Demonetisation in India

March 21, 2017

The Indian Government ramps up its tactics for curbing corruption and black money.

As part of his war against corruption, black money, money laundering, terrorism financing and counterfeit banknotes, India’s Prime Minister Narendra Modi announced on 8 November 2016 the demonetisation of INR 500 and INR 1,000 notes (worth approximately USD 7 and USD 14) within the country. These large denomination banknotes comprise 86% of the cash within the economy and led to substantial panic as nearly 90% of the country’s transactions are cash-based. 

The banning of these notes earned its fair share of praise and criticism. Critics have strongly opposed the planning and implementation and are sceptical of the impact that it may have on the average person. Others, however, are optimistic that its impact on Indian business will be positive in the long run. Given that the country ranks 76th on Transparency International’s Corruption Perception Index, it was a welcome move towards curbing corruption and black money in the economy.

Amnesty Period

The Government asked people holding old 500 and 1,000 notes to exchange/deposit them at banks between 24 November and 30 December 2016. If deposited, people were expected to show the source of the cash, or else be liable to tax and penalties. However, it was found that under the existing tax law, the provisions of the penalty would fail if an individual declared the cash as income from the current year. To plug this gap, the Government announced a new tax amnesty scheme providing for a higher tax rate (including penalty) than the standard tax rate on declarations of unaccounted cash deposited in banks. The Government has also made provisions for greater penalties for tax evaders.

Although members of the public faced some difficulties with smaller transactions and faced long queues to exchange banknotes, the overall reception has been positive and most people praised the move.

Part of the Masterplan

This is all part of the Government’s move towards simplifying the tax system, increasing transparency and reducing discretionary powers of the authorities. All payments of more than INR 5,000 made by Government bodies to vendors must now be made via a digital platform. The Government has also formed a committee to suggest ways of making India a cashless economy and move towards a digital economy.

Many economists believe that there will be a dip in the country’s Gross Domestic Product (GDP) over the next two quarters due to the recent demonetisation. It is hoped that the Government's push towards a digital economy through cashless online processes will result in reduced corruption and help create a more level playing field. More importantly, these online processes should reduce bureaucracy and make it easier to do business in India. We can expect to see the effects of these changes in the next one to two years.

In the long run, we expect that all of these measures will increase transparency, reduce corruption and make India an even more attractive investment destination. 

Article written by:

Maulik Doshi SKP

T: +91 22 6730 9000


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