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DEMONETISATION 2016 By CA Rajesh Sanghvi 1 DEMONETISATION 2016 By CA Rajesh Sanghvi 1

nd TAXATION LAWS (2 Amendment) in the Lok Sabha proposing certain amendments to the nd TAXATION LAWS (2 Amendment) in the Lok Sabha proposing certain amendments to the Income-Tax Act, 1961 & to the Finance Act, 2016

3 major changes (1). Garib Kalyan Yojna (2). Changes to 115 BBE & 271 3 major changes (1). Garib Kalyan Yojna (2). Changes to 115 BBE & 271 AAC (3). Changes to 271 AAB

Chapter IXA in the Finance Act Taxation & Investment Regime for Pradhan Mantri Garib Chapter IXA in the Finance Act Taxation & Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016

Garib Kalyan Yojna Date to be notified – After notification till closure date Who Garib Kalyan Yojna Date to be notified – After notification till closure date Who can declare & What is undisclosed income : Any person may make a declaration in respect of any income, in the form of cash or deposit in an account maintained by the person with a specified entity, chargeable to tax under the Income -tax Act for any Asst Year commencing on (or before) the 1 st day of April, 2017 - Sec 199 C(1) Specified entity – RBI, Bank, Post office or as specified ( Co-op Credit society )

Garib Kalyan Yojna No expenditure, allowance of set off Tax will be 30% of Garib Kalyan Yojna No expenditure, allowance of set off Tax will be 30% of undisclosed income - 199 D Surcharge is 33% of tax to help Economically weaker section – 199 D (9. 90%) Penalty @ 10% of uncisclosed income – 199 E Deposit Minimum 25% of the undisclosed income in the scheme. Lock in 4 years, No interest and comply with such conditions as specified - 199 F

Garib Kalyan Yojna Pay tax, surcharge, penalty & deposit before filing declaration i. e Garib Kalyan Yojna Pay tax, surcharge, penalty & deposit before filing declaration i. e due date & submit proof before filing declaration. Undisclosed income will NOT be included in total income under IT Act 1961. (so no 115 BBE or 271 AAC ) However Tax, penalty – No refund Scheme not to apply : COFEPOSA Detenu, Prosecutable offence under certain IPC, NDPS, Benami , PMLA , PC Act , Foreign Black Money Act

Garib Kalyan Yojna For Residents & Non residents Immunity from prosecution Declaration shall not Garib Kalyan Yojna For Residents & Non residents Immunity from prosecution Declaration shall not be admissible in evidence against the declarant under any Act other than the Acts mentioned in section 199 -O No disclosure under RTI ( Sec 138 of IT Act 1961 ) It is unclear whether the declarant can claim benefit of this scheme before the AO, himself during the course of reassessment proceedings of any earlier year

Amendment to 115 BBE Income suo-motu declared or assessed u/s 68, 69 A, 69 Amendment to 115 BBE Income suo-motu declared or assessed u/s 68, 69 A, 69 B, 69 C and 69 D would be taxed @ 60% without deduction of any expenditure or allowance. Further surcharge calculated at the rate of 25% of such tax i. e. 15% This makes the effective tax rate 75%. This amendment would apply for AY 2017 -18 i. e. FY 2016 -17 and not merely after the demonetisation

Effect to amendment of 115 BBE It covers in its sweep all additions that Effect to amendment of 115 BBE It covers in its sweep all additions that the AO may make on account of failure of assessee to explain source & genuineness of loans, identities of donors/ lenders, unexplained expenditure/ investments, amounts borrowed or repaid on hundi. Eg : if a company receives share application money from some subscribers of shares through banking channels but is unable to prove their identities or is unable to prove the genuineness of the same to the satisfaction of the AO, such share application money could be taxed at the rate of 75%.

