CA explains why Modi banned 1000 note & issued 2000 rupee note

notesIt’s a question that has plagued the best minds of the country and no one has yet been able to figure out why the government came up with a 2,000-rupee note when it had got rid of the Rs 1000 note to control black money.

However, Mehul Shah, a chartered accountant from Surat has come up with a likely explanation for the move.

The move to come up with a 2,000 rupee note instead of a 1000-rupee note was to prevent disguising of new notes as old notes.

In other words, says Shah, if the old 1000-rupee notes were replaced by new 1000-rupee notes, it would be possible for people with undeclared income to recycle their entire holding by using just a small portion of the notes.

Imagine, says Shah, someone holding Rs 10 lakhs in bundles of 1000 rupee notes.

If the old 1000-rupee notes are replaced with a new 1000-rupee note, then all that the person has to do is take 20 old notes from the above stash, get them deposited in the bank, and then withdraw the amount on the same day.

He can do this every day and after 50 days, his entire 20 lakhs would be converted into ‘new money’.

When the Income Tax department conducts a probe, he can say that he only had 20,000 rupees with him, and he used to deposit the amount in the morning, take it out in the evening, and again deposit the same notes the next morning.

It would have been more difficult for the IT department to track that as a deposit slip does not mention the note’s serial numbers.

But he cannot do this if he got only 2,000 rupee notes when he withdrew his money on the previous day, because the next day’s deposit slip will clearly mention that he is depositing 1,000-rupee notes and not 2,000-rupee notes. [polldaddy poll=9579230]

So, under the new scenario, he will go to the bank with 20 notes on day 1, and he will get only 10 notes of Rs 2,000 each. Next day, when he goes with a new bunch of 20 notes from his stash, he has to mention that he’s submitting 1000-rupee notes in the deposit slip.

Because of this, he cannot later argue that he was recycling his money every day, and that he was depositing the same 20,000 every day.

This, says Shah, is called ‘peak theory’ and is well known in the tax circles. Shah wrote all this in a letter addressed to Arvind Kejriwal.