INDIA ON THE CUSP OF CHANGE!

On 8^th
November 2016, the Prime Minister may have possibly altered the course India
was taking. He announced demonetisation of Rs. 1000 and Rs. 500 notes which
constituted 86% of the currency in circulation. For its sheer magnitude, his
courageous decision deserves kudos. I would like to compare this decision to
that of his predecessor (as the then Finance Minister) in 1991, which broke the
shackles of the Indian economy. His announcement will have possibly the same
impact if not greater.

The decision
of demonetisation has been taken for three reasons-to tackle the menace of
counterfeit notes, consequentially to turn off the terror funding tap, and last
but not the least to bring holders of unaccounted money to book. To what extent
the decision will succeed in achieving the objectives only time can tell. The
announcement took virtually everyone by surprise and has been applauded by the
majority. The world is looking at India with expectation. Economists differ on
the possible outcomes, as they do in most cases. Political parties, while
supporting the intent have raised questions about tardy implementation, a major
part of them being justified.

The ordinary
citizen has borne the brunt of the difficulties of the currency crunch, and the
problem is far more serious in the villages than in the cities where plastic
money and various forms of electronic transactions have already taken root.
Indians however are patiently bearing the” inconvenience”, to put it mildly, in
the hope that the decision will be of great benefit to the country, reduce
corruption and result in punishing the persons engaged in illegal activities
and evasion of taxes. One hopes that, as far as the drive against the
unaccounted wealth is concerned, this is only the beginning of a series of
actions which the Prime Minister has promised to take.

Much has
already been said about the economic downturn on account of cash crunch. If
long term benefits are to be realised, a limited fall in economic growth should
be acceptable. In any case, this decision will garner much more for the
government coffers, than the two amnesty schemes for foreign/domestic
unaccounted wealth and income could get. If Rs.15 lakh crore is the money in
high denomination notes and 30% of it is not returned / deposited or exchanged,
that itself would amount to Rs. 4.5 lakh crore.

While the
intent of the Prime Minister in this initiative cannot be doubted, there are
certain concerns which need to be addressed. The first is in regard to the
notices that various persons have been receiving on their depositing cash in
their bank accounts and the surveys that are being carried out. While the
Income tax Department certainly has the power to enquire into the source of
money, such actions should not lead to inspector raj which could, in turn, lead
to abuse of power. Even prior to demonetisation, there were complaints of tax
terrorism. There must be a balance between seeking information and
inconvenience to the public.The use of authority must be judicious.

The second
aspect which the government must brace itself for is a possible rise in crime.
If reports are to be believed, a large part of the underworld, particularly the
foot soldiers are unemployed, as hawala, gambling, extortion have halted or
reduced due to non-availability of cash. For a few days, they would survive on
what they have earned in the past, but if society does not create alternative
sources of employment, retrain them or assimilate them into the mainstream
economy,there would be many unemployed youth on the streets who could cause
problems for other sections of society.

While these
problems are certainly a cause for concern, the move to demonetise currency
notes has several benefits, some intended, others unintended. There seems to be
a fall in terrorist activities, both internal and external, with their sources
of funds having totally been choked. This lull in activity is probably an
opportunity to launch a social/ political offensive, so that the menace can be
contained, if not eradicated.

Demonetisation
has also given a fillip to the drive for financial and digital inclusion.
Banks, both in public sector and private sector, are making a serious attempt
to reach the rural areas. This is a drive which the government must
wholeheartedly support with the funds now at its command. Secondly, a much
larger number of people – consumers, manufacturers, traders and service
providers have started making and accepting payment in the cashless mode. This
will ensure that transactions are recorded and costs in making them are cut.

As I write
this editorial, the Finance Minister presented a bill in the Lok Sabha
proposing additional tax liability in respect of the undisclosed income,
voluntarily declared, assessed or income unearthed after a search. In addition,
the said bill contains a scheme whereby the declarant can pay only 50%, 25%
would have to be deposited in a scheme known as Pradhan Mantri Garib Kalyan
Yojana 2016 (PMGKY), and the declarant would be entitled to retain the balance
25%. After the demonetisation announcement, a detailed article had been worked
on by two of our illustrious past presidents Pradip Kapasi and Gautam Nayak.
However, as they were in the process of finalising it, the Taxation Laws
(Second Amendment) Bill, 2016 was moved. It has now been passed in the Lok
Sabha and awaits presidential assent. Reading the clauses in the bill, the
article would have required complete rewriting. After considering the
limitation of time given the deadline for printing of this issue, it was
impossible to make the changes and provide a detailed analysis of the
amendments, which would be expected by readers. The two authors would however
endeavour to carry out the necessary changes in their article and a sincere
attempt will be made to place that article on the BCAS website. This is of
course presuming that more changes are not made! As an information to readers,
I have attempted to summarise the provisions of the bill in regard to the
enhanced tax liability, surcharge and penalty under the Income-tax Act in
respect of such undisclosed money, etc., which makes the PMGKY seem a
worthwhile alternative. Readers may kindly note that this is only a prima facie
view as I do not possess the ability of the eminent past presidents.

Education cess would also be payable at 3% of the above
tax and surcharge.

A separate
penalty is also provided if income is found after a search which is carried out
after the bill receives presidential assent, and undisclosed income is
unearthed as a consequence thereof.

The
cumulative effect of the demonetisation, and the amendments in tax provisions
will have to be seen as time progresses.