The document provides background information on India's demonetization initiative in 2016. It discusses how the Indian government made high denomination banknotes of Rs. 500 and Rs. 1000 invalid, and introduced new notes of Rs. 2000 and Rs. 500. The key objectives were to curb black money, counterfeit currency, and terror funding. It outlines the operational guidelines issued, potential benefits like reducing corruption and inflation. Short term impacts included cash shortages and economic disruptions. Long term benefits may include greater tax compliance, reduced real estate prices, and boosting digital payments. Ensuring adequate currency supplies and support measures were important considerations for the policy.

1. DEMONETISATION 2016

2. INTRODUCTION
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• November 8, 2016 a day when the Indian Government launched a “surprise attack”/ “Surgical strike”/ “Surgery
against black money in the economy
• The Hon’ble Prime Minister of India, in an unscheduled live televised address to the nation on November 8, 2016 at
20:15 Indian Standard Time (IST) declared circulation of all INR 500 and INR 1000 banknotes of the Mahatma
Gandhi Series as invalid with immediate effect
• Issuance of new INR 500 and INR 2000 banknotes of the Mahatma Gandhi New Series in exchange for the old
banknotes was announced
• With the exchange of new denomination notes of INR 2000 and not INR 1000, the conversion of black money
would be curbed
• Demonetization has been done in an effort to:
– stop counterfeiting of the current banknotes allegedly used for funding terrorism
– crack down on black money in the country

3. BACKGROUND

4. BACKGROUND
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• Similar demonetization has been done in the past. In India, it has been done:
1.In January 1946, wherein banknotes of INR 1000 and INR 10000 were withdrawn
2.In January 1978 wherein banknotes of INR 1000, INR 5000 and INR 10000 were demonetized
• In 2012 the Central Board of Direct Taxes (CBDT) had recommended against demonetization, considering
demonetization not to be a solution for tackling black money or economy, which is largely held in the form of
benami properties, bullion and jewelry
• Difference with respect to demonetization in 2016 with that of earlier once obviously is the size
• Previous ones barely impacted common people but this one is huge with 85 percent of currency out of the system

5. BACKGROUND
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• Demonetization has been embraced in the past by several other countries. They include:
• Some of the countries have met the purposes and whereas have failed
• In 1996, Australia became the first country to have a full series of circulating polymer bank notes after
replacing all paper-based notes
Country Year Denomination
United States 1969 $10,000 and $1,000
Ghana 1982 50 cedis
Zimbabwe 2010 One hundred trillion dollar
Myanmar 1987 25-, 35-, and 75-kyat notes
Australia 1996 Full series of polymer bank notes

6. SOME STATISTICS
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Quantum of Bank Notes in circulation vis-a-vis high denomination notes in circulation
Particulars Amount in INR
Value of Total Bank notes 164.2 lakh million
Value of high denomination bank notes 141.8 lakh million (86
percent)
Particulars In Numbers
Quantum of Total Bank notes 90,266 million
Quantum of High denomination bank notes 22030 million (ie 24
percent approx)
Value of bank notes in circulation vis-a-vis high denomination notes in circulation as on March 31,
2016 (as per Annual Report of Reserve Bank of India)
Value of Bank Notes in circulation as on October 28, 2016 in India was INR 177.7 lakh million

7. PURPOSE/ NEED FOR
DEMONETIZATION

8. PURPOSE/ NEED FOR DEMONETISATION
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• High denomination notes are known to facilitate generation/ circulation of black money
• Total number of bank notes in circulation rose by 40 percent between 2011 and 2016
• Increase in number of notes of INR 500 denomination was 76 percent and for INR 1,000 denomination was 109
percent during this period
• Infusion of new series bank notes will be monitored and regulated by RBI
• The World Bank in July, 2010 estimated the size of the shadow economy for India at 20.7 percent of the GDP in 1999
and rising to 23.2 percent in 2007
• A parallel shadow economy corrodes and eats into the vitals of the country's economy resulting in:
–Inflation adversely affects the poor and the middle classes
–Depriving the Government of its legitimate revenues
–Forged cash used to fund terrorist activities against India

