Thursday, November 10, 2016

Real Demonitisation is Yet to Come

Demonitisation of Rs. 500 and 1000

Much has been said about the move of the Central Government to suddenly declare all the 500 and 1000 rupee notes to be worthless and needs to be replaced in the bank and post office and how it impacts black money. However, a lot needs to be done as the impact is not as one expect it to be.

It is a very easily understood thought that anyone who has stored Black Money in form of cash will do so in higher denomination notes. So 10,000 notes of Rs.1000/- will become a crore. Whereas one needs to use 20,000 notes of Rs. 500/- each to make it One crore rupees or 1lakh ie 100,000 notes of Rs. 100/- each.

There are many small traders, businessmen who keep unaccounted for cash at home or in godowns. So these people are going to get affected. These people can deposit that money in the banks in their accounts. However, that means attracting a penalty of 200% if the IT department feels that these are part of unaccounted for wealth.

However, it is a well known fact that most of the people convert their black money to white by investing in real estate. Some put up shops and establishments as a front to convert their ill gotten wealth that have been amassed as bribes or other dubious means. Many people invest in gold, diamonds etc.

The bigger players either stash it in Swiss bank accounts or send it abroad and get it back via Participatory Notes (PN Notes). The Government doesn't ask any questions about the PN notes. Several years ago the move by the Government to seek more details about Participatory Notes had spooked the share market and the Government had to backtrack. So the big fish is always out.

The Government however is not tackling black money generation. Much of our economy runs on cash. When I asked a road side Momo seller in Malviya Nagar, New Delhi, he told me that every evening he sells Rs.3000 - Rs.4000/- worth of Momos. The Momo seller infront of Hauz Khas Metro station sells anywhere between Rs. 13,000/- to Rs. 15,000/- per evening. And there are many more such road side vendors. All these people are out of the tax net. Ofcourse, the police man on the beat collects Rs. 10 and Rs. 20/- everyday.

The Tandoori Chicken that I order from the eatery never gives a bill. None of the restaurants give a standard bill. They just write a cash memo which is not a proper bill. The medicine stores give a bill only if you ask. And they threaten that they will have to add VAT extra and then inflate the bill.

The Government has to bring all these people under the tax net. Today there is technology to fall back on. With mobile phones becoming ubiquitous, we should mandatorily force people to use mobile phone linked electronic cash which is directly linked with the bank accounts. The Government can come out with a mobile phone payment gateway which doesn't charge people per transaction. Let it be run by a Government agency and all such data can be mined by the Income Tax department. If it is done by Government, then we know that the Government will be responsible for its security.

This electronic payment linked with mobiles should be used everywhere to pay toll, parking fees, any payment anywhere.

The Government has to be creative, use technology and think ahead to curb the menace of Black Money.

It is said that the Government has been planning this removal of Rs. 500 and Rs. 1000/- notes for a long times. However, the timing seems to be aimed at disrupting the roadshows of Akhilesh Yadav, Chief Minister of UP and the money power of Samajwadi Party. How much actual effect this move has on the rival political parties is not known. However, according to grape vine, SP and BSP are hit hard. How this changes the campaigning in UP will not be known accept for whispers here and there.

Nevertheless with this move, the BJP has something to talk about for the next two years. Whether this demonitisation will be able to overcome the perception of their lack of results by the Modi Govt. will be known later.

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