Demonetisation: Income Tax department faces massive challenge

The fact that Notes Ban is more work for the honest and an opportunity for others is being proved time and again.

The #NotesBan announced on 8th of November resulted in unprecedented chaos. People have waited in huge queues to deposit their old 500 and 1000 rupee notes. There were initially huge lines to exchange these notes till the Government rescinded on their promise and stopped the notes exchange. There is still a huge queue infront of ATMs whenever money is loaded in the ATMs as most of the times there is no cash in the ATMs as well as in the banks.

There were indeed some people who had undeclared income stored as cash and they were initially stunned. But later they found out easy route to exchange their old notes by giving commission. Overnight a cottage industry sprung up to exchange old notes. Unscrupulous bank employees and Income Tax commissioners have teamed up to exchange old notes. So the people pay anywhere between 30 to 35% to exchange their notes.

The Government came out with Scheme to penalise people by charging a tax of 50% on their unaccounted deposits in the banks and these money had to be locked for 4 years. Obviously people prefer to pay commission as it is cheaper and also no one now believes that the Income Tax authorities won't harass them later.

In the Income Tax department the honest employees and the lower level staff are not involved in these commission business. They find that there is much more work involved due to the #Demonetisation .  Two income tax staff associations have now written letters to the Prime Minister Mr. Narendra Modi. Income Tax Gazetted Officers Association and Income Tax Employees Federation have said that Personnel and Infrastructure are severely short.

They have written that "The entire department is totally demotivated due to the huge shortage of manpower in lower cadres and huge stagnation in officers's cadre. Must have adequate manpower, especially at key positions, be provided with proper infrastructure facilities so that the workforce stays motivated, committed and highly spirited at this moment".

Clearly it would be a tough task to inspect all the bank accounts. The Income Tax department can ofcourse generate and send queries to lot of people. However, following up their responses and deciding on those would be a massive challenge. That is not going to happen soon enough for the Prime Minister to get political mileage. So there is indeed lot of Psychological warfare inform of announcement threatening people of dire consequences if they don't announce their blackmoney. Read more: http://arjunaubacha.blogspot.com/2016/11/psychological-warfare-in-demonitisation.html

It seems to be strange that the team briefing the Prime Minister never thought about these issues before strongly suggesting the PM to go for demonetisation. 

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BlackMoney Penalty: Official method to recapitalise banks

Govt. has proposed to hold on to some of the money deposited in the banks if people can't satisfactorily explain the source of those money.

In the latest twist to the unfolding #Demonetisation drama, the Modi Government has proposed that people holding blackmoney can declare their blackmoney and pay 49.9 percent as tax and penalty. The breakup is as follows. Govt. will charge 30% as tax on the undisclosed income, plus there will be a 33% surcharge on it. And a 10% of the declared amount will be charged as penalty.

Apart from this, 25% of the declared income will have to be mandatorily locked-up in an interest free bonds for four years. Though the Modi Government doesn't officially say so, it expects this 25% to help in recapitalising the banks which have seen massive NPAs. For the record the Gross Non Performing Assets (NPAs) of Banks in March 2016 was 7.6%. And this figure was expected to increase to 8.5% by March 2017 and if the macro-economic situation deteriorated then it could increase to 9.3%. (Source: RBI Projections) http://arjunaubacha.blogspot.in/2016/11/compensating-citizens-for.html

For example, if it can get say 1 lakh crore voluntarily disclosed as previously undeclared and hence untaxed amount which we refer to as blackmoney, then 25% of it would be 25000 crores. So this 25000 crores would be locked up for 4 years and help in recapitalising the public sector banks.

The Government was expected to inject some 40,000 crores of rupees into the banks which would have been too little. So the Government is trying to get the funds from public to recapitalise the banks.

The Government has also said that if people don't declare their undisclosed income and then get caught, then they will face penalty of 85%.

Since 9th November, a lot of people have been illegally helping change unaccounted for cash of people by taking commissions of 30 to 35%. Some people who have more than 5 or 10 crores of rupees have also given some 50% as commission to some bank employees and Income Tax people to get new notes. So the Government's proposed 49.9% combined tax, surcharge and penalty may find some takers.

Since a lot of people out of fear of persecution by Income Tax department won't declare their previously undisclosed income, the Government is trying to threaten with the higher figure of 85% if they get caught. It is a common knowledge, that the Income TAx department is grossly unprepared to handle such massive volume of cases. So it would be a big help for the Government if more people come forward and declare their previous undeclared incomes.

Till date some 8 lakh crores of rupees have been deposited in the banks. The Government was expecting that this number will be much lower. If this rate of deposits go on, then most of the 1570 crore 500 rupee notes and 630 crore 1000 rupee notes will get deposited in the banks. That would be a nightmare scenario for the Government. They had thought that if some of the notes don't come back, then RBI will knock off that amount from their books as liability and then give back the same amount to Government as dividend. The creative ways many people have adopted to deposit their blackmoney in the banks has raised the tension of the Government. If the Government can't get back money in dividend from the RBI, then it can't have a lower fiscal deficit and also it won't be able to recapitalise the banks.

