The government and the Reserve Bank of India pulled out all the stops to ensure that those with stashes of old notes were caught off guard.
ET Bureau
It was exactly five months before yesterday that the government dramatically flagged off its crackdown on unaccounted for and counterfeit cash with an unscheduled, televised evening address by Prime Minister Narendra Modi. The shock, awe and disruption that followed manifested in cash shortages as people queued up outside banks to exchange Rs 500 and Rs 1,000 notes, which had been rendered useless, for new ones. The government and the Reserve Bank of India pulled out all the stops to ensure that those with stashes of old notes were caught off guard.
Apart from imposing a Rs 4,000 limit for exchange, indelible ink — used only during elections — was also applied on depositors’ fingers to restrict multiple exchanges by the same set of people. There was, however, no upper limit on the deposit of old notes, which would have had many sitting on piles of Rs 500 and Rs 1,000 notes heaving a collective sigh of relief. Perhaps prematurely.
Over the past two months, income-tax authorities have sounded out about 17.92 lakh high-value depositors either via email or text messages. These are cases in which the tax profiles of the account holders are not aligned with the deposit of scrapped notes made by them. The query from the income-tax department: where did the moolah that had been deposited come from? Many who assumed that depositing their cash in banks would ensure that their hoard automatically turned to white may be in for a rude shock.
As this article was being written, assessing officers of the I-T department were following up on as many as 3.78 lakh cases in which deposits of Rs 5 lakh or more of old notes were made; some sub-Rs 5 lakh credits are also being investigated. These depositors collectively comprise those who chose to ignore the taxman’s query as well as those whose responses did not satisfy the authorities. Meanwhile, another set of depositors was exonerated after they availed of a disclosure window — the Pradhan Mantri Garib Kalyan Yojna (PMGKY) — to declare their black money.
Cash Course Depositors with dubious sources of income may be wondering what will happen next. Will there be searches, surveys or open enquiries in the days to come? Will some of those with suspect deposits be taxed with penalties and then freed? Could some face prosecution which, according to the current law, could lead to imprisonment up to seven years. However, the biggest multi-crore question is: when will the official data be released on how much of the Rs 15.45 lakh crore in old notes was black money?
“We live in a democratic country where the aggrieved parties get a chance to appeal. So, I assume many of these cases (3.78 lakh) will stretch up to two years or more before we come to a conclusion on the quantum of black money recovered through demonetisation,” says a senior I-T sleuth involved in the process of following up high-value depositors. According to unconfirmed sources, the government mopped up about Rs 2,000 crore worth of black money through PMGKY disclosure window that was open till March 31; there’s no official word on it as yet.
If statistics related to prosecution and compounding are factored in, there has been a surge in the number of cases since the note ban and, according to I-T officers, because of it. Consider, for instance, compounding of offences under I-T Act 1961, which is broadly an out-of-court settlement where guilt is admitted, hefty fines are slapped but there’s no prosecution. The number of compounding applications filed in 2016-17 till February was 1,440, a sharp rise from the 737 filed in the previous year; it’s also the highest numer since 2012-13.
The number of I-T cases in which the prosecution complaints were filed till February 28 was 745, again the highest in the last five fiscal years. Of the 745 cases, only 83 have been disposed of by the courts. The number of persons convicted so far in those cases, according to data available with the I-T department, was 14.
Searches and seizures have also picked up. Till February 28, 2017, the number of business groups and organisations searched was 1,037, up from 445 in 2015-16. Total assets seized — Rs 1,416 crore — between April 2016 and February 2017 were almost two times the value of those seized in the previous year. Post demonetisation, there were about 600 cases of I-T searches, most of which were handed over to the other investigating agencies such as CBI and the Enforcement Directorate.
The I-T department launched another crackdown in about 100 places on Friday, targeting entities allegedly linked to BSP chief Mayawati’s brother Anand Kumar, Tamil Nadu minister C Vijayabaskar, Tamil actor Sarathkumar and a host of commodity traders and shell company operators.