Penalty 271 AAC due to amendment to 115 BBE Sec. 271 AAC – where Penalty 271 AAC due to amendment to 115 BBE Sec. 271 AAC – where the income determined includes any income referred to in section 68, 69 A, 69 B, 69 C or 69 D for any previous year, the assessee shall pay by way of penalty, in addition to tax payable under section 115 BBE, a sum computed at 10%of the tax payable u/s 115 BBE i. e 6% Provided that no penalty shall be levied to the extent such income has been included by the assessee in the return of income furnished u/s 139 & the tax in accordance with the provisions of 115 BBE has been paid on or before the end of the relevant previous year

I feel this amendment (115 BBE) is guilty of class legislation which the Supreme I feel this amendment (115 BBE) is guilty of class legislation which the Supreme Court has held in a number of cases as violative of Article 14 of the Constitution of India

Penalty 271 AAB – Search – Old provisions For search between 1 -7 -12 Penalty 271 AAB – Search – Old provisions For search between 1 -7 -12 till date of this amendment, penalty will be : 10% of undisclosed income if accepted in search , manner explained , declared in IT return & tax/interest paid before due date 20% of undisclosed income if NOT accepted in search , but later declared in IT return & tax/interest paid before due date In all other cases it is 30% to 90%

Penalty 271 AAB – Search – Now amended For search , conducted after the Penalty 271 AAB – Search – Now amended For search , conducted after the date of this amendment, penalty will be : 30% of undisclosed income if accepted in search , manner explained , declared in IT return & tax/interest paid before due date In all other cases it is 60%

Now lets come to some Economics/Articles Food for Thought Now lets come to some Economics/Articles Food for Thought

Now lets come to some Statistics Denomination made illegal tender in 1978 made up Now lets come to some Statistics Denomination made illegal tender in 1978 made up just 0. 60% of India’s circulating cash In 2016, it was 86% of India’s circulating cash Currency denominations of Rs 500 and 1000 – Rs 14. 1 lakh crore (USD 211 billion) in circulating cash

Now lets come to some Statistics RBI ( In hundred crores or Billion ) Now lets come to some Statistics RBI ( In hundred crores or Billion ) Notes Rs. 50 Rs. 100 Rs. 500 Rs. 1000 14 -15 174. 36 17, 436 crs 1, 502 1. 50 lac crs 6, 564 5, 612 Both totalling 12 lac crs 15 -16 194. 50 19, 450 crs 1, 578 1. 57 lac crs 7, 854 6, 325 Both totalling 14 lac crs

Black Economy NIPFP in 1985 - Black money account for 19 to 21 percent Black Economy NIPFP in 1985 - Black money account for 19 to 21 percent of GDP which stood at a staggering amount anywhere between 31, 584 crs to 36, 784 crs in 1983 -84 Report by Friedrich Schneider in 2006 point to the shadow Economy at 25. 60 % of GDP in 02 -03 using the DYMIMIC & Currency Demand Method.

National Institute of Public Finance and Policy (NIPFP) conducted a study under the guidance National Institute of Public Finance and Policy (NIPFP) conducted a study under the guidance of Dr. S. Acharya. After aggregating the different components of ‘black’ income the study quantified the extent of ‘black’ money for different years as under : Year 75 -76 80 -81 83 -84 Estimate for black (in crs) 9, 958 to 11, 870 20, 362 to 23, 678 31, 584 to 36, 784 %age of GDP money 15 to 18% 18 to 21% 19

The white paper on black money released by the Government of India in 2012 The white paper on black money released by the Government of India in 2012 7. 4 Considering views / suggestions / recommendations from all the stakeholders, including the public, the Committee is of the view that there is no dearth of laws to deal with the menace of black money. However, some new laws, such as to regulate the cash economy, and some changes to the existing legal provisions also need consideration, as suggested by various stakeholders. There are multiple administrative agencies to deal with the problem of black money. There is, thus, no need to create any further agencies. However, the existing agencies need to be strengthened, both in terms of manpower and other resources. There is also a need for better coordination among all agencies.

