Demonetisation
of 5,000 rupee notes
JUNE 18, 2019
It has been many months
since demonetisation of Rs 5,000 currency note was discussed. The main reason
for opposing the move is, of course, that demonetisation failed in India (It
failed there because it was done in a hurry and without proper planning).
Another reason is that those who take bribes are well-connected and strenuously
oppose any measure that would make them need large bags to take home their
illegally earned money every day. Who are the people who need and use 5,000
rupee notes? You can be sure that ordinary people don’t need or use them.
A vast majority of
Pakistanis seldom uses the note. Those in the next income bracket (Rs 30,000 to
Rs 50,000) may have occasionally used it, but since most of them live from hand
to mouth, it is unlikely that they have been able to have many of these notes
at home. If there are any who have managed to save, it’s most likely in banks,
because keeping cash at home is very risky. But most of those who have an
illegal income, like those in government departments and in the private sector,
and other ‘respectable’ citizens like them who earn millions every month, are
the ones who prefer to receive bribes in 5,000-rupee notes.
It cannot be denied that
the major factor that facilitates corruption is the 5,000-rupee note. Whether
it is to pay corrupt government or private sector employees or to ‘peshkars’ in
courts, or smugglers, or havala traders, this note makes it much easier to
carry cash over long distances without fear of detection
Demonetisation of the
5,000-rupee note will help the government bring into tax net the people who
otherwise wouldn’t register themselves with the income tax department. It will
also help in collection of badly needed tax revenue. But rather than do it
suddenly and hurriedly, the government should take a few months to do it. The
whole thing can be done in three stages. In the first stage, lasting 15 to 20
days), only non-filers should be asked to deposit such notes in their bank
accounts, or get the notes exchanged with lesser denomination notes if they
don’t have bank accounts. A flat tax of 10 per cent on the amount deposited
should be taken from the non-filers. This will net the government a sizable
amount of revenue.
In the second stage those who are filers but who pay no tax –
those who say they don’t earn enough to pay income tax – should be dealt with.
They are the ones who should not have been able to save any amount, considering
that they have been spending practically every rupee they’ve earned. People in
this category should also be taxed preferably at the same rate as non-filers.
The third category is of those who have been filing returns and
paying taxes regularly. Their tax returns should be scrutinised to determine if
they have earned enough to have the amount deposited. A man with a wife and
three or four children declaring an income of five million over the past five
years for instance, should not have been able to save more than a million
rupees or 20 per cent of his income, both in cash and in his bank accounts. If
he has more, it should be assumed that he has other undeclared income, and his
deposited amount can be taxed at the rate of five per cent. Of course, there
would be some people who are single and have, therefore, been able to save much
more than 20 per cent of their income; they can be exempted, provided they can
prove that their income is legal and their expenses are not high.
It is estimated that at least a trillion and a half rupees of
the currency notes in circulation are 5,000-rupee notes. By demonetising these
notes, the government will be able to earn at least 75 billion rupees in income
tax, but the bigger advantage would be a sizeable expansion of the tax net.
The writer is an engineer, a former visiting lecturer at NED
Engineering College
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