Long Haul Ahead R Prasad, former chairman of the Central Board of Direct Taxes (CBDT), foresees massive litigation. “Which are these four lakhodd cases (being pursued by I-T)? They are the ones who refused to avail of the black money disclosure window. They are willing to battle it out with the I-T department. Expect a large number of appeals and litigation in the years to come,” says Prasad. According to the former income-tax chief, the quantum of black money recovered from demonetisation would be clearer only after five years. And the journey ahead for the I-T department, as he foresees, is a difficult one.
“One can safely assume that many cases will remain untraceable. Some may not have PAN cards at all whereas others may no longer be residing at the addresses given for their PAN cards.” Prasad adds that in some cases the I-T department would be able to spot the money trail, but recovery will be a totally different and near-impossible ballgame.
A bigger question that crops up is whether the huge illicit political money that would have also entered banking channels, thanks to demonetisation, would ever be identified and recovered by the I-T sleuths. There were speculations that a number of politicians either hid their cash in non-KYC compliant district cooperative bank accounts or camouflaged it as non-taxable agricultural income. Politicians’ money also went into banks as sales receipts of valid businesses. The challenge for the I-T department will be to establish in the course of its investigation that a jeweller’s “white” money, for example, belongs to that of a politician.
Also, did politicians use “operators” to hide their money?
After all, it’s these middlemen who use multiple layers of shell companies to transfer a huge stash of cash from the source to a destination — all through legal banking channels and merely for a commission. A shell company is a non-trading company used as a vehicle for financial manoeuvres. Those “paper” companies mostly remain dormant.
Black is Back Only last week, the Enforcement Directorate, in its biggest crackdown on shell companies, raided 500 such firms in 110 locations across 16 states in the country on the suspicion that they may have been involved in dubious transactions to launder money during demonetisation. Simultaneous raids were conducted in Delhi, Kolkata, Chennai, Bengaluru, Chandigarh, Patna, Ranchi, Ahmedabad and Bhubaneswar. At least two persons, one each from Chennai and Bengaluru, were arrested under the Prevention of Money Laundering Act (PMLA) during the crackdown which, according to reports, was mandated directly by the Prime Minister’s Office (PMO). The Enforcement Directorate administratively comes under the ministry of finance, not the PMO.
No one doubts the seriousness of the Central government in cracking down on black money, starting with demonetisation. But if statistics on cash detection in the recently concluded elections in five states — Uttar Pradesh, Punjab, Goa, Uttarakhand and Manipur — are any indication, demonetisation has failed to break the backbone of the parallel black economy in India. Black money is still getting generated and used widely in elections, the only difference being that it is now in the high denomination Rs 2,000.
Ahead of the Punjab elections, for example, the Election Commission-appointed surveillance teams seized Rs 57.66 crore in cash, up five times from Rs 11.96 crore in the 2012 assembly polls. In the 2014 general elections, cash seized in Punjab was only Rs 14.07 crore, way below the cash seizure in the recent poll conducted immediately after demonetisation. In the first week of March, as the assembly elections in the five states wound down, Chief Election Commissioner Nasim Zaidi told ET that these polls witnessed “extraordinary seizures”.
“In 2012, we seized Rs 112 crore in terms of cash and liquor and this time we have already crossed Rs 350 crore. We have a very stringent expenditure control mechanism but the fact remains that there was considerable cash and liquor. In UP alone liquor worth Rs 60 crore has been seized,” Zaidi said.
This perhaps indicates that a crackdown alone is not enough if the sources that generate black money keep flourishing. Former CBDT chairman Sudhir Chandra recommends even bolder decisions to curb black money at the sources. He wants the government to legalise betting, lotteries and the like that generate large illicit cash; he even advocates taxing agriculture income, a not-so-easy decision for the government as it could be construed as anti-farmer and hence would be politically suicidal (See “Legalise Betting, Lotteries...”).
The Modi government, however, has shown that it isn’t averse to making bold gambits. The landslide in the Uttar Pradesh polls positions it even better to unleash more surprises — surprises that may elicit as much if not more shock and awe than demonetisation did. Over to the sequel to the note ban, this time to choke the generation of black money at source.
ET Bureau
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