Cash, no Cash

Cash, no Cash

Representation image [Photo : iStock]

The recent Reserve Bank of India (RBI) circular, withdrawing Rs 2,000 notes from circulation, from 30 September 2023, raised the spectre of a second demonetisation in the public mind ~ even though RBI has stated that the notes were being withdrawn in pursuance of its ‘Clean Note Policy.’

Officially, the Government has said nothing further on this subject; yet a tweet by Nripendra Misra, former Principal Secretary to the PM and Chairman of Shri Ram Janmabhoomi Teerth Kshetra, congratulating PM Modi for his determination to fight black money and tax evasion by withdrawing Rs 2,000 notes, reinforces the public perception of partial demonetisation.

Absolving the Government from any blame for introduction of Rs 2,000 notes, Mr Misra added: “PM Modi was not at all in favour of (introducing) Rs 2000 notes. But, as demonetisation was to be done in a limited time, he gave reluctant permission for it.”


It is no secret the ruling party believes that Rs.2,000 notes are responsible for facilitating tax evasion and corruption; in the 2022 Winter Session of Parliament, BJP MPs led by Sushil Modi, demanded a ban on Rs 2,000 notes. The Parliamentary debate reinforced market rumours that had been forecasting the demise of Rs.2,000 notes.

Actually, the RBI had stopped the printing of Rs 2,000 notes for the last three years and had been quietly withdrawing them from circulation; the total value of Rs 2,000 notes in circulation had declined from a peak of Rs 6.73 lakh crore on 31 March 2018 (37.3 per cent of notes in circulation), to Rs.3.62 lakh crores, constituting only 10.8 per cent of notes in circulation, as on 31 March 2023.

Therefore, the elimination of Rs.2,000 notes would have automatically been achieved in the next two-three years. Revisiting the demonetisation of 2016, one sees that in the end, almost the entire lot of demonetised currency was deposited. Also, no fake currency was detected nor any significant amount of black money was unearthed.

On the other hand, the public was greatly inconvenienced during the entire fifty days of demonetisation; nearly 150 persons died standing in queues, for withdrawing their own money from banks.

A number of ingenious methods to work around Government sanctions were invented, serious allegations emerged against bankers and gold dealers, for facilitating illegal transactions in demonetised currency.

Significantly, no moneybag was ever noticed standing in line to change demonetised currency, rather such queues consisted of ordinary citizens, leading one to conclude that demonetisation did not affect the persons for whom it was intended, but impacted ordinary citizens harshly.

The proposed withdrawal of Rs 2,000 notes has started showing its ill effects. Smaller business establishments are not accepting Rs 2,000 notes; persons in possession of even small numbers of Rs 2,000 notes have to go to banks, stand in queue and fill out forms to exchange their banknotes. Senior citizens who had kept apart money for medical emergencies are unsure if hospitals would accept the Rs 2,000 notes, so diligently saved by them.

Going to the bank and exchanging Rs.2,000 notes is the only option left, but fear of receiving unwelcome attention from the Income-tax Department is a definite possibility.

Contrary to the belief of our political masters, corruption and black money are a malaise of which unaccounted cash is only the manifestation; till the root cause of these maladies is addressed, unaccounted assets would always exist, in one form or the other.

Also, contrary to what is widely canvassed, most of the unaccounted money is not held in cash, which is unproductive, subject to depreciation through inflation, runs the risk of being stolen, being eaten by termites or being demonetised. Rather, in my experience as a taxman, most of the unaccounted assets are held in real estate, gold and business inventories.

Apart from conspicuous consumption, unaccounted cash held by businesses is mostly to fulfil the requirement of greasing the palms of politicians and officialdom or to donate to political parties at the time of elections. It is an oversimplification that elimination of cash would eliminate corruption; the corrupt would satiate their appetites in other ways.

Black money being highly volatile would surface in other forms and other locations. Financial Year 2022-23, saw both direct and indirect tax collections reaching record levels; particularly, direct tax collections of Rs 16.61 lakh crore exceeded Budget Estimates by 17 per cent, and the earlier year’s collection by 17.63 per cent. In these circumstances, disruptive steps like withdrawing currency from circulation to boost tax collection appear to be overkill.

Similar was the case of imposition of TCS at the rate of 20 per cent on all foreign credit card spends. Since PAN is necessary for issue of credit cards, in almost all cases, TCS would have been reclaimed, but after a long gap and after considerable paper work, thus reducing the ‘ease of living,’ sought to be enhanced by PM Modi.

Many methods have been tried for elimination of black money; we had several rounds of demonetisation, several voluntary disclosure schemes, some schemes to regularise undisclosed foreign assets, and so on. The only commonality between all such measures was their failure to prevent generation of black money.

Strategically declaring their black money, tax evaders took full advantage of the frequently announced Government schemes. However, not many of the tax evaders discontinued their tax evading ways, so, after a few years, things came back to square one. Data leaks like the Panama Papers, Paradise Papers, the Pandora papers etc. show that citizens across nationalities practice tax evasion; same names figuring in a number of data leaks go to show that the moneyed class evades taxes with impunity.

Looked at in the context of Indians involved in stashing funds abroad, one finds that investigations were launched against many such persons, with much fanfare but most of these people are still very much in the public eye, years after they were named. One can only assume that not much has come out of the cases against them. Since elimination of black money does not appear possible in the short or medium term, we can only aim at limiting its generation. To achieve this purpose, the tax administration has to be strengthened and some changes in tax laws are required.

Historically, the Government has entrusted both these task to outside experts, but it may be better to allow new ideas to emerge, from within the organisation. Unfortunately, such initiatives have been discouraged; serious administrative action was taken against some Indian Revenue Service probationers and their faculty, when they dared to suggest some measures for enhancement of tax collection.

To curb flight of capital, and tax evasion in international transactions, the Indian tax administration needs to engage proactively with foreign tax jurisdictions. Also, some fine tuning is necessary to increase the effectiveness of the faceless assessment scheme which has been in operation for the last few years.

Thinking loudly, the faceless assessment scheme could be restricted to classes of taxpayers, who are at a comparatively lower risk of tax evasion. Proper, face-toface assessments, may be necessary for higher risk cases. At present less than 1 per cent of tax returns are being scrutinised, which means that a particular case would come up for scrutiny only once in one hundred years; for better results, resources permitting, scrutiny could be extended to a higher percentage, say 5 per cent cases may be scrutinised.

Oliver Wendell Holmes Jr., US Supreme Court Judge (1902- 32), had observed: “I like to pay taxes. With them, I buy civilization” (Compañía General de Tabacos de Filipinas v. Collector of Internal Revenue, 1927) It appears that not many subscribe to Mr Holmes’ views today

DEVENDRA SAKSENA The writer is a retired Principal Chief Commissioner of Income-Tax