What accountants need to know about India’s demonetization

Late last year, Indian Prime Minister Narendra Modi announced that all 500 rupee and 1000 rupee notes would no longer be accepted as legal currency. The controversial move is akin to the U.S. government’s deciding to do away with the $10 bill or the U.K. government’s ceasing to accept the £5 note. The decision in India has understandably created frustration and confusion. The move is expected to bring a large portion of the population—which relies heavily on off-the-books cash transactions—into a more institutional tax and banking system. As a result, public and management accountants in India will be busier than ever.

Why demonetization?

“There were three primary reasons for demonetization,” said Kamlesh Vikamsey, senior partner with Mumbai accounting firm Khimji Kunverji & Co., past president of the Institute of Chartered Accountants of India and past president of the Confederation of Asian and Pacific Accountants. “One was to stop counterfeit notes. The second was to begin to deal with black money, untaxed money that is kept surreptitiously outside the system. Number three was to reduce corruption and use of drugs.”

What do public accountants need to know?

Demonetization is good news for public accountants within and outside India, said Vikas Sekhri, CPA, Mergers and Acquisitions tax partner at RSM US LLP. The most obvious reason is that more people will now use the finance and banking sector in India, meaning public accountants will have a greater role to play. “More of the population will become taxpayers and will join the mainstream finance and banking world, so the tax net will increase,” Sekhri said.

“This is the same with middle-market businesses, and that is why I think that there will be more opportunities for public accountants,” he added. “Many middle-market businesses likely have been working in the cash economy.” Public accountants can take steps to bring their clients up to speed about the changes in their financial world.

From income tax matters to cash flow issues, and from governance and compliance best practices to company tax and value-added tax concerns, Indian businesses will require guidance about how they can best operate in the new environment. Previously, particularly in the small and medium business space, they may not have considered such advice a priority.

“Accounting was not previously very strictly taken by small traders,” Vikamsey said. “They’ll now need help of accountants to keep the books and to see that things are in order and compliant.”

What management accountants need to know

Management accountants in large businesses will likely not experience great change. But those working in middle-market businesses will find their roles becoming broader and more demanding as a result of the fact that many more businesses will now be entering the tax environment, Sekhri said. Add to this the fact that customers, clients, suppliers, and other businesses will also be entering the same arena, and it becomes clear that the work of accountants will be central to the success of the process.

“There will be a greater need for accountants as organizations deal with more businesses and individuals outside of the cash economy,” Sekhri said. Every individual and business that previously operated within the cash economy, he said, will likely require some form of accounting advice.

There will be short- and medium-term challenges for management accountants, said Anil Kshatriya, ACMA, CGMA, an assistant professor of accounting at the Institute of Management Technology in Nagpur, India.

“Liquidity has taken a hit,” he said. “The money businesses held in the old currency will have to be replaced. That is the first impact. The second, of course, is all the transactions that they carried out in cash will slow down. The whole cash cycle is going to slow down.

“A medium-term impact is around whether or not the business has embedded e-payment options in their systems,” he added. “If the businesses are not fast enough to provide their customers with options to pay online, it will lead to loss of business and customer loyalty.”

E-commerce has been identified as a major opportunity for fast-moving businesses in India as the temporary cash drought has introduced much of the population to online payment systems, Kshatriya said.

An economy that was previously mired in a cash-on-delivery mentality may well be forced into the online payment world by the demonetization process.

Management accountants also should be aware that India’s experience with demonetization could have an important impact in other countries with similar issues, which will likely watch India closely over the next few years to help inform their own decisions around making a similar move.

Chris Sheedy is a freelance writer based in Canberra, Australia. To comment on this story, contact Chris Baysden, senior manager of newsletters at the AICPA.