9. PURPOSE OF DEMONETISATION
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Accordingly, steps have been taken to demonetize the high denomination notes and help to:
1. curb financing of terrorism through the proceeds of Fake Indian Currency Notes (FICN)
2. curb the use of FICN funds for subversive activities such as espionage, smuggling of arms, drugs and other
contrabands into India, and
3. for eliminating Black Money which casts a long shadow of parallel economy on our real economy

10. OPERATIONAL GUIDELINES

11. OPERATIONAL GUIDELINES
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In order to implement the above decisions of the Government and keeping in view the need to minimize
inconvenience to the public, several operational guidelines has been issued:
(i) Old High Denomination Bank Notes may be deposited up till December 30, 2016
(ii) Old High Denomination Bank Notes can be exchanged as per the limits fixed by the RBI
(iii) No limit on the quantity or value of Old High Denomination Bank Notes to be credited to the account of the
tenderer maintained with the bank on complying with extant Know Your Customer (KYC) norms and valid
proof of identity
(iv) Old High Denomination Bank Notes tendered can be credited to a third party account on submission of
specific authorisation along with proof of identity
(v) Limits in cash withdrawal and ATM withdrawals
(vi) No restriction on the use of any non-cash method of operating the account which includes cheques, demand
drafts, credit/debit cards, mobile wallets and electronic fund transfer mechanisms

12. OPERATIONAL GUIDELINES
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Old High Denomination Bank Notes (Rs 500) would continue to be
accepted at certain places for public utility such as Government
Hospitals and pharmacies in these hospitals/ Railway ticketing
counters/ ticket counters of Government/Public Sector
Undertaking buses and airline ticketing counters at airports; for
purchases at consumer co-operative societies, at milk booths, at
crematoria/ burial grounds, at petrol/diesel/gas stations of Public
Sector Oil Marketing Companies and for arriving and departing
passengers at international airports and for foreign tourists to
exchange foreign currency at airports up to a specified amount
for a specified period.
Withdrawal upto INR 2.5 lakhs by the families with upcoming
weddings subject to certain compliances

13. OPERATIONAL GUIDELINES
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I. Special provision for farmers and traders for buying agricultural produce has been introduced from
time-to-time with respect to withdrawals and use of old high denomination notes
II. Special provisions for weddings with respect to withdrawal of cash has been introduced in order to minimize the
inconvenience to the public at large
III. Special provision for receipt of advance salary by Central Government employees up to level of Group C and
equivalent level in defense Para Military Forces, Railways and Central Public Sector Enterprises
IV. Expansion of Banking Correspondents Network (BCs) for rural areas
V. Options for withdrawal of new currency from debit cards has been allowed from petrol pumps, Big Bazaar and
select petrol pumps (using POS machines)
VI. Increase in use of digital wallets

14. MAJOR BENEFITS

15. MAJOR BENEFITS
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Demonetization of high denomination notes would have leap in long term benefits which could be classified as direct and
indirect impact in the economy
Direct impact:
1. Fake currency - Out of circulation in one stroke
2. Hawala Sources Dried Up - Funding stops to Terrorists, Naxalites and underworld
3. Real estate prices dip to be seen in the long run
4. Reduction in inflation
5. Reduction in Fiscal Deficit
6. Reduction in lending rates
7. Increase in GDP

16. Page 16
Indirect impact:
1. Kashmir moved to normalcy - Blow of insurgency, no more schools
being burnt and no stone patters found
2. Use of Apps and cards - Initial step towards digitization in India with the
involvement of small vendors leading to transparency in the system
3. Gold Stock - Declaration in the stock maintained by the jewelers on a
day-to-day basis, which if continued would have control over
generation of wealth from black money
4. Increase in revenue collection by the Government authorities
5. Simplification in tax policies and reduction in tax rates in the upcoming
years
MAJOR BENEFITS

17. IMPACT ANALYSIS

18. IMPACT ANALYSIS - SHORT TERM
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1. Scarcity of cash due to demonetization
2. Sporadic violence wherein people attacked bank premises and ATMs with no major injuries
3. Large chunk of the population, especially at the bottom of the pyramid and rural population highly impacted due
to poor banking facilities and extremely higher dependence on hard currency
4. Various tribal areas living in isolation and illiteracy have been impacted adversely in the short run
5. Certain sectors necessitating frequent use of cash on a daily basis including hospitals, households, roadside vendors,
domestic workers, cab drivers, doctors, transporters likely to face interim disruptions
6. Farmers may face financial difficulties to pay daily wages to laborers in smaller denominations and manage other
farming expenses
7. Slowdown in consumer spending due to limited availability of cash

