Home News Reports All you need to know about the ban on Rs 500 / Rs 1000 notes

All you need to know about the ban on Rs 500 / Rs 1000 notes

In May 2014, in its first decision after taking charge, Prime Minister Narendra Modi’s government announced the formation of a Special Investigation Team (SIT) to probe black money, mostly stashed abroad. In 2015 they followed it up with the Black Money (Undisclosed Foreign Income and Assets) Act to further tap black money abroad. But the popular refrain among experts was that the Government should focus on the domestic black money since the foreign black money would have gone places by now.

In 2014, we also saw the launch of the world’s biggest financial inclusion scheme: the Jan Dhan Yojana, under which, till 2nd November 2016 almost 25.50 crore bank accounts were opened. This scheme brought a huge number of people hitherto untouched by the banking sector, into the banking net.

Then in 2016 came the big squeeze for the big guns: The Income Declaration Scheme of the Income Tax Department which gave people one last chance to come clean, pay taxes at a slightly concessional rate (after factoring in penalties etc) and be done with it. The Prime Minister was in fact categorical in his warning in September 2016:

“No one should blame me if I take tough decisions after the 30th (of September)”

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And yesterday, he lived up to his promise. Yesterday, 8/11/2016 was when India effectively nuked the scoundrels within its geographical boundary. The PM, in an address to the nation, announced that in order to fight black money and counterfeit money which is used for corruption, terror activities and drugs etc, all existing notes of Rs 500 & Rs 1000 would be “demonetised” i.e. they would stop being legal tender from 8/11/2016 midnight.

So here’s whats going to happen:

1. Banks will be shut on November 9 and ATMs on November 9 and some also on November 10, to prepare for this massive exercise including stocking up on the new notes of Rs 500 and Rs 2000 which have been printed in advance by the RBI.

2. Since Rs 500/Rs 1000 notes are no longer valid, people have been given upto 30 December to deposit this money into their bank accounts. Those unable to do so by 30 December for some reason, can change them till 31 March 2017, but they will have to furnish an ID proof.

3. Upto Rs 4000 worth of such old notes will be allowed to be exchanged for new notes of same value. ATMs will dispense upto a maximum of ₹2,000/- per card per day upto 18th November, 2016. The limit will be raised to ₹4000/- per day per card from 19th November 2016 onwards. One can also withdraw cash against withdrawal slip or cheque subject to ceiling of ₹10,000/- in a day within an overall limit of ₹20,000/- in a week (including withdrawals from ATMs) for the first fortnight i.e. upto 24th November 2016.

3. All other currency notes will continue to be legal. There will be no change in any other form of monetary exchange — cheques, demand drafts, credit and debit cards and electronic fund transfer.

4. For 72 hours from midnight of 8th November, old notes can be used for paying for hospitalisation charges at government hospitals, for bus tickets at government bus stands, train tickets at railway stations, and air tickets at airports. The old notes will also be accepted at petrol stations, Government approved Consumer Cooperative stores and milk booths authorised by the Government, and at crematoriums.

5. Foreign tourists can purchase foreign exchange equivalent to ₹5000 using these old notes at airport exchange counters within 72 hours after the notification, provided they present proof of purchasing the OHD notes.

The implications of this move are multifold:

a. 9th November will be the most painful day, with majority of old notes (Rs 500 and Rs 1000) worthless and the new notes not yet available.

b. From 10th onwards, new valid currency will be available but in limited quantity, so even then, high value cash transactions (egs tendering fees at the local registrars office) would be difficult.

c. Anyone depositing old notes into their bank account will have to be careful of one thing: The Income Tax Department can (and most probably will) demand to know the source of such cash, especially if the amount is substantial. If you earned “white” income and withdrew cash from that, then you are safe, but if this was unaccounted income, then you may have some explaining to do. In effect, this is a quasi-income disclosure scheme, where you have to deposit your unaccounted “black” cash and pay taxes on it to make it “white”.

d. How will the IT Department know of your deposits? It has been reported that banks will keep a track of such deposits. The IT Department too will keep track of deposits over Rs 2 lakhs. Further, the tax department already has mechanisms in place such as compulsory quoting of PAN for cash deposits above Rs 50000 and a requirement that banks report to the department details of customers who deposited more than Rs 10 lakhs in cash during the year.

e. Who will this hurt the most? Medium level businessmen and traders, since the lower level guys probably do not have substantial black money, and the upper level guys usually have to keep transactions above board since they have to comply with more regulations. This incidentally will hit BJP’s core support base hard, who are mostly traders.

f. The nation’s biggest state election, Uttar Pradesh, is just around the corner, and this large scale flushing out of cash from the economy will have a huge impact on the calculations of all parties including the BJP.

g. Although in the short term, black money dealings, hawala etc will come down, in the longer run crooks will manage to find loopholes. .

Is this plan free from flaws? No. There is always the risk that the infusion of the new currency notes is not sufficient to satiate the demand for notes. What happens then? Near term there may be some chaos, but over a period of time things will return to normal. Businesses which depend largely on black money will suffer, egs real estate. Banks will have an interesting quandary: Deposits would increase since new money would flow in. But this money comes with the obligation to pay interest. Can they mobilize these funds fast enough and disburse loans, especially in a sluggish economy?

One of the biggest concerns is this: The entire rationale to withdrawing larger denomination notes was to stop encouraging black money deals: Its significantly harder to carry around 5 to 10 times more number of Rs 100 notes. Then why has the Government introduced the Rs 2000 note? Wont this make it easier?

Firstly, the Government has declared that careful monitoring and care will be taken to ensure that the proportion of high denomination (Rs 2000) notes in terms of value does not become as high as it is now. How this will work out exactly, remains to be seen.

Secondly, this could be just round 1, where the Rs 2000 notes are used just to make it easier to exchange the old notes of lower denomination. We could have a round 2 later on when these notes to our withdrawn.

The Government really needs to be applauded for various points:

1. First of all, the political capital expended in this is huge. BJP’s core support base includes businessmen and they are going to be hurt bad. Also, political parties will be hit badly, including the BJP.

2. This plan was presumably in the works for a long time, since the printing of the new notes would take time. So to keep this move under wraps for such a long time is commendable.

3. The Jan Dhan Yojana by itself was a big move, but looking at this latest step, the scheme becomes even more crucial. Imagine the pandemonium if 25 crore odd people had no access to bank accounts.

4. In the larger scheme of things, when one combines all the moves such as the Black Money (Undisclosed Foreign Income and Assets) Act, Jan Dhan Yojana, Income Disclosure scheme, highly network based GST, and now this, it reveals the single focal point of tackling the black economy head on.

All said and done, this is a revolutionary move. Barely 4 hours of notice, and boom, in one stroke the decades-long planning of crooks has been undone to a large extent. Sure there will be a few who will find loopholes to an extent, but for the most part of it, this move will be drive a dagger through the heart of the black economy in India. And GST which is expected to come soon, could very well be the nails in the coffin of  black economy. Suit-boot ki sarkar anyone?

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