In a surprise move, Prime Minister Narendra Modi demonetized high value currency on November 8th 2016. Within minutes the old 500 and 1000 rupee notes were no longer legal tender. Citizens of India could deposit these old 500 and 1000 rupee notes up to any limit in banks and post offices within December 30th 2016. The old notes could also be exchanged subject to limits.
More than 86% of currency by value was in old 500 and 1000 rupee notes. Yes, 86% of the scrapped currency was of value INR 15.44 Lakh Crore. The popular belief was that around INR 4 Lakh Crores would not find its way back to the system. This was the black money which the citizens of India who had hoarded black money for years, would destroy. They wanted to escape the long arm of the law and not get caught for tax evasion.
Now, rupee notes are a liability to the RBI. If black money is destroyed the liability of RBI reduces. RBI will not have to print new currency against the destroyed black money. The RBI would transfer the profits to the Government as a special dividend. Imagine what developmental activities the Government would carry out with all this money?
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If you take a look at the annual report of the RBI, you will see that INR 15.28 Lakh Crores of old 500 and 1000 rupee notes has been deposited or exchanged. This means 99% of the currency notes have returned to the system. Critics of demonetization are jumping with joy asking where is the INR 4 Lakh crore profit to the Government.
Yes...this money has come back, but this doesn't mean there was no black money. It simply has made its way back into the banking system. Critics of demonetization have missed the big picture.
1. Black Money comes back into the system and tax evaders are caught
Tax evaders had found novel methods of getting black money into the system. Tax evaders have tried to legalize their unaccounted money using mules and proxies to make deposits on their behalf. They have made high-value purchases using backdated bills and even connived with unscrupulous bank officials to exchange old currency. Yes, nobody likes to see their wealth, even illegal wealth destroyed. It was a matter of time before unscrupulous citizens and tax evaders would find some way...any way... to deposit their black money back into the system.
This is what the Finance Minister has to say. Just the fact that money got deposited in banks does not mean that all of it is legitimate money. The CEO of Kotak Mahindra Bank, Uday Kotak, says that demonetization has given a much cleaner economy and has left money trails. JP Morgan India CEO Kalpana Morparia, said demonetization has given a lot of data to the government to work on.
The Prime Minister Narendra Modi at a conference of tax officials, has asked that data analytics be used to track and determine undeclared income and wealth. Without demonetization would black money have flowed into the system and could tax evaders ever have been caught?
2. PM Modi unleashes robo-audits on tax evaders
PM Modi has asked the income tax department to decrease the human interface and use technology to catch tax evaders. Data analytics is a powerful weapon in the hands of the taxman. After demonetization the tax department has detected many suspicious bank transactions. These suspicious transactions could be as high as INR 1.7 - 1.8 Lakh crores. Now let's welcome Part 2 of demonetization.
The tax department will scrutinize all the suspicious cash deposits and transactions using tools like data analytics. What's special about data analytics? Data analytics can easily establish links between people as well as their income and investments. Data analytics can scrutinize both structured and unstructured data.
The tax department can establish relationships between different entities and then analyze them using data analytics. Data analytics can use data like addresses, phone calls, social media interactions, IT returns and even travel trends to nail suspicious bank transactions.
Robo-audits can easily compare your tax information with third party data and catch you and other tax evaders.
3. Your financial data can betray you to the taxman
You avail tax deductions by showing visits to Singapore as business visits. If the taxman checks your posts on social media and finds you having fun all the time, you are in deep trouble. The tax department can use data from third party websites to get an idea of your spending habits, your income, taxes you pay and so on. The tax department now has a lot of information on you, which is a financial DNA of sorts.
The tax department will compare your financial DNA with the income tax returns (ITR) you have filed and check for tax evasion.
Demonetization has brought black money into banks. Now, tax evaders who have been hoarding black money and deposited this black money in banks will be caught. The tax department will catch these tax evaders who have deposited black money using data analytics. Just depositing black money in banks, doesn't make it white. Be Wise, Get Rich.
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