Sec. 26 of RBI Act 1934 Legal tender character of notes (1) Subject to Sec. 26 of RBI Act 1934 Legal tender character of notes (1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government. (2) On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification. "

Velocity of money is the ratio between GDP and money in circulation—which RBI estimates Velocity of money is the ratio between GDP and money in circulation—which RBI estimates to be around 1. 3 for India. However by ‘money’, it does not mean the cash that we exchange in day-to-day transactions (called high powered money M 0). Instead it is broad money (known as M 3) where you also include bank deposits, post office savings and other bits and pieces of financial savings. M 3 & M 0 in India are linked by a factor of 6

So roughly speaking, R 1 of cash in circulation, ultimately adds up to R So roughly speaking, R 1 of cash in circulation, ultimately adds up to R 6 worth of broad money. So, if velocity of money calculated using broad money is 1. 3, then it equates to 6 times the amount, or 7. 8 with respect to cash in circulation. Total cash in circulation in the Indian economy is some 18 lac crores, meaning that the demonetization will reduce that money supply of Rs. 3 lac crs i. e about 16 or 17 % or so

LETS SEE WHAT SOME ECONOMISTS SAY LETS SEE WHAT SOME ECONOMISTS SAY

Statements by some economists Nobel laureate and economist Paul Krugman 2 -12 -16 – Statements by some economists Nobel laureate and economist Paul Krugman 2 -12 -16 – Delhi : It is difficult to see major gains from India’s decision to drain out highvalue from the economy and the move might only force the corrupt to become more careful in the future, …. there will be significant-to-low costs to the so-called demonetisation . . although he still saw India as a highprospect economy. . . he could understand the motivation for demonetisation, the move was “highly disruptive

Nobel Laureate - Amartya Sen Demonetisation despotic action, undermines trust - Noting that capitalism Nobel Laureate - Amartya Sen Demonetisation despotic action, undermines trust - Noting that capitalism has many successes that have come from having trust in businesses, he said if a government promises in promissory note and breaks such promise, then it is a despotic act.

IIM Ahmedabad – Prof Sebastian Morris 2 -12 -16 Morris maintains that by hitting IIM Ahmedabad – Prof Sebastian Morris 2 -12 -16 Morris maintains that by hitting hard at black money and doing little else, the black economy will resurrect. “Black economy doesn’t mean black money, ” he says. “Unless the flow of black income is stemmed, not much gains will be made. ”

Article in The Economist in Dec 16 John Maynard Keynes, an economist, wrote : Article in The Economist in Dec 16 John Maynard Keynes, an economist, wrote : “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. ” Trust is fragile & precious. Inflation would affect everyone who held cash, law-abiding or not. Much of the wealth of those enriched by the black economy would be insulated, because lots of their lucre is held not in cash but in property, gold or jewellery. Such heavy-handed measures could undermine the credibility of important government institutions. Fear that they might be used again in future could weaken confidence in the currency as a store of value—paving the way for some broader institutional failure, like hyperinflation. Long-run trust in the judgment of the state might be threatened. India’s “demonetisation” is a cautionary tale of the reckless misuse of one of the most potent of policy tools : control over an economy’s money.

History Major decisions in India What happened on 19 -7 -1969 History Major decisions in India What happened on 19 -7 -1969

On the midnight of July 19, 1969, Indira Gandhi made a giant leap for On the midnight of July 19, 1969, Indira Gandhi made a giant leap for Socialism. Through a single, hurried stroke of her pen, 14 of India’s largest private banks were nationalised. One man, Rustom Cavasjee Cooper, the founder member of Rajaji’s Swatantra Party, stood alone and fought tooth and nail. The Supreme Court sided with him. But Mrs Gandhi overturned the historic judgement through the 25 th Amendment. Cooper lost. To this day, it remains one of the most tragic events in India

In the last 4 years, PSU banks have lost as much as Rs. 30, In the last 4 years, PSU banks have lost as much as Rs. 30, 000 crs to fraud. As of May 2016, India’s top five public sector banks have gross bad loans equalling Rs 2. 68 lakh crore. This amounts for around half of India’s current fiscal deficit. Gross non-performing assets, NPAs, of India’s public sector banks now stands at Rs. 5. 83 lakh crs (85 Billion $)

