DEMONETIZATION - 2016

I-T-Raids

BENAMI PROPERTY

‘NOTEBANDI’ IN INDIA

DEMONETIZATION NOTIFICATION

To curb financing of terrorism through the proceeds of Fake

Indian Currency Notes (FICN) and use of such funds for

subversive activities such as espionage, smuggling of arms,

drugs etc., into India, and for eliminating Black Money which

is a shadow of parallel economy on our real economy, it is

decided to cancel the legal tender character of the High

Denomination bank notes of Rs.500 and Rs.1000

denominations issued by RBI till now. This will take effect from

the expiry of the 8th November, 2016.

A PARALLEL SHADOW ECONOMY OF BHARATH

• The World Bank in July, 2010 estimated the size of the shadow

economy for India at 20.7% of the GDP in 1999 and rising to

23.2% in 2007. There are similar estimates made by other Indian

and international agencies.

• A parallel shadow economy corrodes and eats into the vitals of the

country’s economy. It generates inflation which adversely affects

the poor and the middle classes more than others. It deprives

Government of its legitimate revenues which could have been

otherwise used for welfare and development activities.

CASH VS DIGITAL

• Fake currency possible when cash is used for day to day

transactions and banking transaction is avoided.

• Informal savings are made formal by demonetization

as banks channel these for productive purposes.

• Modes of digital payments are: Unstructured

Supplementary Service Data (USSD), Aadhaar enabled

Payment System (AEPS), Unified Payments Interface

(UPI) and RuPay Cards.

“Black Money is the aggregate of incomes which are

taxable but not reported to authorities.”

• 2015: ‘The Black Money (Undisclosed Foreign Income and

Assets) and Imposition of Tax Act, 2015’ has become

functional now. Undeclared assets in foreign countries.

• Black money needs strict handling of laundering of untaxed

money; it needs to be brought into the mainstream.

• Corruption is defined as the use of public office for private

gains. Tax evasion is an illegal act of an individual or a

corporate body / business. Not collecting tax is corruption.

Effect on parallel economy

The removal of these 500 and 1000 notes and replacement

of the same with new Notes is expected to

- remove black money from the economy as they will be

blocked since the owners will not be in a position to deposit

the same in the banks,

- Temporarily stall the circulation of large volume of

counterfeit currency and

- curb the funding for anti-social elements like smuggling,

terrorism, espionage, etc.

EFFECT ON MONEY SUPPLY

• With the older 500 and 1000 Rupees notes being scrapped, until

the new 500 and 2000 Rupees notes get widely circulated in the

market, money supply is expected to reduce in the short run.

• To the extent that black money (which is not counterfeit) does not

re-enter the system, reserve money and hence money supply will

decrease permanently.

• However gradually as the new notes get circulated in the market

and the mismatch gets corrected, money supply will pick up.

In the last two years, the Govt. has taken steps to curb the

menace of black money in the economy including setting up of

a Special Investigation Team (SIT); enacting a law regarding

undisclosed foreign income and assets; amending the Double

Taxation Avoidance Agreement between India and Mauritius

and India and Cyprus; reaching an understanding with

Switzerland for getting information on Bank accounts held by

Indians with HSBC; encouraging the use of non-cash and

digital payments; amending the Benami Transactions Act; and

implementing the Income Declaration Scheme 2016.

CONDUCTING INCOME-TAX RAIDS

• Tax noncompliance is a range of activities that are

unfavorable to a state's tax system.

• This may include tax avoidance, which is tax reduction by

legal means, and tax evasion which is the criminal non-

payment of tax liabilities.

• The use of the term 'noncompliance' is used differently by

different authors. Its most general use describes non-

compliant behaviors with respect to different institutional

rules resulting in unobserved economies.

POST DEMONETIZATION I-TAX RAIDS

• Income tax and police raids across the country have caught

everybody's attention with the authorities seizing large stashes

of new Rs. 2,000 notes.

• Given that the new banknote is being carefully rationed, the

raids have raised some serious questions about how these

people have managed to get hold of so much of the new

currency.

• Within days of the announcement of the note ban, two people

were arrested with Rs 3.5 crore in New Delhi.

RAIDS OF I-T DEPT. - SINCE DEMONETIZATION

• Over 13 crores seized in New Delhi: Income Tax officials

and Delhi Police on December 10 raided the office of a law

firm T&T in southern part of the national capital and found

over Rs. 13 crore in cash, of which Rs. 2.5 crore was in

new currency notes.

