It’s been a couple of months now since PM Modi’s shock-treatment to the economy – by derecognising the large-denomination 500 and 1000 rupee bank notes, as a first step in the war against terror financing, corruption, shadow economy, tax evasion and circulation of fake notes. This ‘demonetisation’ rendered 86% of all circulating cash in the Indian economy illegal, causing chaos for low-income, ryot and rural households in the short term – purely because large numbers of them are still ‘unbanked.’ We saw mile-long queues for exchanging old notes, experienced agonising short-supplies of the new 500 and 2000 rupee notes, the limits on withdrawal and the lack of calibrated ATM Machines, not to mention deaths that peppered this tumult. Added to these woes hangs the looming final deadline for deposit of old bank notes like a damocles’ sword – March end with the RBI. NRI Achievers brings you a considered analysis of the implications, unravelling Demonetisation for our readers.
What do non-residents need to do in this aftermath of demonetisation? It has been common practice for NRIs to carry Indian currency with them when they go abroad, mainly for the convenience of not having to exchange forex when they return the next time. And rules being observed more in the breach than in the observance in the past, most NRIs have carried sumptuous amounts of Indian currency with them to their host nations. Now here’s what they will need to do in response to Demonetization:
- Those travelling inwards between 02 January and 31 March 2017 may visit any of the designated RBI offices with required documentation like passport and visa details that prove they were out of the country to exchange the notes.
- Those having the money abroad may can send it across to India through someone trustworthy and authorize them to exchange it on their behalf with the RBI.
- Passengers (excluding citizens of Pakistan/Bangladesh) may bring or take out of India (other than to Nepal/Bhutan) – upto INR 25,000.
- Passengers (again excluding citizens of Pakistan/Bangladesh) may bring or take out of India (again other than to Nepal/Bhutan) unlimited foreign currency, but have to fill up a ‘Currency Declaration Form’ if total cash is more than US$ 5000, or total is more than US$ 10,000.
The demonetisation move has resulted in banks witnessing cash deposits of approximately INR 14.5 lakh crores until recently, which in the short term may cause a liquidity squeeze as it is assessed that over 90% of consumer purchases in India are made in cash, and over 80% workers are paid in cash. This will most likely act as a speed-breaker for growth, with our GDP expected to take a hit of 0.7 – 1%, led by reduced consumption in FMCG, retailing, jewellery, luxury & white goods and the construction sector. But on the other hand, if we look at the longer-term goal of making the Indian economy stronger, eliminating the unaccounted and untaxed parallel cash economy, and moving towards digital transactions by pushing demonetization, then the move does deserve some praise.
Consulting firm McKinsey & Co estimates India’s shadow economy at 26% of GDP in 2013, implying that almost one-fourth of the economy is unaccounted and goes untaxed. Further, looking at public tax data disclosed by government, a total of 2.87 crore individuals filed income tax returns for 2011-12, but 1.62 crore of them did not pay any tax — leaving the number of taxpayers at just about 1.25 crore – which was close to one percent of the country’s total population of about 123 crore at that time. Currently, it is estimated that 3% of over 1 billion people in the country are estimated to pay income tax. Here are some more things that are important to note:
- Sectoral analysis of the admission of undisclosed income during searches conducted by the IT Department in FY16 reveal that main sectors generating black money are manufacturing (31%), real estate (29%), trading (8%), educational institutions (7%), contractors (6%), services (5%), and gems & jewellery (4%).
- According to RBI’s annual report published this year, more than 2.61 lakh counterfeit notes of INR 500 denomination were detected by banks in 2015-2016, while another 1.43 lakh fake notes of INR 1000 were also detected.
- By value, counterfeit notes of INR 500 & 1000 accounted for more than 92% of all fake currency detected by banks across the country.
Given this sort of a scenario, It is indeed important that we look at demonetization as an important step taken to curb the shadow economy, in tandem with the other reforms that have so far been undertaken to streamline the economy:
- Supreme Court-Monitored SIT (Special Investigation Team) on Black Money. Constituted in May 2014 to monitor the probe into black money cases – on large amounts of cash stashed abroad by evading taxes and/or generated through unlawful activities.
- Jan Dhan Yojana – the ‘PMJDY’ launched on August 28, 2014. Estimated 25.45 crore accounts opened so far. INR 45,302.48 crore deposited into these accounts.
- Renegotiation of the ‘Double Tax Avoidance Agreement – with Mauritius – to impose Capital Gains Tax if such capital asset is situated in India. Initiation of ‘Automatic Information Exchange Agreements’ with other known tax havens. From 2017, OECD countries have agreed to share information on foreign account holders with their home countries.
- Introducing scheme under the Black Money (Undisclosed Foreign Income and Assets) & Imposition of Tax Act, 2015, for Foreign Black Money – whilst total disclosures under this Scheme were a mite underwhelming, the Act also has various stringent provisions for penalty and prosecution of foreign Black money holder’s unearthed during future investigations by the tax department. A good step.