19. IMPACT ANALYSIS - LONG TERM
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Real
estate,
Jewelry
and luxury
products
•Downward
revaluation
•Indirect reduction in
prices of cement and
steel
Politics
and
elections
•Transparency
•Appropriate utilization
of central exchequer
Online
transactio
ns
•Substantial increase
leading to
transparency
•Increase in revenue
collection by there
revenue authorities

20. IMPACT ANALYSIS - LONG TERM
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Fear of high costs associated with tax evasion
should lead to higher tax compliances which could
lead to reduced overall tax rates by the
Government
Reduced interest rates, inflation and strengthening
of the currency marginally
Parallel economy to a great extent consolidates with
the main economy, as targeted by the
demonetization move
Positive bearing on Governments’ fiscal deficit

21. IMPACT ON ECONOMY - SECTOR WISE
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Banking
• About 3 trillion rupees in the form of old INR 500 and INR 1000 banknotes deposited in the banking system
• 500 billion rupees dispensed via withdrawals from bank accounts, ATMs as well as exchanges over the bank counters
• Spike in the usage of debit card and credit card post demonetization was also reported
Business
• By the second week after demonetization, sale of cigarette witnessed a fall of 30-40 percent
• E-commerce companies saw up to a 30 percent decline in cash on delivery (COD) orders
• E-payment options like PayTM and PayUMoney saw a rise
• Real Estate – Primary transactions may not be impacted, secondary sales may to some extent

22. IMPACT ON ECONOMY - SECTOR WISE
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Municipal and local taxes
• Allowability of use of INR 500 and INR 1000 notes to pay municipal/ local taxes resulted in increase in revenue
collections
Agriculture
• Adverse impact on Input-output channels in agricultural sector
• Sale, transport, marketing and distribution of ready produce to wholesale centres or mandis, adversely impacted
• Disruptions, breaks in the supply chains feedback to farmers as sales fall
• Increased wastage of perishables
• Lower revenues that show up as trade dues instead of cash in hand

23. OVERALL IMPACT
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Short Run
• Whooping increase in cash deposits at banks and reduction in black money
• No affect on stock of black money which had been invested and held in other forms of assets like benami properties
in land and real estate, gold, diamonds, precious gems, foreign currency, artifacts, paintings, etc
• Increase in the proportion of other assets in which black money is held, with different level of difficulties and
challenges to trace the same
Long Run
• The thought remains unanswered/ un-warranted whether there is any way to prevent the generation of black
money again and not re-enter the system?
• Psychological impact on the society on account of this overnight move would result in reconsidering before
indulging into generation of black money
• Greater level of scrutiny at various levels and digitization coupled with sharing of information between various
departments of the Government would help to keep a check on the parallel economy
• Introduction of Goods and Services Tax (GST) to play a key role to keep checks and balances

24. KEY CONSIDERATION

25. KEY CONSIDERATION
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Details of all
bank accounts
in the Income
tax returns
Linking of PAN
and Aadhar
numbers
Introduction of
Jan Dhan
Yojana
Revised Treaty
with most of
the countries
Passing of
Benami
Transaction Act
and
Income
declaration
scheme
(discussed in
detail in the
next slide)
Demonetization
For demonetisation to be successful and to meet its purpose it is important that certain cautionary steps are taken before and
after the introduction of the demonetisation scheme.
Considering the above, the Government of India, had considered the following steps:

