Courtesy ordinance, Narendra Modi govt set to get demonetisation windfall from RBI

The government could get a windfall, though much lower in size than thought earlier, from the Reserve Bank of India (RBI), with an Ordinance cleared by the Cabinet on Wednesday.

Reserve Bank of India, RBI Act, Demonetisation, PMGKY, Cash Crunch
A senior bank official said lenders may require few more months for proper implementation of AQR as most of their staff was busy with demonetisation for two month. (Source: IE)

The government could get a windfall, though much lower in size than thought earlier, from the Reserve Bank of India (RBI), with an Ordinance cleared by the Cabinet on Wednesday, providing to extinguish the cancelled banknotes that haven’t returned to banking system. The move also paves the way for nullifying the central bank’s currency liability to the extent of the value of the extinguished notes.

Although a fringe opinion in legal circles still doubted the legality of such a transfer from the RBI after putting the amount first in its profit and loss account, most said that with the proposed amendment to the RBI Act to give legislative backing to the exercise, there were little chances the courts would overrule it. If this transfer materialises, the demonetisation move could directly enrich the government coffers in two ways, the second being the tax receipts from the new income disclosure scheme PMGKY, which targets to net some Rs 2 lakh crore and tax the same at 50%. The extra receipts, at a time the economy is chugging along, would come in handy for the government in its efforts to perk up the aggregate demand.

Two days before the deadline for depositing old Rs 500 and Rs 1,000 notes expires in banks, the Cabinet also approved promulgation of another ordinance to make possession/receipt/transfer of scrapped banknotes above certain threshold number/value a penal offence that will attract monetary fine.

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The penal provisions won’t apply to holding the junked currency immediately after the 50-day window to deposit them at banks ends on December 30, but after March 31, till when these notes could still be deposited at specified RBI branches, along with a declaration form.
The note recall, it was initially presumed, would lead to elimination of Rs 3-4 lakh crore worth of scrapped currency as black money.

But going by the trend in deposits in banks, the value of extinguished notes would be far lower. (As per the RBI, till December 10, Rs 12.4 lakh crore was deposited; the government told the Supreme Court later Rs 13 lakh crore reached banks and unofficial reports peg the latest number at upwards of Rs 14 lakh crore; the difference between this figure and Rs 15.46 lakh crore, the value of the junked currency in circulation on November 8, is reckoned to be the extinguished portion).

Former finance minister P Chidambaram told FE: “This (ordinance) was a necessary legal requirement. Even a wrong decision like demonetisation requires a law. They should have done it on November 8 and brought a Bill before Parliament.” However, Lalit Bhasin, president, Society of Indian Law Firms, said that although an ordnance has the force of law, “It is a law till only it is under challenge.” Though the Supreme Court asked courts below not to entertain pleas against the demonetisation move, Bhasin said anyone could still challenge the ordinance as “this is new cause of action”.

“There is a good reason to challenge the ordnance as it is inconsistent with the RBI Act,” he said. According to senior lawyer and Congress spokesperson Abhishek Singhvi, there was a high likelihood of inconsistency between amnesty window open till March 31, 2017 on the one hand, and criminality for mere holding of notes after December 30.” Senior lawyer Harish Salve said that it was “sensible to make a law to obviate the legal challenge”.
Analysts said using the notification route to extinguish RBI’s specified currency liabilities could have easily stumbled on legal hurdle.

The Specified Bank Notes Cessation of Liabilities Ordinance makes holding of the cancelled notes beyond a limit after March 31 a criminal offence that will attract a monetary fine of Rs 10,000 or five times the cash held, whichever is higher. Furnishing wrong information while depositing the old currency between January 1 and March 31 will attract a fine of Rs 5,000 or five times the amount.

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PTI reported the proposal put to the Cabinet was for a four-year jail term for anyone possessing a number of demonetised currency after March 31, 2017, but added that it was not immediately clear if it was approved.

The Ordinance will have to be sent to the President and his assent will come into force. It will have to be converted into a proper legislation by passing of a law by Parliament within months. Pronab Sen, former chairman of the National Statistical Commission, told FE: “If people are voluntarily willing to hold a piece of paper (which is what the demonetised notes will turn into after the deposit window is closed), that is their decision. Making it a criminal offence will violate one’s fundamental right and it may not hold up in any court of law.”

Obviously, the government resorted to the ordinance route for the two changes in law as it thought the Parliament route would be cumbersome given the Opposition’s tough stand against demonetisation. The amendments to the Income Tax Act to bring in the PMGKY scheme were passed by Lok Sabha in the winter session without any discussion and amidst slogan shouting by the opposition.

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First published on: 29-12-2016 at 06:26 IST