• The Crime branch team found 7 crores in old Rs 1,000

rupee notes, 3 crores in Rs. 100 denominations, and the

rest a mix of old and new notes.

Chennai: Around 166 crore currency seized. On December

10, the I- Tax department seized 24 crore rupees cash in new

notes in Chennai. This comes after a haul of cash and gold

post demonetization in the city, in which over Rs 142 crore

unaccounted assets were recovered.

Hyderabad: In Hyderabad, CBI busted a note exchange

racket by recovering 65 lakh rupees of new 2000

denomination notes from the Senior Superintendent of Post

Offices.

Challakere, Karnataka: In another development, on December

10, the Income Tax department zeroed in on 5.7 crore rupees

cash in new notes. Besides 32 kgs of Bullion (gold biscuits)

and old notes worth 90 lakh rupees was stashed inside

bathroom tiles of a Hawala operator in Challakere town in

Karnataka.

The department officials laid their hands on the stash on the

basis of searches that began against casino and bullion

traders in Hubballi and Chitradurga districts on December 9.

Vellore, Tamil Nadu: On December 9, a seizure took place

in Vellore where Rs 24 crore in cash was recovered. Rs

2,000 currency notes, kept in 12 boxes, were seized from a

car.

Poll bound states of UP and Punjab: In Punjab, fake

currency with face value of 4.15 lakh rupees was seized in

Sangrur. In Uttar Pradesh, Enforcement Directorate

reportedly found huge amount of cash in a raid at the ruling

Samajwadi Party MLC Santosh Yadav's house.

Bhilwara, Rajasthan: In yet another raid on December 10,

Income Tax Department seized Rs 7, 20, 000 in new Rs

2,000 currency notes from Bhilwara, Rajasthan.

Surat, Gujarat: In Surat, on December 9, Income Tax

officials raided different locations in the city and found Rs

1.57 crore in the form of new currency notes issued by

the government after demonetization.

Goa: The CBI and local police arrested eight persons and

confiscated Rs 1.5 crore worth of new currency in Goa on

Dec. 7.

• Raid at former BJP leader's house in West Bengal: On

December 6, former BJP leader Mahesh Sharma from

West Bengal was arrested by the special task force. Rs 33

Lakh in form of Rs 2,000 notes was confiscated from him.

• Four bank officers were accused by the police of

converting black money after Rs. 5.7 crore cash was

seized from a hawala operator.

• While there is less than adequate number of Rs. 500 and

2,000 notes, crores in new cash has been found in raids

across the country over the past few weeks.

• Demonetisation hasn’t been easy on anyone but it might prove to

be most damaging for small and medium enterprises, many of

whom transact mostly in cash.

• Data is tough to come by but anecdotal reports and assessments

made by analysts suggest that SMEs may be the hardest hit due

to their reliance on cash and their limited staying power. For them,

a loss of business even for a few months could prove to be

debilitating.

• This, in turn, could add to the bad loan woes of Indian banks

which, over the last few years, have seen non-performing assets

surge. While the focus so far has been on stress emerging from

large over-leveraged companies, the demonetization could lead to

an incremental build up of bad loans from the SME segment.

CRACKDOWN ON BLACK MONEY- CHENNAI

• I-T raid at Tamil Nadu Chief Secretary Rammohan Rao's

son's office; 33 crore in new currency seized.

• According to India Today report, during the search

operations which had commenced yesterday (21-12-2016),

around Rs 30 lakh and 5 kg gold were recovered from

Rao's residence.

• Significantly, along with the cash and bullion, 40 valuable

documents were also seized.

AXIS BANK - OVER RS 60 CRORE DEPOSITED

IN ACCOUNTS OF 20 FAKE COMPANIES

• The Income Tax department on Thursday (22/12) raided

an Axis bank branch in Noida sector 51 and reportedly

found out accounts belonging to 20 fake companies.

• According to a report, over Rs 60 crore was deposited in

those accounts. This came days after raid was conducted

at an Axis Bank branch in Delhi's Chandni Chowk.

AXIS BANK AND OTHER FAKE ACCOUNTS

• According to reports, I-T officials had said that about Rs 100

crore in old notes had been deposited in the accounts since

November 8, the date of the announcement of demonetization

by Prime Minister Narendra Modi with an objective to curb

down the flow of black money in the country.

