Reserve Bank of India (RBI) on instruction of Government of India has demonetize the Old Rs 1000 and Rs 500 currency and declare it illegal or no value if transact other than the banking channel or through post offices or selected utilities outlet including hospitals , petrol pump, court etc till certain date which is currently extended to 24th November. Any bearer of old series of Rs 1000 and Rs 500 notes may exchange with same value through any of the branches of banks or post offices in India till 30th December. After Demonetization when RBI introduced Rs 2000 notes people were wondered including many of the economists, Bankers or experts, how would this high denomination of Rs 2000 notes control the black money in the system ?
Many of the political leader started blaming the government that such high value denomination of notes may help hoarding of black money. But Government was stick to his decision and started circulating the Rs 2000 notes. Here we are discussing the basic reason why the Rs 2000 notes were introduced and how come this check the black money in the market.
Before understanding this concept, one must know the basic accounting aspect. Basically good for those who are related with banking or finance or with nice aptitude.
How do Hoarders are currently channelizing the Black money through banking channels ?
Hoarders are converting their ill gotten money through banking channel following the loop holes of basic accounting and taxation policies. In order to understand the concept go through the following case study, how does black money get converted through banking channel ? In the field of Banking, Taxation , Economics and accounting there is a concept called Peak Theory. Hoarders are following the same concept in converting the black money.
CASE STUDY :
Suppose old Rs 1000 and Rs 500 currency notes are in circulation and any one want to convert his/her Rs 1,00,000 black money. check out the steps :
- Hoarder will first divide the Rs 1,00,000 in to various packets of particular denomination i.e. if Rs 1000 currency is there, notes will be in 10 Equal bundles and if Rs 500 currency, there will be 20 Bundles.
- Next step he will visit bank branch where he holds account and deposit one bundle in the account valued Rs 10,000.
- Same day evening he will withdraw the same amount from the account through any channel.
- Now he will keep the withdrawn Rs 10,000 at home or locker
- Next day or after few day he will deposit the Second Bundle of same value i.e. Rs 10,000 and withdraw the same amount and put the money in locker or house.
- However in his books of accounts submitted to Income Tax Department, he will show that he has deposited the same 10 New Notes which was withdrawn on Day 1 (but in real the money is kept at his home/locker)
- On Day 2 : Evening , Mr. X would again withdraw 10 New Notes of Rs. 1000 valued at Rs. 10,000/- and keep the same in Locker . So at the end of Day 2, Mr. X has Rs. 80,000 on Table in Old Notes and Rs. 20,000/- in New Notes in Locker.
- Same process would continue till day 10 and by end of day 10 he will manage to convert Rs 1,00,000 black money through banking channel.
- Income Tax department also would not be able to trace the thing as he has shown that he was having only Rs. 10,000/- as black money initially ( i.e. one bundle of 10 Notes of Rs. 1000 ) and he has rotated the same Rs. 10,000/- by depositing it into Bank account in the morning and withdrawing it in the evening and again redepositing the same on next day and so on. So, he will be fined, Taxed or penalized maximum for Rs 10,000 where as he pocketed Rs 90,000. This concept is called Peak Theory.
- This concept is law bind as there may be genuine scenario where you withdraw money from bank to purchase something and then when you think that no good deal is available, you may again deposit the same money into your bank account and are not required to pay tax again. Authority will be having pain in justifying this.
How Does New Currency of Rs 2,000 or Rs 500 Check the Black money menace ?
You have seen the most common practice which is basically used by many of black money hoarder. Now how would this new Rs 2000 currency stop this menace.
Now imagine the same peak theory concept of rotating the money with New Currency Rs 2000 or Rs 500 or Rs 1000 notes.
- The first bundle of 10 Old Notes are deposited in the bank morning of Day 1.
- Same day evening he withdrew the New Rs 2000 currency. Total count of Denomination will be 5. He kept the same five notes of Rs 5000 in locker.
- Now on Day 2 : Morning when he goes to deposit second bundle of 10 Old Notes of Rs. 1000 each and shows the Income Tax Department that he has redeposited the same money which was withdrawn on Day 1:Evening. Here is the Catch. He is caught red handed ! 😯 ! because the Bank slip on Day 2 submitted to bank shows deposition of 10 Notes of Rs. 1000 each. Scrutiny by Tax official shows clearly that he could never have withdrawn on Day 1 any note of Rs. 1000 because they were never Printed. That’s how Black Marketers would be checked by government ? 🙄
- This mode of operation may continue with new notes also but due to maximum ceiling on withdrawn i.e not more than Rs. 10000/- in a day and even if he withdraws Rs. 10,000/-, there is every possibility that Banks shall give him Rs 2000 ,Rs 500 Rupee new note. With new guidelines on cash deposit this will be checked in future course of time.
I hope this concept would now help people understand the introduction of new series note in lieu of old series notes by Government of India. This is the boldest move to curb the black money and start of fresh growth cycle. Impact of demonetization on growth of country will be seen within shorter time frame.