26. KEY CONSIDERATION
Page 26
The Government of India had given an opportunity for disclosing the black money and payment of taxes in the Income Declaration Scheme
(IDS) 2016. Total amount in bank accounts may swell beyond the INR 65,000 crore collected under the IDS.
Declaration in IDS 2016 Declaration of cash deposits in ITR as current year's income
No requirement to declare the source of income Source of income and manner of deriving income, period in which it was
derived may need to be substantiated
One-time immunity from penalty and prosecution under the Income Tax
Act, 1961 and Wealth Tax Act, 1957
Wealth Tax proceedings could be reopened. Income escaping
assessment (Section 147) could also be resorted
Secrecy of declaration would be maintained and the Government would
not furnish a copy of the declaration to any other Government agency or
Department
Details of cash deposit would be made available by Govt to other
agencies. Departments dealing with indirect taxes - VAT/ Service Tax/
Excise dept may launch proceedings for suppression of sales and evasion
of indirect taxes
If part of sale proceed of property is received off-record, the same could be
declared without attracting Section 269SS and penalty under Section 271D
of Income-Tax Act, 1961
If property sale proceed received in black is declared, Section 269SS
would be attracted and assesee could liable to penalty under Section
271D of the Income Tax Act, 1961
Total tax liability would be only 45 percent without liability for interest
under Sections 234B and 234C of the Income Tax Act, 1961
One could incur huge interest/ penalty if declared amount cannot be
proved as current income and found as past income
Allowed payment by instalments - At least 25 percent by November 30,
2016, not less than 50 percent by March 31, 2017 and entire amount by
September 30, 2017
Entire amount of advance tax on amount deposited in bank and to be
declared will have to be paid latest by March 31, 2017 (self-assessment
tax)
M
A
J
O
R
D
I
F
F
E
N
C
E
S

27. Page 27
Substantial
amount of new
currency notes
had to be
pre-printed to
meet the demand
Recalibration
of ATM’s
Expand the
safety
measures at
Banks, ATMS’s
and other
sensitive places
Time-to-time
guidance on
the scheme
Clarity on tax
and penal
provisions
Increase the
quantum of
banking staff
to manage
the chaos
KEY CONSIDERATION
Though preliminary steps have been taken before the introduction of the demonetization scheme, considering the quantum of high
denomination notes in circulation in Indian economy (ie 86 percent), certain additional steps were required to be taken. They include:

28. Page 28
The e-wallet apps, taxi apps,
business apps collect the personal
details such as IP address, travel
details, transaction details etc as
per the privacy policy
The privacy policy of the various
apps are subject to change from
time-to-time
Steps were required to be taken to
modify the privacy policies as Indian
laws protect only “sensitive
personal data”. Such steps are to be
taken at the earliest possible.
Modification
of Privacy
norms before
Digitization Instances of cyber crimes such as
duplication of Debit/ Credit cards and
leakage of confidential details such
as card number, account number,
ATM’s have increased in the recent
past.
Considering the move for depositing
of cash with the bank accounts, the
privacy norms, security of the money
in the bank accounts and steps to
monitor and eliminate the cyber
frauds had to be initiated before the
introduction of demonetization
scheme
Cyber Crimes
KEY CONSIDERATION
Apart from the above measures, steps should have been taken to improve/ meet the safety aspects of the online transactions,
e-wallet transactions etc wherein the privacy terms are set in place before digitization of transactions

29. WHAT NEXT??

30. WHAT NEXT??
Page 30
Details of Swiss/ foreign bank account holders, foreign asset holders, forex etc
After the demonetization of high denomination notes , the other forms of wealth generated through black money would
have to be taken note of
Jewelry, bullion purchased and hoarded from black money
Digitization of Indian economy and maintain transparency in the long run
Benami properties
Transforming India into a cashless economy

31. ON THE RADAR
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• Sudden spurt in Jan Dhan accounts (INR 21,000 crores already deposited in 25 crore Jan Dhan accounts within a
fortnight, source may be examined)
• IT Lens on big cash deposits, to use data analytics tools to examine investment and consumption pattern
• Lens on high value RTGS transactions
• Jet, Set, Cash-in Northeast states
• Donations by charitable institutions and trusts
• Real estate, Jewelry, forex businesses
• Sliding Rupee despite Central Bank’s best efforts (records low; nears 69/ dollar)
• Rainbow unity of the Opposition staging vociferous protest

32. OPEN HOUSE & DISCUSSIONS
THANK YOU
Sandeep Jhunjhunwala, FCA, ACS, B.Com (H)
E: writetosandeepj@gmail.com
M: +91 97401 55469
The views in this presentation are personal views of the Presenter. The information contained is of a general nature and is not intended to address the circumstances of
any particular individual or entity. Although, the endeavor is to provide accurate and timely information, there can be no guarantee that such information is accurate as of
the date it is received or that it will continue to be accurate in the future.