• The officials told NDTV that these 44 fake accounts had been

created by the usage of forged documents. they said that the

investigators suspected that the money might have been routed

to buy gold.

• This is the second such raid to have been reported at a branch of

Axis Bank. Earlier last month, I-T officials had nabbed two people

with Rs 3.5 crores of cash in new currency notes while they tried

to come out of the Kashmere Gate branch in Central Delhi.

• The government had said that any deposit that amounted more

than Rs 2.5 lakh would come under the scrutiny of the Income Tax

department.

• The centre had also given the people with the outlawed and

untaxed notes one last opportunity and asked them to deposit the

amount in their accounts and pay half the taxes and penalty.

In a conversation with BloombergQuint, Arundhati Bhattacharya,

chairman of State Bank of India acknowledged that SMEs accounts

could start to turn bad if the business doesn’t normalize over the next

couple of months.

‘I am still being optimistic and saying that if we can get back into normal

mode within the next one month or so, the impact will be temporary. But,

having said that, I think that the SME sector will need some hand

holding because they don’t really have any staying power, they don’t

have deep pockets. They make a day-to-day living and their margins

are compressed in any case.’ Arundhati Bhattacharya, Chairman,

State Bank of India

CASH CRUNCH HITS RURAL INDIA HARDER

• New Delhi: The withdrawal of the high value currency notes

has hit rural India harder than the rest of the country.

• The about 25 crore accounts in the regional rural banks

received just Rs. 8000 crore in fresh currency from Nov. 10

to Nov. 30.

• This works out to be a little less than Rs. 350 per account

holder. Rural bankers persuade customers to seek only as

much cash as they immediately need.

IN THE LONG TERM, IT BENEFITS PEOPLE

• The finance Minister said that ‘Demoni’ benefits would be felt in the long run due to its good effect on the economy although it carries the pain in the transition.

• There would be better GDP, cleaner ethics and cleaner economy.

• The F M admitted that there was a shortage of cash and that was what made the parallel shift to electronic transactions so important. India will move digital. There will be increased money in the banking system, increasing abilities of banks to support the economy.

Terming demonetization a "monumental tragedy" and an "anti-

poor" measure, former F M, P Chidambaram today said. "I

don't think demonetization is a reform. It is a monumental

tragedy which is anti-poor and has put millions in misery and

hardships," he said.

All cash is not black money; Agricultural income is not subject

to taxation, income of charities is exempted, as is the income

of religious trusts. Also, the people of Northeastern states do

not have to pay income tax and they have cash in hand, he

said.

BENAMI PROPERTY

(PROPERTY WHICH LACKS THE OFFICIAL OWNER'S

NAME)

• Parliament had passed the Benami Transactions

(Prohibition) Act, and the rules and provisions of the

Benami Transactions (Prohibition) Act came into

force on November 1, 2016.

• The existing Benami Transactions (Prohibition) Act,

1988, was renamed as the "Prohibition of Benami

Property Transactions Act, 1988".

• Benami Property Transactions Act, 1988 has been

amended by the Benami Transactions (Prohibition)

Amendment Act, 2016 (BTP Amendment Act).

• The rules and all the provisions of the BTP Amendment Act

shall come into force on 1st November, 2016.

• After coming into effect of the BTP Amendment Act, the

existing Benami Transactions (Prohibition) Act, 1988 shall

be renamed as Prohibition of Benami Property

Transactions Act, 1988 (PBPT Act).

Benami (literally means ‘without a name’) transactions:

› Any property transaction, where the property is held by a

person but the consideration for the same has been

provided by another person; and the property is held for the

future benefit of the person paid the consideration.

› A property transaction carried out in a fictitious name

› A transaction where owner of the property is not aware of

or denies ownership

A transaction where the person providing the

consideration is not traceable or fictitious

PROHIBITION OF BENAMI PROPERTY

TRANSACTIONS ACT, 1988

• The PBPT Act defines benami transactions, prohibits

them and further provides that violation of the PBPT

Act is punishable with imprisonment and fine.

• The PBPT Act prohibits recovery of the property held

benami from benamidar by the real owner.

• Properties held benami are liable for confiscation by

the Government without payment of compensation.

