I am not an economist. I do not have a fancy degree in Business Management. Neither do I qualify to be called a “Business Journalist”. I cannot give you “macro” or “micro” policy analysis. I am just an ordinary Chartered Accountant and I can only tell you what I have seen since 8th November 2016 when India plunged into the era of demonetisation.

I neither have empirical data nor do I have fancy statistics. I just have a range of anecdotes to give you my worldview about demonetisation.

So about me. I have my office in a Tier 2 city. I cannot claim to have a huge set of clients, but over the years I have built a fair number of clientele mostly in the small and medium enterprise range. These are my experiences with them since that fateful November night:

8 PM, November 8th: As I was watching TV, lightning struck via PM Modi’s speech. In the first few hours I did not fully grasp the widespread impact it would have over the next few months.

- Advertisement -

9th to 14th November: Flooded with calls from my clients. Most of them panicking as to what they do with their cash. With no legal or formal guidance available, my only advice was:

If you can explain the cash, deposit it in the bank. Keep you proofs ready. If you can’t, think of ways of offloading it to someone else. Last resort, destroy it.

15th to 30th November: Clients keep turning up at the office, asking for specific guidance as to what to do with their cash. They admit that it is largely “black” or “unaccounted”. For any solution, I first ask them the amount of “dirty money”. Some hesitate, some do not disclose, some are upfront. In most cases, the cash with these people was at least 3 to 5 times more than what I expected them to hold. I kept repeating my past maxim: deposit it in the bank if you can explain.

Now there’s another way you can explain them. As soon as you deposit, be prepared to offer it as income. Try to claim that sales shot up during October or November, and hence you suddenly amassed so much cash. The consequence of this would be 2 fold:

Pay Income Tax on this amount at 33% odd (including interest)

Pay VAT or Service Tax on the same at a median rate of 12.5% odd.

Thus, even if the “black” money was “converted” into white, my client would have to bear a loss of approximately 45-46% on the amount deposited. This was just to avoid any sort of detailed scrutiny.

Some obeyed, some thought they will go unnoticed and deposited “black” money without caring. Some deposited the “black” money simply because they did not have any choice and they would rather take a chance of salvaging some of it than outright destroying it.

25th January to 05th February – The first “surgical strike”: Many of my clients received emails from the Income Tax Department, in which details of cash deposited by them were mentioned, and the source for these deposits was asked. Some people with cash deposits, as low as Rs 5 lakhs were picked up for scrutiny.

They wanted a very elaborate reply. If the cash had been received from identifiable persons, then my client had to furnish the persons’ names, addresses and most importantly the PAN. If not, at least name and address was expected. If the payers were completely untraceable, at least source was expected.

Obviously, reporting as many PANs as possible was the safest, since then the IT department would chase those PAN holders, instead of my client. We replied to the best of our ability for as many clients as possible.

15th to 31st March: Of the above clients, few received summons from the Investigation wing of the IT Department. These clients were asked to produce all evidence, sales bills, books of accounts etc, substantiating the reply we had given.

31st March was the last date of the Pradhan Mantri Garib Kalyan Yojana (PMGKY) scheme which was in effect an amnesty scheme for people who had deposited “black money”. Via the scheme, they would have to pay 50% of the undisclosed income as fine and put away 25% of the money in a FD for 4 years which would be refunded without any interest at the end of that period. Doing so they could avoid prosecution, especially under the Prevention of Money Laundering Act.

We began visiting the IT Investigation wing officers, to present our case. We would generally have to wait in line for 4-5 hours every-time, to visit the officer. And every time, you could see all the people waiting along with you. I saw many local big shots, some politically exposed people, and many other CAs, all being made to wait for hours, sometimes until they came up with a satisfactory reply.

In my case, 4 of my clients ended up declaring substantial money under the PMGKY scheme. 1 of them was a politically influential person.

31st March: The Government amends the Income Tax Returns. Now all tax payers have to compulsorily disclose the amount of cash deposited during demonetisation period, in each and every bank account they have. The return would just not go through without this data. Data, which I was sure will be mined and used for scrutiny.

6th May: The Government notified that all companies would have to declare a statement of cash which showed how the Rs 500 and Rs 1000 notes were utilised or deposited during the demonetisation period. As an auditor, I was expected to certify this too. Basically, it was another means of gathering information.

15th to 31st July – The second “surgical strike”: Few more clients received notices similar to those sent in January. In some cases, the old clients got additional notices for other bank accounts. The data of some banks was probably just flowing in to the Income Tax Department. We went through the entire process again.

My observations through this cycle of audits: As we are now auditing the accounts for FY 2016-17 when demonetisation happened, many clients are showing a spike in sales in October to December months. The answer is always the same: to accommodate the “black” cash. As mentioned earlier, due to Income Tax and other indirect taxes, such inflated sales have been subjected to 45% odd tax. If not for demonetisation all this money would just continued to circulate far away from the tax net.

So have all the people who deposited “black” money been caught? No. Did people engineer ways and means to camouflage their cash deposits via shell companies etc? Yes. But has the Income tax Department stopped asking questions? No. And if you ask me, the questions have just begun.

I repeat, I am no economist, but with the little experience I have had with my clients, and from the stories I have been told by my fellow Chartered Accountants, many businesses have been caught on the wrong foot. While all of the above are one-time implications, we are still waiting to see how this will play out in the long run, since people who were showing low incomes for so many years, have suddenly shown a much higher income this year. As the months pass, I would not be surprised if there are more “surgical strikes”.