Demonetisation of 5,000 rupee notes

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