COUNTRY STORIES COUNTRY STORIES

In 1987 Myanmar's about 80% of the value of money in circulation was invalidated In 1987 Myanmar's about 80% of the value of money in circulation was invalidated by the military junta, which had resulted into political unrest in the country

In 2010, North Korea dictator Kim Jong-2 made some changes with currency to lower In 2010, North Korea dictator Kim Jong-2 made some changes with currency to lower down the market of black money and to improve the economy of the country. But this decision of Kim Jong misfired. Price of necessity goods increased and this led people to become angry on this decision and resultant Kim Jong murdered finance minister and asked for apology

In January 1991, the erstwhile Soviet Union had withdrawn large-rubble notes with the aim In January 1991, the erstwhile Soviet Union had withdrawn large-rubble notes with the aim of taking on the black money. The invalidation of 50 and 100 rubbles notes had led to the invalidation of about one-third of money in circulation in the Soviet Union. However, this currency reform to fight with menace of black money failed to give any positive result & the government could not stop the increasing high inflation. People lost their faith in the leadership of Mikhail Gorbachev and finally on December 25, 1991, this resulted into the breakup of Soviet Union.

Presently 164 official currencies are being used in 197 countries 60 countries do not Presently 164 official currencies are being used in 197 countries 60 countries do not have their own currency & use US dollar is considered as most powerful currency in the world USD has about 47 % share of world payments & 80% of the forex market's daily turnover. Euro has about 28% of share of payments made by the international banks & it has share of 23% of daily transactions in the forex

India Today : July 2015 : 75 percent of rural India survives on Rs India Today : July 2015 : 75 percent of rural India survives on Rs 33 per day 75% of rural households in India have a monthly income of less than Rs 5, 000 28% (over 50 million) of households do not have mobile phones or any form of communication. 83 crs Indians, or 69% of the population, live in rural areas.

World Bank, an estimated 27 crs Indians live in extreme poverty, so they hardly World Bank, an estimated 27 crs Indians live in extreme poverty, so they hardly have any access to bank accounts or fancy credit cards. Which bank will give a credit card to a homeless Indian living in a slum on Rs. 65/- per day ?

About 28%-32% of Indians have access to financial institutions, including post offices and banks. About 28%-32% of Indians have access to financial institutions, including post offices and banks. Further, 33% of the 138, 626 bank branches are in 60 Tier-1 and Tier-2 cities, leaving rural India at a huge disadvantage

TUFT UNIVERSITY Massachusetts USA October 2014 Cash Survey-2014 shows that even card users in TUFT UNIVERSITY Massachusetts USA October 2014 Cash Survey-2014 shows that even card users in the most affluent part of India’s megapolis transact 73% of their expenditure in cash and only 17% by card. 1. 3 crore retail outlets in India to cater to almost 250 million families spread out over 600, 000 villages, 468 large towns and a long tail of 7, 500 micro towns

According to a Reserve Bank of India’s (RBI) report released in March 2016, Concept According to a Reserve Bank of India’s (RBI) report released in March 2016, Concept Paper on Card Acceptance Infrastructure, usage of debit cards at ATMs still account for 88% of the total volume and around 94% of the total value of debit card transactions. Compared to this, transactions at point of sale (Po. S) terminals account for only 12% of volume and 6% of value of transactions.

 According to the RBI report, India’s average number of card transactions per inhabitant According to the RBI report, India’s average number of card transactions per inhabitant at 6. 7 is among the lowest in the world. In Australia it is 249. 3, in Canada it is 247. 9, in the UK it is 201. 7, Brazil 54. 8, and it is China 14. 4.

