Understanding Demonetization: 4 Primary Reasons it was Implemented

The proposal of demonetizing 500 and 1000 rupee notes was passed in the RBI Board at 6 pm on 8th of November led by RBI Gov Dr. Urjit Patel. For the same, a Cabinet meeting of Union Government was called on at 7 pm. Our honorable Prime Minister had already made the communication to the head of three armed forces regarding this decision of demonetization.

What is Demonetization?

The replacement of old unit of currency notes with a new currency unit is known as demonetization. In 2016, the Indian government decided to demonetize the 500 and 1000 rupee notes which account 86% of the country’s cash supply. This move was done:

to eradicate the flow of black currency in the system,

to eliminate fake black money responsible for terrorist financing activities,

to promote a cashless economy and

to fight tax evasion.

By doing this, the government has now forced individuals and entities having a huge amount of black money to convert them at a bank, where by law they are required to acquire tax information from the entity. If in case the entity could not provide proof of making any tax payments on the cash, a tax penalty of 200% of the tax owed was imposed as per the law made by the government of India.

Objectives of Demonetization:

#1. Eradicating Black Money -

One of the primary objectives of demonetization is to eradicate the flow of back money in the system. The term “BLACK MONEY” refers either to the revenue that is generated through illegal practices or to the amount which is supposed to be paid as a tax but has not been paid. This factor holds the maximum share of weightage in this decision making. As per the reports, the government estimated around 3.5 to 7L crores of this currency in circulation.

#2. Eliminating Fake Currency Notes -

This factor comparatively holds less weightage as the total fake currency estimated was around 400 crore which was 0.025% of currency in circulation. Although there is not much data available for this. It is often considered as the major section of this fake currency is used for terrorism, so it is a step to abolish any terror practices in the nation.

#3. Promoting Cashless Economy -

Economic transactions through electronic means like credit cards/debit cards/online transaction etc is referred as the cashless economy. The main advantage of this is to sustain the black market that often proves damaging our national economy. As they say: “You can't become corruption free unless you are cash free.”

#4. Fighting Tax Evasion -

Indian taxes payers have found ways not to pay them and, as a result, it may be said that the income of the country has been suffering. India has been facing a massive problem with tax evasion. People who should be paying taxes have found ways not to pay them and, as a result, it may be said that the income of the country has been suffering.

My next blog would highlight the impact of demonetization in India. READ HERE

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Written by Deepak Sharma
An ambivert by nature and a keen business editorial reader. I believe - "Either write something worth reading or do something worth writing"

Friday 6 January 2017