These are people with undisclosed ₹2,000 bills – the cash they have to wash and hide in the next four months.
In Mumbai’s gold bazaar, some jewellers were charging a premium on the precious metal for accepting the currency note that will soon go out of circulation. On Saturday afternoon, gold was sold in the unofficial market for around ₹67,000 (per 10 grams) when paid for with ₹2,000 notes, compared with the official rate of ₹63,800 (including GST).
“It’s a knee-jerk reaction. The premium has gone up since Friday evening when the announcement came, but I think it will come down in the next few days. People would try out other ways. There’s time,” said a source in the market.
However, with rules becoming harsher since the demonetisation of 2016 and markets like real estate expected to be impacted by the withdrawal of the ₹2,000 note, cash hoarders may be left with very few options.
Depositing it with the bank and offering it for tax is no solution. Those who tried it in 2016 were slapped with tax demands and notices for reopening of assessment as late as 2021.
Some, said another person, would try to circulate the cash through temples and religious institutions – which are allowed to receive anonymous donations – to get back currency notes of smaller denominations.
In the 2016 demonetisation, many jewellers, functioning round-the-clock, offered an easy way to regularise secret stacks of the delegalised ₹500 and ₹1,000 notes.
As a result, many are tempted to do it again. Even though there was a stiff premium charged for the gold sold with banned notes in 2016, buyers did not lose any money, with gold prices surging later.
Consequences Ahead
Now, however, things have become tougher.
Siddharth Banwat, a chartered accountant with a leading firm in Mumbai, said, “People working on various schemes to utilise large amounts of cash with ₹2,000 notes must think of the consequences. One may see short-term business opportunities in some transactions, but there are enough restrictions built in under various laws.”
“Businesses will have to be cautious of various provisions brought in the tax laws to curb accommodation entries,” he said. “For instance, there are several transactions in which quoting of PAN is mandatory, which includes payment in cash of an amount exceeding ₹50,000 to a hotel or restaurant against bill at any one time, in connection with travel abroad or payment for purchase of any foreign currency at any one time. Similarly, any sale or purchase of goods or services for an amount exceeding ₹2 lakh per transaction requires PAN.”
Immediate Reactions
Banwat also pointed out that as per section 269 ST of the Income Tax Act, no person can receive Rs 2 lakh or more in cash from a person in a day, or in respect of a single transaction or in respect of transactions relating to one event or occasion. “Earlier this month, the threshold for mandatory generation of e-invoicing was reduced to Rs 5 crore,” he said. However, it is widely believed that with the currency note remaining legal tender till the end of September, those looking to launder the money would explore new avenues.
People reacted differently on Saturday. The Angadiyas – informal cash couriers used by many businessmen – stopped accepting Rs 2,000 notes. Families which had stashed away these notes in bank lockers cleared them out. Some tried finding out whether the cash can be spent to buy dollars and euros in the foreign exchange black market – a transaction that would use up the notes as well spare them from the tax on international credit card spends. Over a call, the Reserve Bank of India advised banks on ways to restock ATMs and replenish the outgoing notes – probably to avoid the chaos of 2016.
“Those who had deposited cash during demonetisation had received income tax notices. The government had then assured that savings up to Rs 2.50 lakh would not be questioned by the authorities. However, this time, there is no such guideline yet. Families with savings in cash may avoid depositing to prevent inquiries from the tax authorities. So, further clarifications or relief should be provided for genuine cases,” said Priyank Ghia, partner of Chokshi & Chokshi LLP.
In 2016, many used undisclosed cash to buy white goods, take memberships of clubs, spas and gyms, while businesses used it to clear dues to suppliers and repay old loans. Some of these stories may repeat themselves, albeit in pockets and at a smaller scale. But will tax and enforcement authorities be able to catch the tainted money when it changes hands? The bigger story is yet to play out.