The Government of India made an announcement on 8 November 2016 with profound implications for the Indian economy. The two largest domination notes,₹500 and ₹1000, were “demonetised” with immediate effect, ceasing to be legal tender except for a few specified purposes such as paying utility bills. This lead to 86% of the money in circulation invalid. Demonetisation is the act of stripping a currency unit of its status as legal tender.
It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Or It is a situation where the Central Bank of the country (Reserved bank of India) withdraws the old currency notes of certain denomination as an official mode of payment.
The people of India had to deposit the invalid currency in the banks which came along with the restrictions placed on cash withdrawals. In, other words restrictions were placed on the convertibility of domestic money and then deposits.
The aim of demonetisation was to curb corruption counterfeiting the use of heigh demonetisation notes for illegal activities and especially the accumulation of “Black money” generated by income that has not been declared to the tax authorities.
Demonetisation is viewed as a tax administration measure. Cash holdings arising from declared income was really deposited in bank and exchange for new notes. But those with black money had to declare there an accountant wealth and pay taxes as a penalty rate.
Demonetisation is also interpreted as a shift on the part of the government indicating the that tax evasion will no longer be tolerated or accepted.
It also leads to tax administration channelising savings into the formal financial system. Through, much of the cash has been deposited in the banking system is found to be withdrawn but some of the new deposit schemes offered by the bank will continue to provide and base loans, at lower interest rates.
Another feature of demonetisation is to create a less-cash or cash -lite economy, for example, channel link more savings through the formal financial system and improving tax compliance. Though there are arguments against this as digital transaction required use of cell phones for customers and post -of -sale machines. For merchants will only work if there is internet connectivity on the contrary this disadvantages for counterbalanced by understanding that it helps people into the formal economy.