Reserve Bank of Indis (RBI) took a decision on May 19, on the withdrawal of Rs 2,000 bank notes from circulation. However, as it will continue as legal tender, there is no need to hit the panic button. RBI said that the exchange and deposit of Rs 2000 notes will remain open from May 23, 2023, until September 30, 2023. To clear any doubts in the minds of the people, Finance Secretary TV Somanathan spoke to CNBC-TV18 and elaborated on the need for the decision.
Below is the verbatim transcript of TV Somanathan, Finance Secretary with CNBC-TV18:
Q: Let me start by talking to you about the decision to withdraw the Rs 2,000 denomination banknotes from circulation. It will continue as a legal tender. We know that the printing of the note stopped in 2018-2019. Its circulation, as a percentage of the currency in circulation, is also down from 35 percent at its peak to about 10 percent now. So why is the pressing need for this decision at this point?
A: It’s not a pressing need, but it's a need because this is a high denomination note. It had its utility at a particular point of time, that point of time has passed. And we have tremendous progress in digital payments, the need for such a high denomination for transactional use is no longer there. So, it's an appropriate time to shift into lower denomination notes and increasingly into digital payments. So, the number of these notes used currently in transactions is very limited.
Q: I understand that it's down to about 10.8 percent as of March 31, 2023. But I just want to press on this issue of transactional use, you are saying that it has served its purpose, it's outlived its utility. It was born and came into existence on account of the demonetisation exercise of 2016, but we have gone through this period of a fair degree of volatility because of demonetisation. The economy now is going through a phase of recovery and repair. Was this the right time to go through with this because even as far as perception is concerned, it does unsettled people.
A: I don't think there is any comparison between this and demonetisation. It continues to be a legal tender; in fact, it will have no effect on the economy. I think it is wrong to compare it with demonetisation. This continues to be a legal tender, there are several months in which to hand it over and it’s not in an unused transaction.
Q: I am not comparing it with demonetization…
A: I do not foresee any impact on the economy.
Q: One clarification because the release from the Reserve Bank of India as well as the frequently asked question (FAQ) are not quite clear on that. I am reading from the release of the Reserve Bank of India - point number eight, it says to complete the exercise in a timebound manner and to provide adequate time to the members of public all banks shall provide deposit and or exchange facility with a Rs 2,000 banknotes until September 30, 2023. If someone was not able to avail themselves of this exchange facility till September, for whatever reasons, maybe they are not in the country, etc., what happens post that?
A: I am sure the Reserve Bank will have a proper system to handle this. I am not in a position to comment.
Q: Let me address the other issue, and this is of course an issue that the finance ministry has dealt with, and this is the imposition of the 20 percent tax collection at source (TCS) on credit card transactions. You are aware of the fact that there has been an outpouring of feedback of criticism, of the fact that this was actually opposite to the ease of doing business as well as the ease of living for the honest taxpayer. So, the government has now decided to course correct and bring in changes to the 20 percent TCS imposition - that levy will now apply only if the transactions are more than Rs 7 lakh per financial year, but why was the decision brought in in the very first place?
A: There are two aspects here. It was never the intention to tax small transactions. We had, even in yesterday's clarification or yesterday’s FAQ, stated that we would be issuing a clarification. So, the intention has always been that all liberalised remittance scheme (LRS) transactions need to be properly accounted for - that credit cards should not be outside the LRS limits, that LRS usage beyond a certain threshold needs to be accounted for properly and to suffer a collection at source because we have seen many instances of persons whose LRS transactions far exceed their disclosed income. And these are not a few cases, these are plentiful cases. So, at the same time, we have no intention of inconveniencing people with small payments on their trips abroad and so on. And that is why the clarification has been given that it doesn't apply to payments up to Rs 7 lakh per annum. Now, as regards the larger payments, payments that are made are tax collection at source, there are two possible cases - a person is paying taxes in accordance with his actual income, in which case this can be adjusted against advanced tax payments every quarter, it can be adjusted against tax deduction at source (TDS), which an employer will deduct, it can be adjusted against self-assessment payments. So, it should not affect, I mean, barring a slight working capital effect in the short run - that too for a very few months. It doesn't affect those who are paying their taxes, and it doesn't affect people whose transactions are less than Rs 7 lakh per annum. For those who are not paying their taxes if they suffer a 20 percent TCS, I think that is legitimate.
Q: Yes, I do not think anyone is arguing about those who are evading taxes and the impact of the implications for them. But you talked about working capital constraint and you said that it is expected to be a constraint for a few months. And of course, we are now with the clarification that has come in talking about people who are transacting more than Rs 7 lakh per annum, but that is a concern that many have expressed that it will impact working capital needs and of course a burden as far as people and businesses are concerned?
A: Let me be clear, I use the term working capital erroneously, this is not working capital, this is not business, this is gifts, this is investments abroad. This is other forms of non-business transactions. These are personal remit-----audio disconnects---- delay in getting your TCS back, but if we are talking about large transactions, then that is something that is the necessity, we have seen huge increases in remittances, the amount of remittances under LRS particularly large remittances are becoming significant at a macroeconomic level in the balance of payments. And so, those who are either outside LRS limits through the use of credit cards, which has been happening and therefore are not accounted for within the LRS limits and those who have been incurring foreign exchange transactions without paying commensurate taxes, it is a legitimate aim to cover them and therefore, this is a reasonable step.
Q: Okay, that is as far as the clarification that has come in on the 20 percent TCS imposition. There will not be a 20 percent TCS imposition on transactions below Rs 7 lakh per annum. There is another important development that has taken and that is of course, the Reserve Bank of India's surplus – Rs 87,400 crore coming in from the Reserve Bank of India to the government is significantly higher than last year's number.
A: Yes, it is significantly higher than last year's number. However, it is not something that significantly changes the overall non-tax receipts position for the year. We are not expecting any significant change in the overall receipts of the government.
Q: Yes, but that does provide ample cushion to you. And I also wanted to understand that we saw cabinet decision on May 18, and that will result in correction as far as fertilizer prices are concerned. On balance what does the food and fertilizer subsidy picture now look like?
A: It doesn't look any different from the budget estimate on February 1.
Q: No change on account of the decision is taken?
A: No. It was a routine seasonal decision that is taken every year for the kharif season, and it determines the particular levels of subsidy over a six-month period. The amounts that were mentioned are not incremental to the budget. They are within this year's budget figures.
Q: You said that you cannot clarify at this point in time what happens post September 30th and I would imagine that we will see more coming from the Reserve Bank of India in terms of FAQs, but your message to people who are watching, we have been saying through the course of this evening that Rs 2,000 note continues to be a legal tender so you can transact in the Rs 2,000 note as of tomorrow, this is not demonetisation, your message to viewers who are watching.
A: This is not going to affect the economy. This is a smooth transition; you have plenty of time to go and banks will credit your accounts with these amounts, and they will exchange monies at the counter if you wish. And you have till September 30th – there is plenty of time, this is not going to cause any disruption either in normal life or in the economy.
For more details, watch the accompanying video.
(Edited by : Jerome Anthony)
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