Sandeep Ahuja & Co.

Established in the year 1986, we are a leading chartered accountancy firm based in Delhi & NCR rendering comprehensive professional services which include statutory audit, internal audit, direct tax, transfer pricing, GST, bank audit, propriety audit, cost accounting, internal financial controls and risk advisory.

Tuesday, November 15, 2016

Demonetisation framework, updates, effects & public reviews

I. Demonetisation of High Value Currency Notes
Govt. of India announced on 8 th November 2016 that Legal tender character of High Denomination Currency notes of Rs. 1000 & Rs. 500 has been cancelled through a press release dated 8th November 2016.Thereby, making the currency notes of Rs. 500 &  1000 useless unless deposited in a bank account or exchanged with new currency notes.
II. Size & Volume of Shadow Economy of which Fake currency notes are a major contributor:
As per the estimates of The World Bank in July, 2010  the size of the shadow economy for India was determined at  20.7% of the GDP in 1999 which has risen  to 23.2% in 2007. Shadow economy generates inflation, which adversely affects the poor and the middle classes more than others. As a result, Government is also deprived of its legitimate revenues, which could have been otherwise used for public welfare and development activities.
III. New Currency Notes
Therefore to counter this menace of Fake Indian Currency Notes, New Series bank notes of Rs.500/- and Rs.2,000/- denominations will be introduced for circulation from 10th November, 2016.  Introduction of new series of banknotes, which will be distinctly different from the current ones in terms of look, design, size and color has been planned & issued in market.
IV. Political Force
 The BJP Govt. has taken a no. of steps for curbing the menace of Black money in India as compared to previous Governments. Some of the major steps taken by current Govt in this direction are:
·         Implementing the Income Declaration Scheme 2016.
·         Encouraging the use of non-cash and digital payments.
·         Setting up of a Special Investigation Team (SIT)
·         Enacting a law regarding undisclosed foreign income and assets
·         Understanding with Switzerland for getting information on Bank accounts held by Indians with HSBC.
·         Amending the Benami Transactions Act; 
However, the top leadership of BJP somehow felt that public was still not satisfied with their efforts to curb black money as evident from the blunt offensive from opposition parties. Therefore, to win the trust of people & remind them about the commitment of current Govt. toward Black money, Policy for demonetisation of Rs. 500 & Rs. 1000 bank notes has been introduced.

