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How Demonetisation has Affected the Income Tax Scenario in India

Effect of Demonetisation on Income Tax
March 06, 2017 4411
The cash was stashed away in underground bunkers, stitched into mattresses and left to stay crisp for such a time when it could be pumped back into the vicious underbelly of India's black money empire. For the black money hoarder, business was good and the possibilities, endless. He was seemingly invincible and glib about it too. That was until November 8th. In what was an unprecedented exercise of powers by the government, the writing was on the wall for anyone who was hoarding a fortune in 500 and 1000 notes.

Indeed, an unfathomable volume of currency circulates in the economy sans accountability like an intricate network of sewer pipes that ultimately drain into a few deep pockets at the expense of the sanctity of innocent taxpayers. What this inevitably does is make the taxation system adversarial and less reliant on business analytics for scrutiny.

This paradigm creates what is called the grey economy. It carries on legitimate business, but using cash so it can conceal income and pay lower taxes as opposed to black economy which is the illegal business of taking bribes, capitation fees, ransom, protection money and such in cash. Such is the nature of Black economy: it uses the money it makes, but focuses more on assets and hoarding. It pushes up demand for property and gold. It hoards the cash locally and globally, treating it as a store of value. While the intent in both systems is to hide earnings and evade tax,the grey economy uses the cash to buy goods and services and inflates prices for all of us making it an equally potent threat.

The unenviable job of managing this ugly network and creating liquidity falls on the banking system. The ugliness of it lies in the extent and dissemination of unaccounted cash spread across millions of unscrupulous players using their accounts as storage tanks and siphoning off the water for future use, compounding the problem at each stage. The cash economy harms all of us by focusing on storing money at every stage, rather than letting it flow in a stream, being used only where it is needed.

Undisclosed cash that is pouring into bank accounts will enable the income tax department to collect taxes. Taxpayers who have drawn cash for various uses, can deposit it all back as long as it is within the amounts they legitimately earned and paid taxes on. Evaders will pay taxes on what they bring into the bank.

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