 According JM Financial report, Card penetration in India, number of Po. S devices According JM Financial report, Card penetration in India, number of Po. S devices stands at 1. 2 million for more than 14 million estimated merchants, which means that over 90% of the outlets are left without a medium to collect payments electronically

In India total issued cards crossing 60 cr in FY 15, it is way In India total issued cards crossing 60 cr in FY 15, it is way lower in comparison with the 4. 2 billion cards issued in China. RBI has indicated that India would need to set up close to 20 mn Po. S Ru. Pay is an Indian domestic card payment network launched in 2012 by the National Payments Corporation of India (NPCI)

 NPCI plans to launch its Credit Card variant in Sept’ 16. NPCI has NPCI plans to launch its Credit Card variant in Sept’ 16. NPCI has leveraged its existing capabilities in payment systems (such as National Financial Switch) and built new ones to create a domestic and cost-efficient alternative card network to Visa/Master. Card.

Cardholder presents the credit card at the point-of-sale. Merchant swipes the card or enters Cardholder presents the credit card at the point-of-sale. Merchant swipes the card or enters the information by hand, enters the purchase amount and transmits the authorization request to the Acquirer electronically sends the authorization request into Interchange passes on the authorization request to the Issuer approves or declines the transaction. Interchange forwards the Issuer's authorization response to the Acquirer forwards the response to the Merchant receives the authorization response and completes the transaction accordingly. Merchant closes the batch and submits the transactions to the acquirer through their merchant account.

Acquirer electronically submits transactions into Interchange for settlement. It also credits the merchant's checking Acquirer electronically submits transactions into Interchange for settlement. It also credits the merchant's checking account for the submitted transactions once settlement information is received from Visa and Master. Card Interchange (called funding). Interchange facilitates settlement by sending settled transaction information to the issuer and acquirer and providing both with information on what to credit the merchant, what to debit the cardholder and the type and amount of the interchange fees that are to be paid by the acquirer to the issuer. Issuer posts the transactions to the cardholder accounts and sends the monthly statements to its cardholders. Cardholder receives statements and pays issuer

SOME COURT JUDGEMENT ON CORRUPTION SOME COURT JUDGEMENT ON CORRUPTION

Mere receipt of amount by accused as bribe is not sufficient to fasten guilt, Mere receipt of amount by accused as bribe is not sufficient to fasten guilt, in absence of any evidence with regard to demand acceptance of amount as illegal gratification [2013] 37 taxmann. com 89 (SC) SUPREME COURT OF INDIA State of Punjab vs Madan Mohan Lal Verma

SUPREME COURT OF INDIA CRIMINAL APPEAL NO. 31 OF 2009 P. SATYANARAYANA MURTHY …APPELLANT SUPREME COURT OF INDIA CRIMINAL APPEAL NO. 31 OF 2009 P. SATYANARAYANA MURTHY …APPELLANT VS THE DIST. INSPECTOR OF POLICE AND ANR. … RESPONDENTS

(22). As a corollary, failure of the prosecution to prove the demand for illegal (22). As a corollary, failure of the prosecution to prove the demand for illegal gratification would be fatal and mere recovery of the amount from the person accused of the offence under Sections 7 or 13 of the Act would not entail his conviction thereunder Sept 15 Judgement

Ethics and morals have taken a back seat in modern India’s scheme of things. Ethics and morals have taken a back seat in modern India’s scheme of things. To eradicate the cancer of corruption the “hydraheaded monster”, it is now a high time for the citizens to come together to tell their Governments that they have had enough. That is this miasma of corruption. If the same continues, taxpayers’ may resort to refuse to pay taxes by ‘non cooperation movement’.

BOMBAY HIGH COURT NAGPUR BENCH CRIMINAL APPLICATION (ABA) NO. 642 /2015 Pralhad @ Pratap BOMBAY HIGH COURT NAGPUR BENCH CRIMINAL APPLICATION (ABA) NO. 642 /2015 Pralhad @ Pratap s/o Tanbaji Pawar vs. State of Maharashtra : Through PSO Bhandara 27 -1 -2016

REPORT OF THE SELECT COMMITTEE OF RAJYA SABHA ON THE PREVENTION OF CORRUPTION (AMENDMENT) REPORT OF THE SELECT COMMITTEE OF RAJYA SABHA ON THE PREVENTION OF CORRUPTION (AMENDMENT) BILL, 2013 PRESENTED TO THE RAJYA SABHA ON 12 th AUGUST, 2016

