The success of the demonetisation of the R500-1,000 notes will, no doubt, depend upon the proportion of the R14 lakh crore worth of such notes are destroyed instead of being exchanged for either R100 notes or the new R500/2,000 notes that banks are now exchanging for customers, albeit in small quantities. If, say, R2 lakh crore is not exchanged by the end of the year, this means there will be that much less black funds in the economy. To that extent, as our page-1 story today points out, the government stands to gain since the central bank can, theoretically, print this amount of fresh money and give it to the government. That money can then be used to either recapitalise banks or to increase government spending—that is why chief economic advisor Arvind Subramanian said that the demonetisation was effectively a transfer of funds from those holding black money to the government.
The data itself also provides a rich treasure of information. Banks will collect PAN card data or any other identity proof of those exchanging old notes with the new ones, as also for those who are depositing such monies. Special track will be kept of those who deposit over R10 lakh worth of cash and this information is to be shared with the taxman immediately. In other words, the taxman will be able to match this data with the tax returns filed by these very individuals. Anyone whose deposits of cash do not match the incomes declared in the past will be considered to be tax defaulters and will face penalties of 200%—that, of course, will ensure that those who are not able to launder their funds will not even bother to deposit them. Those who deposit under R2.5 lakh, the exemption limit for paying income tax today, the finance ministry has said, will not have their deposits scrutinised. What this means, however, is that with the government able to link almost every demonetised currency note to people, the taxman will be able to build a profile of depositors—that will then help the taxman achieve the goals of adding new taxpayers or to get existing ones to correctly declare their incomes. There could, for instance, be taxpayers who declare their incomes as R8 lakh in a year but whose deposits suggest their incomes are probably much higher—this problem of the ‘missing middle, where those in the R10-20 lakh income bracket especially tend to understate their incomes the most, can then be tackled by reminding these taxpayers that their real incomes are actually higher. The taxman, however, will have to be cautious about not harassing genuine persons—large sections of the economy such as agriculture are formally out of the tax net, and it would be unfortunate to find them facing all manner of queries from the taxman when they deposit large sums of cash in banks.