A battle between the government and unaccounted cash holders

It is now clear that about 90% of the demonetised currency found its way back to banks (both by over the counter transfer and deposits in bank accounts), the expectation of windfall profit for the RBI and hence the government that could accrue from unreturned demonetised currency would remain unfulfilled. The unreturned demonetised currency connotes 100% taxation on the same for the RBI and government. Does this mean that the entire exercise of demonetisation failed miserably? Let us discuss it in detail.

Read: Demonetisation shadow on GST, Oppn threatens to hold up tax reform

The currencies that found its way back to the bank accounts are of four categories. The first category is accounted money. This category essentially belonged to the personal savings with an upper limit of ₹ 2.5 lakhs per account holder, irrespective of how much was exchanged over the counter or deposited in the bank account. For instance, if a family has three bank accounts and deposited demonetised currencies worth of ₹7.5 lakhs together from their savings, it would still be considered as accounted cash. However, with restrictions on cash withdrawal from banks, a substantial portion of their transactions either for their economic or personal activities henceforth should be carried out through cashless transactions, which would force them to become tax-compliant in the future, especially if their income exceeds the minimum slab of income tax.

The second category is those who managed to convert their whole or part of their unaccounted cash over the counter fraudulently with the connivance of some bank officials and mercenaries during the window period of November 10 and November 25 2016. The total currency that were issued over the counter was about ₹I35000 crores, which would be about 2.3% of the total demonetised currency. Had the government not introduced inking and subsequent stopping of over the counter exchange, the money laundering would have reached newer heights and would have become the most-sought-after avocation and made the demonetisation a failure even before December 30. The new 2000 currencies worth of INR hundreds of crores that were seized by the IT department in the last one month essentially came from this. Among 35000 crores that were exchanged over the counter, it is not known till now how much currencies were exchanged over the counter fraudulently. It is also a million-dollar question whether the IT department could trace all such fraudulent transactions in the shortest possible time, given the limited bandwidth of IT department in consolidating umpteen tips they receive on hoarding of both demonetised and new currencies and acting upon the same. The raids and associated unearthing of undisclosed wealth may add to the kitty of IT department, when the cases of unaccounted wealth are adjudicated.

The third category is the currency that were deposited beyond the upper limit of ₹2.5 lakhs per account. It was already reported that demonetised currencies worth of about ₹7 lakh crores was deposited in 60 lakh bank accounts, which is almost about half of the demonetised currency that returned to the banking system. Individual bank account deposits were about 3 lakh crores to 4 lakh crores and the rest is of companies and institutions. This amounted to about ₹ 11.66 lakhs on average in an account, although the distribution of deposits is not known. With proper justification on the deposited currency, the depositor would be allowed to use his money with no penalty. Even then, he will be forced to become tax-compliant from the financial year 2016-17, if he has not been in the tax net so far and may have to pay more income tax if he has paying less than what he was supposed to pay. In the absence of justification, if the depositor voluntarily discloses his unaccounted income, he will be charged with 50% tax on the deposited amount beyond ₹2.5 lakh, 25% of the deposited amount beyond ₹ 2.5 lakh in Pradhan Mantri Garib Kalyan Yojana (PMGKY) account with no interest and locking period of four years and the remaining 25% will be given back to the depositors. If the IT department caught hold of unaccounted income subsequently, the unaccounted income will be penalised with 85% on the deposited amount beyond ₹ 2.5 lakh. It is too early to predict how much the government could get in the form of tax, penalty and PMGKY fund from this category of deposits.

Read: Apologise for demonetisation ‘blunder’ in Dec 31 address, Kejriwal tells Modi

The fourth category is those who decided to deposit old unaccounted currencies beyond the limit of ₹ 2.5 lakhs in the accounts of other people who agreed to use their account to park unaccounted money for a commission. For instance, if a person holding 1 crore unaccounted demonetised currency may deposit the same in 200 Jan Dhan accounts, each INR 50000/, as no PAN card is required for deposits up to ₹ 50000. This kind of deposits is essentially a benami currency. This is a tricky case for IT department unless they get solid information on this fraudulent practice and act in a time bound manner before the cash is withdrawn from the accounts. By hugely incentivising people to share the information with the IT department on money laundering that includes people who allowed the unaccounted money holders to park their money in their own accounts, IT department may be able to collate information on the same. The third and fourth category of people may constitute the “Missing Middle” as defined by IT department, who incessantly avoid tax net or pay much less than what they should be.

The question that haunts is that how the expectation that at least 2 lakh crores would not return is belied by the hoarders of unaccounted cash. Apart from money laundering and over the counter fraud, by depositing the huge unaccounted income in bank accounts, it looks as if, the unaccounted cash holders have opened Pandora’s box for themselves as the entire wealth, both accounted and unaccounted, will be under the scrutiny of IT department henceforth. Still, they have decided to go ahead with depositing their unaccounted cash, which means that there are still some loopholes available for them to show such deposits as their legitimate cash. Or they may strongly believe that the government machinery and IT department does not have the capability and bandwidth to book tens of lakhs of unaccounted money holders and penalise them in a time-bound manner. More than demonetisation, this belief of unaccounted cash holders is indeed a challenge for the government. Although the window for demonetisation comes to an end by December 30, 2016, the battle of nerves between the government and the unaccounted cash holders does not seem to end soon.