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On November 8 2016, Prime Minister Narendra Modi announced a ban on Rs

500 and Rs 1000 notes which together accounting for 86% of currency in
circulation in India.

The move for cancellation of high denomination notes is seen as a step to

end black money, fake currency and terror financing in the country.

Sanjeev Prasad, Suvodeep Rakshit and Sunita Baldawa, analysts at Kotak

Institutional Equities, said, The latest step appears to be the final one in the
governments systematic approach to remove black money from the
economy.

They believe such move will result in higher tax-to-GDP ratio from proper
reporting of income in the future.

As on October 2016, the direct tax collection were at Rs 3.77 lakh crore, a
rise of 10.6% from the same period a year ago. Growth rate under corporate
income tax was 11.6% while that under personal income tax (including
securities transaction tax etc.) was 18.6%.

Till that month, nearly 44.5% of the Budget Estimates of direct taxes for FY
2016-17 has been achieved, as per Income Tax Department (ITD).

Recent data published by ITD on income tax returns said that 45,027 people
in the country had gross earnings between Rs 1 crore and Rs 5 crore. While,
just 3000 people had their annual income over Rs 5 crore.

The data also showed that 98,815 people had gross income more than Rs 50
lakh but less than Rs 1 crore.

What does demonetisation do for income tax?

Finance Minister Arun Jaitley believes that tax collection will increase. He
said, "In the medium and long term, direct and indirect tax collection will
increase. Lot of currency outside the banking system perforce will have to
get into the system."

Mahesh Singhi, Founder & Managing Director at Singhi Advisors said, As per
the latest data, there are around 4,00,000 individual tax payers in India. One
can imagine the extent of parallel economy in India when almost 4 million
automobiles are brought in the country in a year.

He feels demonetisation will have beneficial effect in the long term though
adverse effect on economy and market cannot be ruled out in the short term.

Singhi said, In the long term economy will benefit by integration of parallel
economy with mainline economy resulting in acceleration in GDP growth and
improvement in tax collection & fiscal position due to integration of black
economy.

This improvement in tax collection to GDP ratio and lower debt to GDP Ratio
will lead to Sovereign credit rating upgrade over 18 month as GDP expands
at a faster rate & fiscal situation improves due to better tax compliance,
added Singhi.

Overall, Modi-led panels move will in most likelihood result in higher tax
collections for the government, surge in liquidity and lower interest rates.

VELOCITY OF MONEY
The CA from Gujarat, whose open letter to Kejriwal wherein he tried to
explain to the ex-IRS officer and AAP Supremo the logic behind the
Governments introduction of Rs 2000 note, has now attempted to highlight
an important impact of Demonetization: Velocity of Money-

The following Video shall reveal some very Interesting stuff about Money and
give the readers some delightful food for thought!

Points to Ponder upon after Watching the above Video

Money on the move has no fixed abode. From one wallet to another, from
one shopper to the next, from one bank account to another, that is the life of
money. But curiously, many of us want to cling on to every bit of money that
we may have.

It is the greatest myth that Cash is like any other asset. In-fact, Cash was
never meant to be kept as a commodity but it was always meant to be used
as a medium of exchange for goods and services to be received. Have you
ever come across of an investment in Cash kept in locker/home grow or
provide returns ?

This is because Cash/Money in Bank has a peculiar feature:

A Single Note of Rs. 1000 is worth Rs. 10,00,000/- if it passes through 1000
citizens across the country in a year and is worth only Rs. 1000 if it is kept
idle in a locker. This is called the Velocity of money. As the Velocity of money
through banking channels increases, so will the tax collections from the said
money. All the taxes which were earlier evaded by keeping the trail out of the
economy, will now be recovered. And because money keeps travelling, taxes
will be collected at each stage, thus giving a ripple effect to one act.

This is not the case for any other asset, lets say Machinery! If a single
Machine is transferred through 12 people in a year, it will still give almost the
same level of production.

The million dollar question then is Will demonetisation help to increase the
velocity of money ?

Velocity of money is a term used to denote the number of times a unit of

money in an economy changes hands during a certain period. By money, it
does not mean the cash that we exchange in day-to-day transactions.
Instead it is broad money where you also include bank deposits, post office
savings and other bits and pieces of financial savings.

It is true that the economy may surely be benefited if the Velocity of Money
increases and theoretically the move of demonetization and move towards
cashless economy should help to increase the Velocity of Money but it cannot
be proved with certainty because we never knew the velocity of money in
parallel economy because those transactions were never captured in
accounts or public records.

We do not really know the rate of corruption in India or how fast corrupt
Indians churn cash. Probably a black money holder would be interested in
moving cash into consumption quite quickly, in which case this statistic
would be higher. Or if black money holders are keener to stuff all their black
cash under carpets or lockers and refrain from spending them too frequently,
then it will be a smaller number. Thus we just dont know what the
macroeconomic effect of demonetization is going to be. Its something weve
just got to wait and see about.

Mathematically, Velocity of money is a derived statistics which can be arrived

by dividing the value of GDP with the value of money in circulation. As an
analogy, the sudden lowering of GDP due to demonetization can be offset if
simultaneously we can increase the velocity of money.

However, the task of the Government as well as citizens is not going to be

easy because as I said earlier , Cash leaves no trails. Hence it is in the
interest of the Government as well as we common man to adopt to cashless
means of doing business and encourage everyone to use banking route as
much as possible.