- 19-Apr-2025
- Healthcare and Medical Malpractice
In November 2016, the Government of India demonetized ₹500 and ₹1000 currency notes to combat black money, corruption, and counterfeit currency. This move aimed to bring unaccounted money into the formal financial system. Post-demonetization, the government employed several measures to track cash deposits and ensure compliance with tax laws, preventing individuals from exploiting the system to launder illicit wealth. The objective was to monitor large cash deposits and ensure they were accounted for through proper documentation.
Post-demonetization, the Reserve Bank of India (RBI) and commercial banks were required to report any cash deposits of ₹2.5 lakh or more to the Income Tax Department. This was part of the government's effort to track large, unexplained cash inflows that could be linked to black money or tax evasion. These deposits were flagged for review and were subject to further investigation if no legitimate source of income was provided.
The Income Tax Department closely monitored bank statements to identify individuals or businesses who made unusually large cash deposits after the demonetization announcement. Deposits that were disproportionate to the individual's income or business turnover were flagged for potential scrutiny, leading to inquiries regarding the source of the cash.
As part of the government's efforts to ensure transparency, individuals making large cash deposits were required to provide their Permanent Account Number (PAN), and in some cases, their Aadhar number. This allowed the government to link the depositors' identity to the transaction and trace any unreported income. This also helped in cross-checking the legitimacy of deposits by verifying them against the taxpayer's declared income.
The Financial Intelligence Unit (FIU) of India was tasked with monitoring and analyzing suspicious financial activities, including large cash deposits. FIU works by collecting and processing Suspicious Transaction Reports (STRs), which are filed by financial institutions, such as banks, to report unusual or suspicious cash deposits. These reports are then analyzed to identify potential instances of money laundering or tax fraud.
In cases where suspicious deposits were detected, the Income Tax Department initiated audits of the concerned individuals' or businesses' accounts. The government paid special attention to those who deposited large amounts of demonetized currency without a corresponding increase in income or business activity. If the source of the money could not be justified, tax evasion penalties or fines were imposed.
The Prevention of Money Laundering Act (PMLA) also came into play post-demonetization. Under PMLA, financial institutions are required to report large or suspicious transactions to the Financial Intelligence Unit (FIU). The act allows the government to investigate money laundering activities and take action against those attempting to disguise illicit money as legitimate income.
The government also encouraged digital transactions as a way to reduce reliance on cash. In the post-demonetization period, banks were required to track and report digital transactions, particularly those linked to high-value cash deposits. This helped identify individuals and businesses shifting large sums of money from physical currency into digital platforms or bank accounts in order to evade detection.
The government also kept an eye on the patterns of cash withdrawals from banks. If an individual or business withdrew large sums of cash within a short period after depositing demonetized currency, it could indicate an attempt to convert unaccounted money into legitimate assets or move the money out of the formal banking system. Such activities were flagged for investigation.
The Income Tax Department and other financial authorities used data analytics tools to track cash deposits across the banking system. The analysis helped identify patterns in cash flow and pinpoint potential tax evasion or black money activities. For example, large deposits made in small amounts across multiple bank branches could indicate an effort to evade scrutiny, and these would be flagged for review.
If an individual or business could not justify the source of a large cash deposit, they were subject to penalties and potential legal action. The Income Tax Act mandates that any income that is not declared and cannot be substantiated is treated as undisclosed income, and tax authorities can impose hefty fines or tax assessments on the amount.
After demonetization, a businessman deposits ₹10 lakh in cash over a few days. The bank reports the transaction to the Income Tax Department, and it is flagged as a suspicious transaction due to the large sum and the businessman’s income records showing no correlation with the deposit. Upon further scrutiny, it is discovered that the deposit was made from undisclosed sources, and the businessman is penalized for tax evasion, facing a tax demand along with a penalty.
The government used a variety of mechanisms to track and monitor cash deposits following demonetization. This included the mandatory reporting of large deposits by banks, the use of PAN and Aadhar numbers to link transactions to individuals, and the involvement of the Financial Intelligence Unit (FIU) for analyzing suspicious transactions. Through these measures, the government was able to bring unaccounted money into the formal financial system, deter tax evasion, and ensure greater transparency in the economy.
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