“Fighting corruption is not just good governance. It’s self defence, it is patriotism”- Joe Bidden Vice President of USA.
O8 November 2016 will be remembered for a long time in our country since it marked the introduction of perhaps the biggest demonetisation drive undertaken by any government ever across the world. Just terming it as a bold step would perhaps qualify as the understatement of the year. If the government plays the follow up game effectively it could then be termed as a watershed move in the history if independent India. In absence of an effective follow-up to the demonetisation drive, the government is not likely to achieve much. All that it would achieve is a miniscule short term impact on corruption and black money while the cost paid by majority of the citizens, who have nothing to do with corruption and hoarding black money, would be colossal. The nation would feel let down since the government will have no sizeable gains to show for the sacrifices made by the common man. The question is what the government can do as part of follow up measures to make a serious dent in corruption and black money.
The solution is simple – just demonetise the new Rs 2,000 notes that are in circulation at an early date after the deadline of 31 December for depositing old currency notes in banks (other than RBI) expires. The prime need to be addressed before the new note ban is to make banks flush with other denominations of currency notes – Rs 500 and below. This will ensure adequate cash in circulation so that there is no repeat of hardships that people faced after 08 November. The other question that would need answers is what to do with the new Rs 2,000 currency notes that people would be holding.
Logically no one should have a huge pile of new currency notes issued after 08 November. In last eight weeks the maximum an individual could have drawn from banks was about Rs 192,000 assuming he could get his full entitlement of Rs 24,000 each week. In all probability this would not have been possible since most banks were disbursing lower amounts of new currency due to the shortage. In between part of the disbursement was also made in other denominations. It would be fair to assume that some of the cash withdrawn would have been used and net available with any individual, barring a few exceptions, would be much lower than the maximum possible amount of Rs 192,000 in new Rs 2,000 notes. Therefore the government will not be obliged to replace any amount above Rs 192,000.
There will be individuals who have managed to replace their old black money with new bank notes as is obvious from various cases reported in the media on a daily basis. It is unimportant how they managed to do it since one can safely term it as black money but in new currency notes. Most of it would be in Rs 2,000 notes as of now. The withdrawal of Rs 2,000 notes will make sure that any amount held above Rs 192,000 in Rs 2,000 notes will be worthless. The next question is how to replace the legitimately held Rs 2,000 notes. Ideally there should be no immediate replacement of these since account holders could draw fresh cash (available freely) from banks and survive. For replacement a well considered fool proof methodology could be adopted which would have to be different for income tax payers and non income tax payers.
Income Tax Payers
- Allow individuals to deposit Rs 2,000 notes in their bank up to 31 March 2017 from where the money was withdrawn after 08 November 2016. Maximum limit for such deposits would not exceed Rs 192,000 per individual subject to proof of accumulated withdrawals from 08 November till date of ban of Rs 2,000 notes. If withdrawal was less, the banks must accept lesser amount.
- Banks must notify electronically the IT department where an individual has a PAN number about the amount deposited and issue a confirmation number to the individual.
- Based on the above confirmation number, all individuals who file income tax returns for FY 2016-17 could claim a refund for the amount deposited that should be credited by the government (IT department) electronically to their accounts with no questions asked.
- A similar procedure could be adopted for corporates and business entities with PAN numbers.
Non Income Tax Payers
- Allow individuals to deposit new Rs 2,000 notes in their bank up to 31 March 2017 from where the money was withdrawn after 08 November 2016. Maximum limit for such deposits would not exceed Rs 192,000 per individual subject to proof of accumulated withdrawals from 08 November till date of ban of Rs 2,000 notes. If withdrawal was less, the banks must accept lesser amount.
- Banks should submit details of all such transactions to RBI on a weekly basis along with currency notes deposited. For small amounts not exceeding Rs 20,000 (Up to ten notes of Rs 2,000), RBI should allow banks to give credit to individual straight away after the report is submitted to RBI. For sums beyond this limit, RBI could issue bankers’ cheques in favour of individual accounts within a period of 30 days.
- For small businesses that do not have a PAN number and do not pay tax, a similar procedure could be adopted with same or different limits.
Individuals with No Bank Account: If an individual does not have a bank account the only way he could have a few notes of Rs 2,000 in new currency would be by way of salary or payment for work/services rendered. The government could allow a onetime replacement of the same subject to a limit of Rs 10,000 per individual (5x Rs 2,000) with proof of identity being a prerequisite for such a transaction. Use of indelible ink as a marker too may be considered for such transactions.
Foreign Visitors: The new Rs 2,000 notes held with foreign visitors must be exchanged without any fuss based on record of foreign exchange converted or a generous limit of Rs 20,000 per individual.
Wedding & Other Gifts: There could be some cases where gifts were received in Rs 2,000 currency notes by individuals after 08 November 2016. This will be a grey area where government will have to make some exceptions based on individual cases backed by reasonable proof. It will be highly unlikely that Rs 2,000 notes were passed off as gifts freely since availability was very restricted for normal law abiding citizens. Barring weddings, it may be prudent to assume that such cash gifts (in Rs 2,000 notes) were not given on other minor occasions.
The above procedures will ensure that those holding huge sums of black money in new Rs 2,000 notes will not be allowed to exploit the savings accounts of others including Jana Dhan accounts since deposit amount will be linked with withdrawal amount. As Rs 2,000 note will not be a legal tender what so ever, there will be no scope to exchange it for any other denomination currency even at a discounted value. Any new notes that cannot be deposited as per above procedure would be worthless in the hands of the holder. This step, in all probability, should deliver a telling blow on black money. It is time we incorporate self defence and patriotism in our march towards good governance.