DEMONETISATION
1. Context
The Supreme court upheld the government's decision to demonetise currency notes of Rs. 500 and Rs. 1,000 by a 4:1 majority. Rather than the effect of the decision, the court was to consider whether the recommendation for the policy came from the government or the RBI.
2. About Demonetisation
On 8th November 2016, the government announced that the largest denomination of Rs. 500 and Rs. 1000 were demonitised with immediate effect ceasing to be a legal tender. It is the act of stripping a currency unit of its status as legal tender or fiat money. It occurs whenever there is a change of national currency and the current from or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins.
3. Objectives of Demonetisation
- To discourage the use of high-denomination notes for illegal transactions and thus curb the widespread use of black money.
- To encourage digitisation of commercial transactions, formalise the economy and so, boost government tax revenues.
- The formalisation of the economy means bringing companies under the regulatory regime of government and subject to laws related to manufacturing and income tax.
4. Operation Clean Money
- It was launched by the Income Tax Department (CBDT) for e-verification of large cash deposits made during the period from 9th November to 30th December 2016.
- The programme was launched on 31st January 2017 and entered into the second phase in May 2017.
- It aimed to verify cash transaction status (exchaange/savings of banned notes) of taxpayers during the demonetisation period and to take tax enforcement action if transactions do not match the tax status.
5. Supreme Court’s verdict on demonetisation
- The court stated that the Centre has the power to demonetize all series of notes and that there was consultation between the Centre and the Reserve Bank of India (RBI) for six months leading up to the demonetization.
- During the hearing, two seperate judgements were pronounced, with Justice BR Gavai supporting the demonetization and the Justice BV Nagarathna opposing it. Nagarathna argued that only the Central Board of the RBI can recommend demonetization and that the RBI did not have time to consider the move properly.
- The verdict was pronounced by five Judges, with Nagarathna's being the only dissenting jedgement.
- Earlier, during a hearing on December 7, the Supreme court directed the Centre and the RBI to present relevant records relating to the demonetisation decision and reserved its verdict.
- The arguements of the Attorney General, the RBI's counsel, and the petitioner's lawyers, including P.Chindambaram and Shyam Divan, were heard. Chidambaram had called the demonetisation deeply flawed and argued that the government can only initiate proposals for legal tender on the recommendation of the RBI's central board.
6. Doctrine of Proportionality
Proportionality is a ground for judicial review. In India, the decision of Proportionality was adopted by the Supreme court of India in the case of Om Kumar vs Union of India.
Proportionality means that the administrative action should not be more drastic than it ought to be for obtaining the desired result.
In K.S.Puttaswamy vs Union of India (2017) case, the court held that any restriction placed on the right must conform to a doctrine of Proportionality.
This requires few tests,
- State action must have a legislative mandate.
- The action must show that the objective of its law is founded on a legitimate government aim.
- It must be proportionate, i.e., such state action- both in its nature and extent, must be necessary for a democratic society. Further, such action must have no alternative and less intrusive measures available to achieve the same objective.
- The principle of Proportionality calls for striking down of laws that are excessively harsh or disproportionate.
For Prelims & Mains
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For Prelims: Section 26(2) of the RBI Act, K.S.Puttaswamy vs Union of India (2017), Reserve Bank of India (RBI), Doctrine of Proportionality, Central Board of Direct Taxes (CBDT).
For Mains: 1. Demonetisation was done for the proper purposes of eliminating fake curremcy, black money and terror financing. Discuss.
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Source: The Indian Express