V. Major Highlights of Currency Demonetization Policy
1.       Last Date for Currency Exchange: Old Rs. 1000/ 500 may be deposited or exchanged on or before 30th December 2016.
2.       Maximum Limit on Currency Exchange for A week per Person: However, Currency can be exchanged for a maximum sum of Rs. 4000 which has been revised to Rs. 4500 at any Bank Branch, any of the 19 Issue Offices of RBI & post offices & such limit will be reviewed after 15 days i.e. after 25th November.
3.       No Maximum Limit for Deposits: There is no maximum limit on amount that can be deposit in a bank account. However, only a maximum amount of Rs. 50,000 can be deposited  if KYC requirements of such account are not complete.
4.       Specific Authorization: For depositing Old Rs. 1000/ Rs 500 notes in bank account of a 3rd person, a letter from the depositee authorizing the depositor to deposit old Rs. 1000/ Rs. 500 notes shall be produced before bank officials.  
5.       Cash Withdrawl From Over the Counter:
i. For Savings Bank Account: Cash withdrawal from over the counter is restricted to Rs. 24,000 for a week which may be withdrawn either once or in installments.
ii. For Current Bank Account: For Current bank accounts, cash withdrawal limited to Rs. 50,000 per week.
6.       Deposit of Cash by persons who are not present in the country: Any third person can deposit cash on behalf   of such persons provided such third person is authorized in writing by the depositee by following the standard banking procedures.
7.       Exchange Facilities for Arriving & Departing Passengers at International Airports: In such cases, exchange of old currency notes of Rs. 500/Rs.1000 is allowed subject to a maximum limit of Rs.5000.
8.       Cash Deposit in Any Branch of Bank with which depositee holds an account: Cash can be deposited at any of the branch of bank with which depositee has an account.
9.       Cash deposit With a Bank with which depositee does not hold any account: Cash can be deposited with a bank with which depositee does not hold any Bank Account subject to furnishing  valid identity proof and bank account details will be required for electronic fund transfer .
VI. Penalty Provisions for Deposit of Excess Cash than Declared in Income Tax Return.
Special Provision in Finance Act, 2016: The Finance Act 2016 has replaced Section 271 (1) (c) of Income Tax Act,1961 with Section 270A of Finance Act,1961 i.e. Penalty @ 200% for Underreporting & Misreporting of Income for AY on or after 1st day of April,2017 & subsequent assessment years.
Thus, keeping our discussion strictly limited to penalty under currency demonetisation, Penalty @ 200% of underreported income shall be levied  if:
ITR is Filed: Cash deposited in Bank account is not proportionate with the cash or income declared in Income tax return.
ITR is not Filed: Where Assessee could not explain the amount of cash deposited by him/her in bank account & such amount exceeds the basic exemption limit of Rs. 2,50,000.
In other words, following cases will attract penalty @ 200% u/s 270A for disproportionate cash deposited in Bank Account.
·         Failure to record Investments in the books of accounts.
·         Claim of expenditure not substantiated by any evidence.
·         Recording of false entry in the books of Accounts.
·         Failure to record any receipt having a bearing on total income.
VI. Conclusion:
Demonetization of High Value currency notes of Rs. 500/1000 is a significant step towards curbing the menace of black money.  This move has multiple benefits for the country such as:                         
·         Destruction of Arms Funding mechanisms for terrorists & separatist organisatons.
·         Incremental revenue for the Government.
·         Move Purchasing power in the hands of common man.
However, Demonetization scheme only focusses on the problem of Black money hoarded in the form of cash. Black money that is hoarded in form of Gold & other assets remains unaffected from this scheme. Assets other than cash remains an area that need to be brought under scanner of taxman for curbing the menace of Black Money.
Ineffective Monitoring of Cash Exchange of Rs. 4,000: A person can exchange money more than once in a fortnight since there is no centralized server for all the banks. As a result, one person can exchange Rs. 4000 more than once in a fortnight from different banks, which is used as a means to convert Black Money on a very large scale.
Distortion of Objective of Demonetization through Exemptions for Public Conveniences: Exemptions to Chemists for cash deposits of high denomination notes with banks has opened a window for Black Money holders to convert their cash through chemists. Similarly, Donations to NGO's & Religious trusts should be strictly scrutinized, as they are presenting an opportunity to the Black Money holders to convert their black money by way of colluding with the management of these installations in lieu of some consideration.   
Open Offers for Conversion of Cash: It has been observed that many of Black Buck holders have started colluding with Small shopkeepers, Auto rickshaw drivers & others who receive small denomination currency for their daily work to exchange their High denomination currency notes for small denomination notes in lieu of 20% or 40% commission for the money exchanged.    
Further, Marginalised sections of society like, daily wagers, labourers etc. who do not have any reserves of money except cash for their daily expense are facing harrassment in the form of long queues for exchange of money, black marketing of small denomination currency notes & so on. These people do not have any option but to opt for discounting of Rs. 500/1000 currency notes.
Payments In High Denomination Notes Only: Further, Rich people with big hoards' of High denomination currency notes are paying their employees only in Rs. 500/1000 currency notes, thereby forcing them to get exploited in the market & face harassment.
In a nutshell, it can be said that Govt. does not have any control over such alternate means of conversion of Black money & prima facie, it appears to be another scheme that creates much louder noise than the tangible benefits provided by it. In view of above observations, it is quiet evident that Govt. does no have any plans to curb such alternate means of conversion leading  the  purpose of entire  Demonetization exercise futile.

Therefore, it needs to be thought whether, incremental gain from such currency demonetisation is higher than the harassment 80%  of population is facing. Government could have prepared a better plan than to make people wait in long queues & frustrated.
Contributed by : Tanveer Alam CA Finalist

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