for deposit/exchange will end immediately,” he said.
He further added that had the government brought this ordinance earlier than this, everyone would have revolted. “With about 90 per cent of the old currency already flown back into the banking system, the ordinance will impact only around Rs 1-1.2 lakh crore of old currency and so, the backlash won’t be that bad. Just that one cannot rely on any assurance of the RBI. As it is their reputation is in bad shape, this ordinance will only make it worse.”
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On the proposed penalty on holding of old currency notes, Sen said that it cannot be illegal to hold old currency as long as people are not transacting with it. “Not sure if they can impose penalty on pieces of paper as their legal character would end after the ordinance. I am not sure how it can be made a criminal offence, as it’s not cocaine or heroin, where holding it can be termed as illegal.”
The government will now be faced with the challenge of getting the ordinance passed in the Budget session of Parliament and if it doesn’t get it passed, it will be an embarrassment for the government, he said, adding that its introduction as a money bill will be questionable.
On November 8, the prime minister had announced December 30 as the deadline for deposit of old currency notes of Rs 500 and Rs 1,000. In a series of changes after the announcement, the government and the RBI disallowed the exchange of old currency notes and also made it conditional for non-KYC accounts to deposit old currency notes only to once per person for an amount exceeding Rs 5,000 during December 19-30.
For those depositing any unaccounted funds, the government has offered them a second chance to come clean through the Pradhan Mantri Garib Kalyan Yojana (PMGKY), which is open from December 17-March 31, 2017. Under the PMGKY scheme, along with the total 49.9 per cent of tax, penalty and surcharge, the declarant will have to deposit 25 per cent of the undisclosed income in an interest-free deposit scheme for four years.