Understanding The Twin Financial Revolution In India

Understanding The Twin Financial Revolution In India



There is a twin financial revolution taking place in India. The first is Demonetization and the second is the General Sales Tax (GST).

No country can operate without being able to raise adequate taxes. The fall of innumerable nations is directly related to their inability to raise adequate taxes. The reasons may have been varied, but the result was the same. This is a sad truism.

Understanding fair taxation.

In India, the dilemma is that the tax base is very small, somewhere between 2-3% of the population Since majority of the economic transactions are based on cash, there is no opportunity for taxation. If India is going to become a major player in global affairs, and have a strong future, there must be a fair taxation system with substantial tax revenues accumulating in the national treasury.

The Modi government believes that India must transition to a cashless economy and a fair tax system must be put in place.

The first leg of this system is the General Sales Tax (GST). By having a uniform tax, the wastage in time, energy and graft taking place, as products and services move from one state to another, will be largely eliminated.

The second leg of the financial revolution is that by moving to documented transactions (to replace cash transactions), the resulting transparency will allow fair and more comprehensive taxation.

This is one major reason for the currency demonetization. The other reasons are to deal with counterfeiting and black money that is sitting idle that does not incur taxes nor enter the economy to provide national growth.

Most people in India seem to understand this dilemma and support the current set of solutions. The problems seem to be on the pain of this transition and the fairness issue. Since many people have legitimate cash holdings, they are lumped with people who do not.

The Government is sensitive to this issue and is constantly reviewing its policies to make it more fair to all. I was told that there have been over 100 amendments during the last month to make the system fair.

Understanding demonetization

How does one understand demonetization in India?

Here are some basic statistics.

Total currency in circulation in India was around $250-260 billion.

High value notes of Rs.500 and Rs.1000 denomination were 86% or about $220-230 billion (Rs.15.4 lakh crores)

About 85-90% of the currency is expected to come back. The balance 10-15% will disappear and act as a credit to the system.

NRO banking

An individual is able to withdraw Rs.2500 per day or Rs.24,000 per week. The problem is that there is an acute shortage of Rs.500 rupee notes and the Rs.2000 notes are hard to use in most transactions.

The small denomination notes are in very high demand and not readily available. There are daily struggles at the banks to get cash.

It is no longer possible to exchange of old currency at the banks, but these notes may be deposited into your NRO accounts. Checks may be written freely against your balance; however, you must be prepared to explain where you got the cash.

The paperwork associated with the deposit of old notes into your NRO account can take up as much as 1.5 hours. So, it helps to have a pleasant attitude and a friendly bank clerk. Arguing and showing frustration with the long-suffering bank employees will not serve your cause.

Please carry all your documents – U.S. passport, OCI card, bank statements, bank checks, etc. Senior citizens and foreign account holders are able to jump ahead of the long lines at the bank offices. On the other hand, if you happen to collapse and die in the line, the UP government will grant Rs.300,000 to your survivors.

There seems to some confusion on whether the threshold of explanation starts at Rs.200,000 or Rs.250,000 per person.

There is a final deposit date of December 31, 2016 for all Indians, though there may be opportunities for NRI’s to deposit at certain locations up to March, 31. 2017.

There is an amnesty proposed for high, unexplained deposits. The current proposal is 50% of the unexplained deposit goes to tax and 50% of the balance (25% of the total) will be withheld for 4 years at no interest. The remaining 25% will be available to the depositor. However, you must make a self-declaration, asking for the amnesty.

These proposals are under constant review and revision, so they may change at any time. If you plan to make a trip to India, please be updated so you do not have cash problems.


A resident of Texas for over 40 years, Ranvir Mohindra has been involved with many issues that are relevant to the South Asian community living in the United States. Whether you have money in India that you did not report or have inherited an ancestral property, there are new rules of compliance. Mr. Mohindra’s expertise is built on personal experiences and access to tax and legal professionals, both in Houston and in India, who can provide additional support to bring you in compliance and protect your assets. He can be reached at 713-805-0915 or nritax.wealth@gmail.com

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