So the Government now has come out with this idea of a voluntary disclosure. However, the Government is not using the word voluntary disclosure because its Voluntary disclosure scheme has just ended on 30th September.

There are some people who have 8-10 crores of cash. Some of them who were previously despondent, may go and declare it to the Government. Since they were anyway giving 35% as commission to agents, so giving a bit more and buying peace of mind may be preferable to some. However, knowing the fear of the income tax department, not everybody will agree to declare. So the Income Tax team may need to do a lot of work. Recapitalising banks won't be such an easy job.

Nevertheless, already the banks are flush with cash deposited by people. All these money is locked up in banks, as people can't draw more than 2000 rupees per day. This is expected to last for six months. So the banks have got some respite for six months from the NPA problem. The last word on this is not yet heard. However, the cover of the Modi Government that this is a people centric move is slowly getting blown and the main aim to recapitalise the banks and give a positive spin to the PM's image is now becoming clear to many people.

Psychological warfare in Demonitisation

The Government of India on 8th November night declared that the 500 and 1000 rupee notes are not legal tender from midnight that is effectively from 9th November. This 9/11 moment is as momentous in its impact on India as was the 9/11 attack on the twin towers of America.

If one looks at the messages emanating from the Government, much of it is warning to the public about the consequence of certain actions. It is a strange situation where the Government is consistently telling people to not to do certain things and if they don't listen then they will be prosecuted. If people are doing something wrong then they should be prosecuted. Lets analyse some of the warnings of the Government.

Since the Government announced that the Rs. 500 and Rs. 1000 notes are no longer legal tender and needs to be exchanged in the bank or deposited in the bank accounts, people have been depositing the money in the bank accounts. The Government then announced that any deposits in the bank accounts above Rs. 2.5 lakhs will be investigated. So some people started depositing only Rs. 2.5 lakhs in each account.

Then the Government warned that deposits in the name of housewives will be questioned ie the Government can question the source of funds.

It was reported that the Jan Dhan Yojana accounts that were opened and were lying dormant were being used to deposit upto the allowed Rs. 50,000. The Government warned that such deposits will be investigate.

Now the Income Tax department of Government of India has announced that if anyone is depositing cash in someone else's account, then these cases will be investigated under the Benami Transactions Act. The person whose account the money will be deposited will be treated as "benamidar" and the person who is the original owner of the money will be the termed as the "beneficial owner". Under the Benami Transactions Act all the persons involved are liable to be punished from anywhere between 1 to 7 years of rigorous imprisonment (R.I).

Why Govt. Creating Fear Psychosis:

The question that can come to mind is why the Government is trying to induce fear in people? Why this effort to create fear psychosis? The answer is two fold.

It Helps Political Narrative:

The first is the political narrative. The Modi Government hopes to utilise this as their big bang war on corruption and black money and use it to fight the UP and Punjab elections in early 2017. They believe, that the poor people will buy the argument that though they faced some inconvenience, they helped down in hunting the rich and the blackmoney holders. If a soldier can fight for the country, why can you not suffer this huge inconvenience for the betterment of the country, runs the argument. Since it gives the poor the vicarious pleasure of hunting the rich, it is a kind of a de-facto class warfare. Instead of directly proclaiming themselves as communists, Mr. Modi believes they can usurp the class struggle theme of the communists and get an entirely different class of voters cutting across caste and religious boundaries.

It is ofcourse a different matter that this chaos is resulting in a severe disruption of India's predominantly Cash only economy and the GDP is likely to contract. According to initial estimates the economy will take a year to come back to the days before demonitisation.

Income Tax Department will drown with work:

The Second reason for creating this fear psychosis is that the Income Tax department is not geared to handle this massive amount of work.

Only 2.87 crore Indians had filed personal income tax in the assessment year 2012-2013. Out of this 2.87 crores 1.62 crores didn't pay any income tax. So one can realise that the work of the Income Tax department is to analyse the data and work on this number.

Till last year there were some 31 crore bank accounts and then the Government is supposed to have added some 20 crore bank accounts under Jan Dhan Yojana. So roughly 50 crore savings bank accounts may be in India. Since the Government is forcing people to deposit the Rs. 500 and Rs. 1000 notes in the bank accounts, it is expected that the money will be deposited in many of these accounts. Due to computerisation it is easy to get data of high amounts of money deposited in the banks.

However, now the Income Tax department has to scan through data of deposits in atleast 50% of the bank accounts. I am assuming 50% because many of the Jan Dhan Yojana accounts are supposed to have been used by people to deposit money. So the workload of the Income Tax department is going to increase by atleast a massive 10-12 times. From roughly 2 crore plus accounts to some 25 or 30 crore accounts, the workload increase is going to be humongous. So it would be in their interest to discourage people to not deposit blackmoney in different accounts.

India with a population of 1.3 billion is much more than any other country except China. The sheer scale of work here is a challenge. To add to that challenge is this unprecedented action of the Government forcing people to deposit their cash in the bank accounts. One thing is for sure, neither the blackmoney holders can sleep in peace, nor the income tax guys will have any respite from work, work and more work.

Is possession of lot of old notes a crime?

