Demonetization and its Effects

Dr. Abdul Azeez N.P.

Assistant Professor
Aligarh Muslim University Centre, Malappuram
abdulazeeznp@gmail.com Mob: 9446909545
 Black Money
Black money is any money on which tax is not
paid to the government.

All unreported incomes whether by legal or illegal

means, and their subsequent use in consumption or
investment forms the 'black economy'.

Some reports claim a total of US$1.06 trillion is

held illegally in Switzerland
 Black Money
•Money laundering is a very common way of
terrorist financing;
•It may be in the form of cash in hand, jewels,
property and foreign currency
•In March 2012, the GOI clarified in its parliament
that the CBI director's statement on $500 billion of
illegal money was an estimate based on a
statement made to India's Supreme Court in July.
Reasons for Creation of Black Money 
Income from illegal/ unlawful sources:

Illegal activities such as smuggling or kidnapping, it is very obvious that

he is not a fool to disclose the same in his income tax return.
The income goes unaccounted. This income is known as 'Black Money'.
Income from legal source:
Say, a doctor earns Rs. 2 lakh per month (Rs.24 lakh per annum).
Now from the current tax rates of Income Tax, the income tax
comes to Rs. 5.1 lakh approximately.
 Now the doctor shows his income at Say, Rs. 50,000 per month
(Rs. 6 lakh per annum) and paying a tax amount of Rs. 46000
approximately. ​

Consequently, he saves Rs. 4.64 lakh as income tax.

This Tax evasion is 'Black money'.
Bribing a traffic police:

If you prefer paying Rs.50 to a traffic police

instead of paying the fine of Rs. 300 then he
obviously doesn't account the same and this
income is his ​
black money.
Middle income class:

The middle income class will always try to hide the

income and save the tax. The reason is middle
income class always face the problem of inflation
and hence they are always in a need of money (their
propensity to consume is more than that of rich). 
 Indian Black Money
 Black money refers to funds earned on
the black market, on which income and other
taxes has not been paid.
 The total amount of black money deposited in
foreign banks by Indians is unknown, but one
estimate by R Vaidyanathan, a Professor of
Finance, estimated the total at over Rs 7,280,000
Crores
 Black Money in Swiss Banks
While official numbers are not available, Swiss
banking officials have said that the largest
depositors of illegal foreign money in
Switzerland are Indian.

In August 2010, the government revised the

Double Taxation Avoidance Agreement to
provide means for investigations of black
money in Swiss banks
 Evasion Attempts After
Demonetization
 Converting black money into Gold
 Donations in temples and other
 Multiple bank transactions
 Booking large number of tickets in railways and airways
 Depositing money in the accounts of their parents,
relatives and friends
 Enticing people with some percentage of money for
exchange
 Paying bank loans
 Paying a few months salaries in advance
 Using their links with bank employees to exchange of
notes.
How Black Money
Affect Economic
Growth
 Demonetization
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. 

The old unit of currency must be retired and replaced

with a new currency unit.
 Demonetization of currency
 On the night of 8 November 2016

 The total value of old notes in the circulation is to

the tune of Rs.15.44 trillion,

 It is 85% of the total value of currency in

circulation. (Equivalent to 11% of GDP).

Only 12% of Black money in the form of cash &

fake currency
Objectives
To tackle Black money in the Economy its
around.

To lower the cash circulation which is directly

related to corruption in our country and
control inflation .
To Eliminate fake currency & dodgy funds
which have been used by terror groups to
funds terrorism in INDIA.

To Bring Plastic Money in the Economy

To give a direction to CREDIT CARDS, DEBIT

CARDS, and e-Payments and other Net
transaction
 Earlier Efforts
 Very first Cabinet meeting, constituted a Supreme Court-
Monitored Special Investigation Team (SIT) on Black
Money

 Renegotiation of Tax Treaties and Automatic Information

Exchange Agreements with Tax Havens: Govt. negotiated an
Automatic Information Exchange Agreement with
Switzerland.
 Agreements are also being negotiated with other tax havens.
From 2017, Organisation of Economic Cooperation and
Development (OECD) countries have agreed to share
information on foreign account holders with their home
countries.
 28 August 2014
30.56 Cr opened account 67264.72 cr Deposits till 01/11/2017
Cont.
 The Black Money (Undisclosed Foreign Income and Assets)
and Imposition of Tax Act, 2015 for Foreign Black Money:

 Income Disclosure Scheme, 2016: opened on June 1 gave a

chance to black money holders to come clean by declaring
the assets by Sep 30 and paying tax & penalty of 45 % on it.

 Penalty on Real Estate Transactions undertaken in Cash

exceeding Rs 20,000;

 The Parliament passed the Benami Transactions

(Prohibition) Amendment Act, 2016 (BTP Amendment Act)
in August. It came into force from November 1, 2016.
 Effects on GDP growth

The GDP formation could be impacted by this measure, with reduction

in the consumption demand in shortrun.
 Effect on Parallel Economy

- Remove black money from the economy some extend

and expected that it prevent future one.

- Temporarily stall the circulation of large volume of

counterfeit currency and

- curb the funding for anti-social elements like

smuggling, terrorism, espionage, etc.
 Effect on Money Supply & Inflation

• By providing small amount as withdrawal and

deliberately creating scarcity of currency notes in
circulation and money supply. This will lead to
reduction of money circulation in the economy
leading to deflation in short run.

• However gradually as the new notes get circulated

in the market in the form of investment and the
mismatch gets corrected, money supply will pick up.
 Effect on Banks

 High Savings;

 It will enhance the liquidity position of the banks;

 Expected lower lending rates;

 which can be utilized further for lending purposes.

Promote Cashless
&
Digital Transactions
Broaden tax base by
reducing tax rate
 High Financial Inclusion
&
Scope for Islamic Banking
Restrictions on Gold
&
Economic Growth
Badly Affected Layman
Badly Affected Layman
Badly Affected Layman
Inflation
Corporatism/ Fascism
Negative Impact of Demonetization

 Less Business Activities.

 Chance of losing business customers.
 Chance of losing job for daily workers.
 Insufficient funds for trade.
 Delayed payment of debts by firms which
leads to liquidity crunch.
 Foreign money still remains untapped.