PROVISION OF AN APPELLATE MECHANISM

• An appellate mechanism has been provided under the PBPT Act

in the form of Adjudicating Authority and Appellate Tribunal. The

Adjudicating Authority referred to in section 6(1) of the

Prevention of Money Laundering Act, 2002 (PMLA) and

• the Appellate Tribunal referred to in section 25 of the PMLA

have been notified as the Adjudicating Authority and Appellate

Tribunal, respectively, for the purposes of the PBPT Act.

• A Joint / Additional Commissioner of Income-tax, an

Assistant / Deputy Commissioner of Income-tax and a

Tax Recovery Officer in each Pr. CCIT Region have

been notified to perform the functions and exercise the

powers of the Approving Authority, Initiating Officer and

Administrator, respectively under the PBPT Act.

• All the notifications have been uploaded on the website

of the Department at www.incometaxindia.gov.in.

However, as per the regulation the following transactions are excluded

from the definition of Benami transactions

› A property acquired out of known sources of income of the Hindu

Undivided Family (HUF) and held by the HUF

› Properties held by a person in fiduciary capacity (where a fiduciary is

responsible for managing the assets of another person, or a group of

people)

› Properties acquired from known sources in the name of spouse and

child

› Properties acquired from known sources jointly with brother and sister

or any lineal ascendant or descendant

PENALTY OF HOLDING A BENAMI PROPERTY

• The amendment to the Benami Transaction (Prohibition)

Amendment Act is aimed at restricting generation and use of

unaccounted money. Real estate is considered as one of the

main avenues for investment of unaccounted money in India.

• The Act lays down stringent measures to discourage Benami

transactions. The re- transfer of the Benami Property is

prohibited under the act and there is defined punishment for

commencing any Benami Transaction after the date of

commencement of the Bill.

Along with other regulatory changes such as implementation of

Goods and Services Act (GST), Real Estate (Regulation &

Development) Act (RERA) and Land Digitization, this amendment of

Benami Transactions (Prohibition) Act is a step in the right direction in

improving transparency in real estate transactions.

In the short term it will lead to a reduction in transaction volumes.

However, in the long term it will make India a more attractive

investment destination, aligning transactions with ethical standards

and will increase international institutional investors and financial

institutions participation in this sector.

WHAT IS MONEY LAUNDERING?

• Money laundering, loosely defined, is the transactional

processing or moving of illicitly gained funds (such as currency,

cheques, electronic transfers or similar equivalents) towards

disguising its source, nature, ownership or intended destination

and/or beneficiaries.

• The desired outcome of this process is “clean” money that can

be legally accessed or distributed via legitimate financial

channels and credible institutions.

Money laundering has fairly benign origins in the hawala and hundi

systems of South Asia, which were informal financial systems which

allowed people to execute financial transactions in confidence and

secrecy.

These systems were perfectly legitimate to begin with, and merely

reflected institutional underdevelopment or unfamiliarity or lack of

confidence in the formal banking system.

However, these systems soon attracted criminal organizations,

which began to use them along with other means in order to launder

money to remove the taint of illegality. In the past century, money

laundering has become an international problem.

WHAT IS HAWALA?

• In India money laundering is popularly known as Hawala

transactions. It gained popularity during early 90’s when many of

the politicians were caught in its net. Hawala is an alternative or

parallel remittance system.

• The Hawala Mechanism facilitated the conversion of money from

black into white. "Hawala" is an Arabic word meaning the transfer

of money or information between two persons using a third

person.

• The system dates to the Arabic traders as a means of avoiding

robbery. It predates western banking by several centuries.

WHO IS GUILTY OF MONEY LAUNDERING?

• Section 3 of Prevention of Money Laundering

Act, 2002 – “whosoever directly or indirectly

attempts to indulge or knowingly assists or

knowingly is a party or is actually involved in any

process or activity connected with the proceeds

of crime and projecting it as untainted property

shall be guilty of offence of money-laundering.

ANGER AND FRUSTRATION IN RURAL BHARATH

• At a public hearing meeting, demonetization or Notebandi

speakers were angry and frustrated.

• ‘Narendra Modiji has chosen to ride the tiger of notebandi

and will eventually be eaten.’ said a villager.

• A local businessman’s daughter’s wedding was turned

traumatic by notebandi. Even for officially permitted

purpose, individual affidavits were demanded from

venders and service provider, declaring that they did not

have bank accounts.