•2. The new normal

In the year 2015-16, 3.7 crore assesses of the total population 

of over 125 crores, filed income tax returns. Out of these, 99 

lakhs declared income below Rs.2.5 lakhs and paid no 

taxes; 1.95 crores declared income less than Rs.5 lakhs; 52 

lakhs declared income between Rs.5 to10 lakhs, and only 24 

lakhs declared income above Rs.10 lakhs. No better evidence 

is required to substantiate that both in the matter of direct 

and indirect taxes India continues to suffer being a hugely 

tax non-compliant society.

•Expenditure required for poverty eradication, national security 

and economic development have to be compromised with on 

account of tax non-compliances. For seven decades the Indian 

“normal” has been to undertake transactions partly in cash and 

partly in cheque. “Pucca” and “Kachha” accounts are a part of the 

business language. Tax evasion has been considered as neither 

unethical nor immoral. It was just a way of life. Several 

Governments have allowed this “normal” to continue even though 

this compromised with larger public interest. The Prime Minister’s 

decision is intended to create a new “normal”. It seeks to change 

the expenditure pattern of India and Indians. It is obviously 

disruptive. All reforms are disruptive. They change the retrograde 

status quo. The demonetisation puts a premium on honesty 

and penalises dishonest conduct.

•1. Steps against Black Money

The Narendra Modi Government had absolute clarity from day one that it would move against the shadow economy and black money. It’s first decision was to constitute SIT under the directions of the Supreme Court. The Prime Minister had proposed to the G-20 at Brisbane that international cooperation in sharing information with regard to base erosion and profit shifting should be expedited. The arrangement with the United States furthered this object. The NDA Government completed its agreement with Switzerland that w.e.f. 2019, details of assets held by Indian citizens in Switzerland and vice versa would be provided to each other. Since 1996, the Double Taxation Avoidance Treaty with Mauritius was being renegotiated. The treaty effectively incentivised round-tripping. It was renegotiated. Similar treaties with Cyprus and Singapore have also been renegotiated. The Black Money Law dealing with illegal assets outside India opened a window for disclosure with 60% tax and provides a ten year imprisonment.

The Income Declaration Scheme (IDS) 2016 was highly successful with a 45% tax. The PAN card requirement for cash transaction beyond rupees two lakhs put hurdles on expenditure through black money. The Benami law legislated in 1988 and never implemented. It was amended and has been put into action. The GST, which is scheduled to be implemented this year, will provide for better indirect tax administration and being a more efficient law will check tax evasion. The demonetisation of high denominational currency notes was the big step in the same direction.

•Demonetisation – A look back at the last two months

Two months have passed since the Prime Minister announced the decision that high denominational currency notes would cease to be a legal tender. Subsequently those notes have been demonetised. When 86% of a country’s currency constituting 12.2% of its GDP, is squeezed out of the market and sought to be replaced by a new currency, there would obviously be significant consequences of that decision. Now that the queues outside the banks have disappeared and the remonetisation has moved ahead, it would be worthwhile to analyse the rationale behind the decision and its impact.