Possession of lot of old notes a crime?

The Income Tax department is now conducting raids across the country based on tip-offs. In one case, in Delhi, a doctor was arrested when he was loading lot of cash in his car. A sum total of 69.86 lakhs was recovered from him in 100 rupee notes.

A man by the name Nazer-e-Alam was arrested in Delhi on Nov 18th with Rs. 1000 notes worth 96 lakhs. Alam was arrested under Section 103 of Delhi Police Act which is about possession of property for which no satisfactory explanation can be provided.

Though the above two cases appear to be same, however there is a big difference.

Technically, all our notes are legal tender. However, the Government on 8th November declared that Rs. 500 and Rs. 1000 are no longer legal tender. It is not known under what act this declaration was made. Though some may consider that Government declaring the notes not being legal tender is akin to Government reneging on its promise. Every currency note is a promissory note and is guaranteed by the Central Government. Nevertheless, that is not a point of discussion for this article.

When the notes are no longer legal tender, these notes are just pieces of paper. So When a man possesses a large amount of these notes like Nazer-e-Alam, technically he cannot be charged for possession of assets disproportionate to his known income. Neither can he be charged for possession of property for which no satisfactory explanation is provided because the notes he is in possession off is no longer legal tender. Since it is no longer currency and is worthless, unless and until deposited in a bank, technically any lawyer can successfully argue and rescue him.

The sudden declaration by the Government has caught many small time traders and businessmen with cash which has not been declared to the Income Tax authorities. So they are expected to use people couriers to transport such cash from one place to another. It is expected that some of them will get caught and will be tried under various sections. However, it would be interesting to watch how the prosecution will unfold.

However, when people are found with Rs. 100 notes which are perfectly valid legal tender, there would be no respite from the income tax authorities from prosecuting the arrested persons.

Indian economy predominantly runs on cash. Demonitisation cannot happen overnight. It would take sufficient effort by the Government to move much of this to digital cash. Not many people understand how to use e-wallets. Not many trust those as well. It would help if the Government of India comes out with an e-wallet which would be readily acceptable in all places. There would be trust factor if the Government steps in as the Government would be responsible for security. The Government though at the moment seems to be letting the PayTMs of the world run with the ball.

Notes Ban: Terrible Implementation shows no Planning

The Government of India order to declare the current Rs. 500 and Rs. 1000 notes as not legal tender has initially said as a well planned move against black money. Shri Arun Jaitley, Union Finance Minister as well as Shri Rajnath Singh, Union Home Minister has reiterated the Government stand that the Government had thought through the move and implemented it. However that appears to be complete hogwash.

It seems that the number of Rs. 500 notes withdrawn are 1570 crores. And 630 crores of Rs. 1000 notes were withdrawn by the Government order. The total capacity of Government of India's currency press is 300 crore notes a month. So it would have taken some 7 odd months to print replacement of Rs. 500 and Rs. 1000 notes. So the Government decided to print Rs. 2000 notes in lieu of Rs. 1000 notes. Nevertheless, it appears that it will take some 3-4 months atleast for the Government to fully print replacement currency. So the queues will last for a long time.

The Government initially said that people will be able to draw RS. 2000/- from their ATMs per day and from 19th onwards they will be able to draw Rs. 4000. However, the Govt. again raised the limit to Rs. 2500 and dropped the promise of raising the limit to Rs. 4000/- per day. Clearly they realise that it is impossible.

The initial order said that people will be able to exchange Rs. 4000 worth of old Rs. 500 and Rs. 1000 notes by filling a form. Now that limit has been reduced to Rs. 2000. People will old currencies can however deposit all the money in their bank accounts. However despite the Jan Dhan Yojana accounts not many in India have bank accounts. So that makes it very difficult for people.

The Government has also allowed people to withdraw Rs. 2.5Lakhs if a family has a marriage. This appears to be a fallout of Mr. Modi sarcastically saying in Japan that even marriages have been stopped and the people were heard laughing. The Government has now decided to fight that negative image by ensuring that anyone in the family having a marriage can draw Rs. 2.5L. So this again shows that the Government had not thought about this before ordering its implementation.

The Government realised that many people are going to exchange notes. Some of the people are visiting again and again. So to stop it the banks were asked to put indelible ink on the finger of people while exchanging old notes.  However, there was shortage of such ink, so the banks were advised to use the ink that dhobi's use to mark clothes. Now the Election commission has written to the finance ministry that that since this ink is only for use in elections, the finance ministry ask the banks to stop using it. This again shows how this Government is grappling with a bad idea which was implemented without planning. The Government is moving from one knee-jerk solution to another.

Mr. Modi had come to power by promising efficiency and development. Certainly this muddle headed idea and its poor implementation has left his carefully crafted image in tatters. If this impasse continues for some more days, which it is likely to be, the anger against the Government will rise and no amount of giving it a positive spin will suffice.

His past actions tell us that he will try some other big bang announcement to make people talk about it and forget the pain of notes ban. We haven't heard the last word yet on this issue.

Read the previous article: http://arjunaubacha.blogspot.in/2016/11/blackmoney-politics-way-forward.html

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.