Definition of “undue advantage” Laying down time line for speedy trials of corruption cases Definition of “undue advantage” Laying down time line for speedy trials of corruption cases – 2 years to 4 years Max Criminalization of the act of giving of bribe Intimate agencies in 7 days else can be jailed upto 7 years

Sanction for initiating investigation against a public servant to be granted by Lokpal or Sanction for initiating investigation against a public servant to be granted by Lokpal or Lokayukta ( Max 4 months ) Extending protection of prior sanction of the Competent Authority of appropriate Government to retired government servant and providing for timeline for granting sanction by that Competent Authority

Foreign investors pull out 5 Billion $ (Rs. 33, 000 crs) in November 2016 Foreign investors pull out 5 Billion $ (Rs. 33, 000 crs) in November 2016 – Highest in 38 months

Illicit Financial Outflows from the Top 10 Developing Economies, 2003 -2012 (in millions of Illicit Financial Outflows from the Top 10 Developing Economies, 2003 -2012 (in millions of U. S. dollars) India – Rank 4 Cumulative from 2003 till 2012 is 439, 587 Million $ = Rs. 29 lac crores Source : Raymond W. Baker Global Financial Integrity December 15, 2014

Estimates show that the developing world lost US$ 991. 2 billion (Rs. 65 lac Estimates show that the developing world lost US$ 991. 2 billion (Rs. 65 lac cr) in illicit financial flows in 2012, over ten times the amount of official development aid received by these countries in that year, and greater than the amount of net foreign direct investment received. From 2003 - 2012, US$ 6. 6 trillion ( Rs. 4. 35 crs ) left developing country economies illicitly Asia accounted for 40. 3% of cumulative illicit financial flows from the developing world during 2003 -2012. There are five Asian countries in the top ten globally: China, India, Malaysia, Indonesia & Thailand

India Figures Housing 6% of GDP - 2 nd Largest employer Agriculture – 58% India Figures Housing 6% of GDP - 2 nd Largest employer Agriculture – 58% rural dependent 2 nd largest fruit producer in world 1 st in Spices in World Agriculture – 10% of exports Auto – One of largest in world Gives 7. 10% to GDP Cement – Worlds largest producer

India Figures Retail – 10% of GDP 5 th Largest Global destination in Retail India Figures Retail – 10% of GDP 5 th Largest Global destination in Retail Gives 8% employment Retail Industry is 39 lac cr in 2015 Retail Expected is 66 Lac crs by 2020 Manufacturing - 6 th largest in world Contributes to 16% of GDP

India Figures Food – It is 31% of expenses for Indian households - 6 India Figures Food – It is 31% of expenses for Indian households - 6 th Largest in World To grow from 32 lac crs in 2013 to 61 Lac crs by 2020 - Gives 14% of GDP Gems & Jewellery – 6 to 7 % of GDP Exports 95% of worlds diamonds Worlds Largest cutting/Polishing

India Figures Education – 14 lac schools 22 cr chidlren 6. 60 lakh crs India Figures Education – 14 lac schools 22 cr chidlren 6. 60 lakh crs Industry Higher education system largest in world Pharma – Worlds Largest producer of generic drugs Largest pool of scientists 80% of Global HIV drugs made by India

This giant engine India moves a lot on cash economy This giant engine India moves a lot on cash economy

Failure lies not in the absence of great ideas but, rather, in their execution Failure lies not in the absence of great ideas but, rather, in their execution

Thank You CA Rajesh Sanghvi 98210 12159 While the best efforts have been taken Thank You CA Rajesh Sanghvi 98210 12159 While the best efforts have been taken to present the information herein, any inadvertent error ( if any ) is regretted. This is a generalized expression on the subject with no liabilities. Other than information in the pubic domain any reproduction of this work may be avoided, as a mark of professional ethics. For correction pls contact the author on 9821012159. It is always advisable to solicit specific legal opinion on a case to case basis. 71