- For the investigation of the Panama Paper leaks, the government bringing in the constitution of a Multi-Agency Group (MAG) with officers of the Central Board of Direct Taxes (CBDT), Reserve Bank of India (RBI), Enforcement Directorate (ED) and Financial Intelligence Unit (FIU).
- Opening the ‘Income Disclosure Scheme 2016’ on June 2016 to provide an opportunity to black-money holders to come clean by declaring assets by September 30, 2016, and paying tax and penalty of 45% on it. Though the IT department had identified 90 lakh high value transactions without PANs, final disclosures were only to the tune of INR 65,250 crore.
- Imposition of a penalty of 20% on all cash transactions exceeding INR 20,000 to purchase or sell property (real estate). Aimed at curbing the role of black money in real estate transactions.
- Tax Collection at Source at a nominal rate of 1% on cash purchases exceeding INR 2 lakh. To check high value cash transactions and create an audit trail.
- Benami Transaction (Prohibition) Amendment Bill – Parliament enacted this in August 2016 by passing the Benami Transactions (Prohibition) Amendment Act, 2016 (BTP Amendment Act), which came into force from November 1, 2016. The law seeks to give more teeth to authorities in curbing benami transactions.
Notwithstanding all these, there is no gainsaying that the biggest reform would be the encouragment of digitisation and cashless banking to root out the parallel economy in the long run. According to a 2014 study ‘The Cost Of Cash in India’ by Tufts University, cash operations cost the RBI and commercial banks about INR 21,000 crore per annum. Also, a shift away from cash will make it more difficult for tax evaders to hide incomes, bringing considerable benefit to a monetarily constrained country that we continue to be. There are various digital payment options available today and many more are likely to come up in future as people start adapting to cashless transactions.
- Plastic Money (Debit Cards/Credit Cards/Charge Cards)
- eWallets (PayZapp, Chillr, SBI Buddy, PayTM, Mobikwik …)
- UPI Apps (SBI Pay, Axis Pay )
- UPI Wallets (PhonePe, Pockets)
However, there are certain challenges and pain-points in India that need to be tackled post-haste if we really do want to usher in a digital transformation such as the one which is a world trend metamorphosing into a veritable torrent …
- Lack of access to banking – leaves no option other than cash for a large fraction of the population.
- No extra transaction costs in cash payments. E-payments so far unviable for small value transactions.
- Flexibility and simplicity of Cash. No worries of losing connectivity and transactions.
- Large unorganized sector – majority retailers, suppliers and service providers with no infra for e-transactions.
- Lack of consumer education / awareness regarding use of cards and digital payment modes.
- Cyber security, data privacy, and above all, connectivity. We lack in all three, especially the last.
Though the government has taken steps and introduced some measures, their implementation is going to take some time. Like for instance:
- Discounts announced on digital payments towards auto-fuel, service tax exemption on payments upto INR 2000, 8-10% off on insurance premia, INR 100 per month rental charge by PSU Banks, deployment of 2 PoS devices in each village with upto 10,000 residents.
- RBI issuing licences to open new-age small-finance banks and payments banks that are expected to give a push to financial inclusion and take innovative banking solutions to the doorsteps of the masses.
- The launch of UPI (Unified Payments Interface) by the National Payments Corp of India.
- The JAM Trinity Idea: Jan-Dhan Yojana, Aadhar, Mobile connectivity.
- Efforts to improve financial literacy undertaken by RBI as well as banks, microfinance institutions, NABARD, and stock exchanges et al.
- Strengthening network of business correspondents in rural areas, equipping all ATMs with Aadhar authentication facility.
- Ensuring inter-operability between various banking systems – entrusted to National Payments Corporation of India.
- Provisoning of micro ATMs to more than one lakh ration or fair price shops by March 2017.
In sum, it does seem like India has taken a structurally positive step that focuses more on the organised rather than the unorganised sector. As the country undergoes this huge transformation from a cash-dominant economy to a less-cash reliant economy, India Inc. will definitely feel the pinch in terms of lower off-takes in volumes in the short-term.
However, the longer term macro-economic effects that will accrue to the economy in the form of lower inflation levels, lower interest rates and lower budget deficits will benefit all. The parallel unaccounted-for economy will come in the reporting domain, which will provide a boost to the real GDP. This would also result in increased tax compliance in addition to the indirect boost that GST is expected to bring. It is also expected that with the data made available to the government on deposits in banks, the tax base would broaden over a period of time and enhance revenue collection from taxes, which in turn would facilitate tax rate reduction in the long term. The digitisation of transactions as well as deposits made by the public will open the floodgates of funds available with the banks, but the challenge before them now is how to deploy this windfall, as credit growth is still sluggish. As an balm in the aftermath of demonetisation, there is an urgent need for the government to now introduce a whole slew of measures to address and stabilise the resurgence in the economy that is beound to ensue in the coming years.