CONCEPT OF DEMONETISATION

                     DEMONETISATION

Concept

Demonetisation is the act of stripping a currency unit of its status as legal tender”.

DEMONETISATION IN INDIA

After demonetising bank notes on two previous occasions i.e. in the year 1946 and 1978 the Government of India decided to do so again on November 8, 2016, wherein, higher  denomination currency notes of `500 and `1,000 ceased to be legal tender. These notes accounted for 86% of the country’s  currency supply.

Aim of Demonetisation

The recent move of demonetisation by the 

Government of India aimed at achieving the following objectives:

1.To curb corruption and penalise illicit activities and wealth acquired from it.  

2.To curtail circulation of counter feitcurrency(fake currency).

3.To tax unaccounted private wealth maintained in the form of cash.

4.To reduce tax evasion and to increase tax base.

Impact of Demonetisation

Some of the notable short term impacts of demonetisation are discussed below.

1.A decline in the stock of black money.

2.Sharp rise in the bank deposits and financial system savings.

3.Government’s revenue from taxes increased.

4.Reduction in illegal activities

5.Reduction in Counterfeit Currency.

6.Promoting Cashless Economy.

7.Increase in Tax Revenue.

Disadvantages of Demonetisation

1. Inconvenience to the Public.

Unexpected announcement of demonetisation has created high degree of inconvenience to the public.

2. Economic Recession.

Demonetisation has deeply affected trade, business, service sector, and consumption.

3. Additional Cost for the Government

Demonetisation of old currency  and remonetisation of these with new currency notes of Rs.500 and Rs.2000 denominations, increased the cost of RBI by Rs.12,000 crores.

4.Difficulty in Cashless/Digital Transactions.

More than 60% percent of the population are not having the experience of digital transactions. 

Conclusion

Demonetisation is an effective tax administration measure as black money holders are not left with any choice but to declare their wealth and pay taxes as penalty. 

Through this measure the government seeks to communicate that tax evasion shall not 

be accepted and allowed any further.