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Wednesday, November 9, 2016

Use unaccounted wealth to improve education

Another surgical strike happened yesterday. The Government of India has declared the Rs. 500 and Rs. 1000 notes will no longer be legal tender in the country. This is huge amount of money. Different newspapers are giving different figures, but they vary from Rs. 6 lakh crores to Rs. 9 lakh crores (6-9 trillion rupees). Of course, people and organizations who are holding this cash can deposit this money in the bank over the next 50 days, but if the money was unaccounted for, it could lead to questioning by Income Tax authorities. Most people are estimating that a significant part of this cash is unaccounted for. Of course, over the next 50 days, the financial experts will try to find ways to deposit the money in bank or get it exchanged with valid currency, but it is pretty obvious that a very large amount, in trillions of rupees, will be worthless very soon.

Will burning these notes be the only solution?

I have a suggestion. What if the government allows these people to "donate" these notes to educational institutions (who have been given tax exempt status for donations) and allow educational institutions to deposit any amount of such donations in the bank. These people who donate money can then be given a receipt which they can use to claim tax deduction.

If someone has 1 crore worth of unaccounted for currency notes, he will have the following options:

1. Give this money to an educational institute anonymously. He may feel nice that his ill gotten wealth is helping the nation in some way.
2. Give this money to an educational institute, get a receipt, show that receipt in his income tax return and get a tax saving of 30 percent (or 15 percent, depending on the educational institute). The person still loses 70 percent of the money, but again, he may feel nice that instead of destroying those notes, they are of some use in nation building.

Depending on whether someone is willing to show that money or not, they can chose option 1 or option 2.

Of course, one could consider other priorities and allow a broader set of organizations to whom such donations can be made. Since in some cases, this can become a conduit to exchange the old notes with new (you donate, and then you get a contract or some other goodie), government may decide that only government institutions will be permitted to accept such donations.

Just imagine what it can do to education.