Demonetisation helped to reduce black money, increase tax compliance and given a boost to transparency
Demonetisation helped to reduce black money, increase tax compliance and given a boost to transparency
- On 8 November 2016, the Government of India announced the demonetisation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series.
- The move is aimed at fighting black money.
- Demonetisation is a radical monetary step in which a currency unit’s status as a legal tender is declared invalid.
- This is usually done whenever there is a change of national currency, replacing the old unit with a new one.
- In India, it was first implemented in 1946 when the Reserve Bank of India demonetised the then circulated ₹ 1,000 and ₹10,000 notes.
- The announcement of demonetisation was followed by prolonged cash shortages in the weeks that followed, which created significant disruption throughout the economy.
- People seeking to exchange their banknotes had to stand in lengthy queues, and several deaths were linked to the rush to exchange cash.
- However, Demonetization has been used as a tool to stabilize the currency and fight inflation, to facilitate trade and access to markets, and to push informal economic activity into more transparency and away from black and gray markets.
- According to a 2018 report from the Reserve Bank of India, approximately 99.3% of the demonetised banknotes, or ₹15.30 lakh crore (15.3 trillion) of the ₹15.41 lakh crore that had been demonetised, were deposited with the banking system.
- In 2012, the Central Board of Direct Taxes recommended against demonetisation, saying in a report that “demonetisation may not be a solution for tackling black money or shadow economy, which is largely held in the form of benami properties, bullion and jewelry.”
- According to data from income tax probes, black money holders kept only 6% or less of their wealth as cash, suggesting that targeting this cash would not be a successful strategy.
- In India, black money is funds earned on the black market, on which income and other taxes have not been paid.
- Also, the unaccounted money that is concealed from the tax administrator is called black money.
