Note-ban gains may just be Rs 72,800cr, says Motilal Oswal

Against trillions of rupees of fiscal and tax gains projected from the note ban, a domestic brokerage today said the Government may gain only Rs 72,800 crore from the move -- taxes, penalties worth Rs 32,800 crore and Rs 40,000 crore by way of surplus transfer from the RBI.
Many pro-demonetisation economists and analysts had in the early days of the move claimed at least 20 per cent of the Rs 15.55 trillion of cancelled money would not come back to the system, which in turn, could enable the RBI to write off that amount from its balancesheet. The profit accretion could then be transferred to the Government by the RBI as surplus transfer.

While the central bank had publicly cited only Rs 15.55 trillion of high value notes were cancelled on November 8, in an RTI reply to PTI, it had said the actual quantum of bills cancelled was much higher at Rs 20.51 trillion.
But according to a report by domestic brokerage Motilal Oswal, this could just be a whimper of the initial projection at Rs 40,000 crore. Which means only around 3.5 per cent of the cancelled money was not returned to the system or were black money.
The brokerage said while RBI has not provided any data on deposited notes after December 10, calculations using official data on currency in circulation and total supply of bills by December 19 show that over Rs 15 trillion has come back to the system.

"Thus, the RBI could transfer a maximum of Rs 40,000 crore to the Government, which will be included in the latter's non-tax revenue receipts for the next fiscal," the report said.

Additional taxes worth Rs 32,800 crore and non-tax revenue of Rs 40,000 crore will add Rs 72,800 crore to the Government's kitty next year, it said.
But this is based on the broking firm's assessment of the cancelled money which came back to the system till December 19. So far, neither the RBI nor the Government has quantified the money that came back to the system.
"Further, based on our assumption of the voluntary

declarations under the PMGKY and involuntary declarations, the individual tax base will widen by 57,000 people earning over Rs 10 million a year (more than 45,000 people in 2013-14)," Motilal Oswal said adding this will garner another Rs 8,600 crore as individual taxes.
"Overall, it implies that demonetisation can help the Government collect additional taxes worth Rs 32,800 crore in 2017-18," the brokerage noted.
Further, noting the Government on December 30 had issued an ordinance to extinguish the RBI from liabilities related to the cancelled notes, the report said the amount of junked bills that did not return to the system by end-March can be transferred to the Government as special dividends.

The Specified Bank Notes Cessation of Liabilities Ordinance makes holding of old Rs 1,000 and Rs 500 bills after March 31 beyond a threshold amount a criminal offence that will attract a minimum penalty of Rs 10,000 or five times the cash held, whichever is higher. It effectively works out to be a 137 per cent of penalty.
"With the Government collecting additional resources of only about Rs 73,000 crore in 2017-18, it is highly unlikely for it to be able to meet high expectations of providing stimulus to almost all sections of society.
"Almost half of these additional resources (Rs 38,000 crore) are expected to be used to provide relief to (individual/corporate) tax payers, while the other half (Rs 35,000 crore) could be used for the major pro-poor schemes (under revenue spending)," it added.