The absence of certain safeguards, regulations and penal provisions have meant that this time’s demonetisation drive may not be a success after all.
New Delhi: Rs 11 lakh crore of the nearly Rs 15 lakh crore of Rs 500 and Rs 1000 notes in circulation have already been deposited in banks, with nearly a month left before the deadline for their deposit expires. Questions are now being raised about whether a substantial amount of black money will actually be extinguished at the end of the entire exercise. In this scenario, RTI activist Venkatesh Nayak has drawn a comparison with a similar demonetisation exercise undertaken in 1978, when about 25% of high-denomination notes were not returned. The absence of various safeguards this time, he said, may have actually provided an opportunity to black-money holders to legitimise their black money.
Nayak said a closer look at The High Denomination Bank Notes (Demonetisation) Act, 1978 (HDBND Act) revealed that the government’s November 8 notification carries a number of big loopholes.
No restriction on transfer of demonetised notes
In the HDBND Act, Nayak said, the ‘transfer’ of demonetised notes to anybody other than scheduled banks was expressly prohibited after they had stopped being legal tender. The clause restricting such transfers clearly said: “Prohibition of transfer and receipt of high denomination bank notes. … Save as provided by or under this Act, no person shall, after the 16th day of January, 1978, transfer to the possession of another person or receive into his possession from another person any high denomination bank note.”
But the announcement made by Prime Minister Narendra Modi on November 8 was not accompanied by any such provision.
Nayak said this was a reason why demonetised currency notes have been used for purchase of gold and other articles. The media, he said, reported frantic purchases of gold soon after Modi delivered his address to the nation on November 8. Similarly, he said, many people reportedly bought railway and flight tickets to only seek a refund later on. Likewise, temples reported huge offering in the initial days after the announcement.
All such actions, Nayak said, would have become illegal, automatically, if the transfer and receipt of the demonetised notes to any entity or person other than banks had been prohibited in the manner done by section 4 of the HDBND Act. “While the government permitted certain kinds of transactions to ease the travails of the public, the absence of an express bar on other kinds of transfer may have resulted in what cannot but be described as ‘drywashing’ of billions of unaccounted for money. However, such a prohibition would have required the backing of an Act of parliament as it cannot be done through executive fiat,” Nayak said.
Observing that while the demonetisation drive sought to target unaccounted money, Nayak said the ingenious methods used to ‘launder’ that money have shown that many of the targets may have survived the “surgical strike” while law-abiding citizens continue to brave it out in serpentine queues for cash withdrawals.
No declaration of the source of the demonetised notes
The HDBND Act also required every individual, company, trust or society intending to redeem the value of the demonetised notes to submit a declaration, in triplicate, containing the “reasons for keeping the amount sought to be exchanged in high value denominations; source from which the demonetised notes were acquired by the person seeking to exchange them; whether the person seeking to exchange the demonetised notes had borrowed them from any person, if so, details were to be provided;and if the person making the declaration was not the owner of the demonetised notes, then the name of the true owner with a declaration that the notes were not held benami”.
This apart, Nayak said, section 7(3) of the HDBND Act also authorised the manager or the person in charge of the bank where the demonetised notes were sought to be redeemed,a salaried magistrate or a police officer of the rank of inspector of police or above to attest such a declaration by identifying the declarant.
But this time, Nayak said, none of these procedures of transparency and accountability have been laid down, instead the November 8 notification permits a person to deposit the demonetised notes in the bank accounts of third parties.
With the notification stating that “the equivalent value of specified bank notes tendered may be credited to a third party account, provided specific authorisation therefor accorded by the third party is presented to the bank, following standard banking procedure and on production of valid proof of identity of the person actually tendering”, Nayak said it was not surprising that the Jan Dhan accounts are suddenly flush with funds. Incidentally, most of the Rs 29,000 crore in these accounts have gone into just three crore of the 25 crore accounts. And many of these happen to be previously zero balance accounts, which were not in use but kept alive.
Though the Centre is now probing the sudden surge of deposits in these accounts and Modi was compelled to caution such account holders not to get lured by unscrupulous persons and accept their money, Nayak said the developments clearly show that the intended purpose of the scheme has been defeated to a large extent. “What is worse, the poor seem to have become unwitting or in some cases even willing accomplices to this exercise of ‘drycleaning’ unaccounted for money.”
On the other hand, he said, it is also being suspected that the loopholes in the demonetisation scheme are being used to legitimise unaccounted for money, worth billions.
Punishment specified for false declarations in the 1978 Act
A key difference between now and 1978 is that section 10(2) of the HDBND Act had made furnishing of false declarations punishable with a prison term extending up to three years or a fine, or with both. However there is no penal provision in the Modi government’s notification. Instead, as Nayak pointed out, the Centre has amended the Income Tax Act to impose a higher rate of tax, coupled with some monetary penalty on those found to have deposited sums of money that were not previously accounted for.
Noting that penal provisions cannot be introduced through executive action except an ordinance, he said even that would have to be brought before parliament for approval.
However, as the Modi government has not taken parliament into confidence about the exercise, it may now find it difficult to bring about a penal provision with its help.
In fact, quoting an article by former additional solicitor general Indira Jaising, the RTI activist said questions have been raised about the legality of the demonetisation exercise. Quoting an article published in The Wire, he added that it is also being argued that such a course of action requires the sanction of law passed by parliament.