In 1978, when independent India conducted its first demonetisation exercise initiated by the Morarji Desai-led Janata Party government, branches of the State Bank of India reported a strange phenomenon: a large number of local residents were turning up at remote branches to deposit the high-denomination Rs 1,000, Rs 5,000 and Rs 10,000 currency notes that had been withdrawn by the government.
Given that the demonetised high-value notes only comprised a minuscule amount of the total currency in circulation at that time, unlike the 86% now, there was certainly something going on.
As it emerged later, this had to do with the conditional income-tax exemption members of the Scheduled Tribes living in parts of the North East are given under the Income Tax Act, 1961. Local residents, eligible for this income-tax exemption, were depositing black money into their accounts on behalf of others for what is believed to be a small cut.
Flood of high-value notes
Nurul Islam Laskar was a 27-year-old posted as special secretary to the chief regional manager of the State Bank of India in Shillong, Meghalaya, in 1978. After the Desai government announced its demonetisation plan, he was suddenly sent to Jowai, a much smaller town, 67 km away, on special deputation.
“I was summoned to reduce the burden of the SBI branch in Jowai where a lot of locals had unexpectedly turned up with Rs 1,000, Rs 5,000 and 10,000 notes,” said Laskar. “On the same day, some of my colleagues were transferred to Kohima and Imphal for similar reasons.”
According to Section 10(26) of the Income Tax Act, a member of a Scheduled Tribe residing in any area specified in the Sixth Schedule of the Constitution – which covers autonomous administrative areas like Dima Hasao, Karbi Anglong and Bodoland Territorial Area District in Assam, and the Khasi, Jaintia and Garo hills in Meghalaya – or the states of Arunachal Pradesh, Manipur, Mizoram, Nagaland and Tripura, is exempted from paying tax on any income that accrues from any source in the concerned area or state.
Explaining why the large number of customers with high-denomination notes at the bank was unexpected, Laskar said that only the wealthy possessed high-denomination currency notes at that time.
“Currency notes of Rs 1,000 and above was an elite affair back then,” said Laskar. “Leave Scheduled Tribes in remote areas, even many [bank] officers in the cities did not have such high-denomination notes in 1978 either.”
It soon emerged that those living in the North East, who were not exempt from paying income tax, and businessmen from mainland India, who had good contacts with members of the Scheduled Tribes, were channeling their black money through the bank accounts of locals to escape the impact of demonetisation.
This is because members of the Scheduled Tribes were not being asked about the source of their high-value deposits because they were exempted from paying income tax anyway.
“Such areas had turned into pockets for black money hoarding,” said Laskar. “The locals were probably lured with some percentage of commission for the amount they deposited. That was never properly investigated.”
Though members of Scheduled Tribes living in certain areas of the North East are still exempt from paying tax on income earned in their areas, this time, they will have a number of high-value currency notes of their own to deposit in the bank. However, Laskar said that it is still possible that their accounts may be used to channel black money again, as it is not possible for bank staff to scrutinise each deposit made.
Same story in 2016?
“The possibility of channelising black money in tribal pockets cannot be ruled out,” said a senior employee of a nationalised bank in Agartala, the capital of Tripura. “Following Reserve Bank of India guidelines, we are keeping a record of all transactions above Rs 50,000 with details of identification documents, source of cash and Permanent Account Number, as required. But one cannot be scrutinised beyond a point.”
Discussing the possibility of channeling black money through accounts of locals, the officer gave an example of how it could be done. He said that a significant percentage of the Scheduled Tribe population in Tripura cultivates rubber. A large cash deposit therefore can be made into someone’s bank account and attributed, without much scrutiny, to the sale of rubber – both for current consignments and for old, pending payments.
“The only document which the concerned depositor will have to show is a certificate from the Rubber Board, legitimising his trade,” said the officer. “Traditionally, there is no culture of receipts as the natives are exempted from [paying income] tax.”
But this officer, and other senior bank officers at Bomdila and Tawang in Arunachal Pradesh, and Shillong in Meghalaya, said that banks are very careful about maintaining records of cash deposits, and that they are yet to come across any suspicious transactions.
The Income-Tax Department is also aware of the possibility of money mules.
K Sanglawma, commissioner of taxes, Mizoram, said that income-tax officers were on the lookout for deposits that were out of the ordinary. “The vigil is high and the income-tax department is coordinating with banks to detect all suspicious deposits,” said Sanglawma. “If questioned, people will have to show their income sources in detail.”
He added that it will not be difficult to scrutinise accounts in remote areas in Mizoram as most people there are known to each other and their bankers. Leaving aside a few members of the Scheduled Tribes who run large businesses, bank officials are also familiar with the income, accounts and cash deposit habits of most of the locals, he added.