The Narendra Modi-led government on Tuesday scrapped currency notes of Rs500 and Rs1,000 denominations, in a move that is seen as a push towards a cashless economy and a crackdown on black money.
Here are some FAQs on the change.
Can I use my existing Rs500 and Rs1,000 currency notes to pay off people, since they can get it exchanged at banks?
No. The Central government has declared that these two denominations are no longer legal tender. Hence, these notes have no value.
Can traders start depositing money in banks? Will that create problems?
Experts are of the opinion that as long as there is sufficient proof of the source of the income, traders should have no trouble depositing money with banks. In fact, at present, banks will not ask for proof. That will only happen at a later stage.
“If traders are depositing money against valid identification, banks should not create any problem. Traders will have to substantiate the deposits and identify the source of money, but this will be at a later stage. If the trader can’t substantiate, the tax department can levy tax, interest and penalty,” said Amit Singhania, tax partner at Shardul Amarchand Mangaldas & Co., a law firm.
Sunil Jain, tax partner at law firm J. Sagar Associates, however, cautioned that the tax department will be closely watching transactions shown around 8 November, when the demonetisation happened. “If traders suddenly start depositing lakhs of cash to show income for 31 March 2017 and hope to get away with paying a high slab of tax, that won’t happen. The government will look at previous years’ transactions or ask for block assessment of the last 5-6 years. Transactions and sales that happen around 8 November will catch the tax department’s eye. These tough measures are required,” Jain added.
What about savings made at home in cash?
For money saved at home, either by keeping away salary or other declared income, it won’t be a problem either. “Home savings means that it’s already tax paid cash being used for buying day-to-day things and the remaining balance. So long as people can substantiate their expenditure and can correlate it to their available sources of income, it should not be a problem,” Singhania said.
Can I exchange my Rs 500/1000 notes with services being offered by various companies/restaurants/stores?
No. That is illegal because as on date, the old Rs 500 and Rs 1000 notes have no value in India.
“The existing series of Rs. 500 and Rs. 1000 currency notes have officially ceased to have legal tender since expiry of November 8, 2016. Consequently, advertisements made by various entities indicating that they are accepting such notes is effectively illegal and punishable by penalty. Only specific exempted entities set out under the Government’s notification will be permitted to accept Rs. 500 and Rs. 1000 notes for the first 72 hours,” Sapan Gupta, national practice head for banking and finance at law firm Shardul Amarchand Mangaldas & Co, said.
What is a legal tender?
A legal tender is any acceptable currency in a country. The denominations are declared by the government. In India, different values of the Indian rupees are legal tender. After Tuesday’s announcement, Rs500 and Rs1,000 will not be accepted as currency notes.
The Reserve Bank of India (RBI) Act and the Indian Coinage Act specify which bank notes and coins will be legal tenders.
Who has the authority to declare currency as not valid legal tender?
The Central government under Section 26(2) of the RBI Act. The Central government can announce that a note of a certain value ceases to be legal tender. This is generally done on the advice of the central board of directors of the RBI.
Will any law require amendment for this to be in effect?
No, the government has, by way of notifications, declared the existing notes of the two denominations invalid. It is set to introduce two new currency notes of value Rs500 and Rs2,000. Section 24 of the RBI Act empowers the Central government can issue bank notes of any value, as long as it is Rs10,000 or below. The specific denominations mentioned are “two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, five thousand rupees and ten thousand rupees”. However, the Section says that bank notes can also be “of such other denominational values”. So, one can have denominations like Rs99 or Rs9,999, which might help customers while making purchases.
Will the government start issuing the new notes then?
The power to issue new notes is vested with the RBI. It will soon begin issuing the new Rs500 and Rs2,000 currency notes.