In Pakistan we have currency notes of Rs 10, 20, 50, 100, 500, 1000 and 5000 denominations. Generally, large denomination currency notes are often used for hoarding, black marketing, smuggling, flight of capital and by mafia for illegal activities such as hawala/hundi, payment for smuggled goods and narcotics, high denomination notes also help in avoiding taxes. It is reported that in Pakistan, the size of black/underground economy is just about double the size of white/legal economy. Tax net is extremely narrow. Majority of taxpayers are those whose tax is deducted at source. Businessmen either do not pay taxes or pay a fraction of what they should have paid.
Recently in the Senate, a Senator disclosed that while he has paid two crore rupees as income tax, the Prime Minister paid only four million rupees as income tax. Prime Minister is supposed to be one of the richest men not only in Pakistan but he along with his son is one of the 20 richest men in England. Source of income? An easy way to widen the tax net and realise tax actually owed is to slap "capacity tax" on majority of business houses. Even in England capacity taxation is practiced.
The government should consider demonetization of Rs 5000, 1000 and 500 currency notes. Of course, people should have the facility to exchange demonetized notes up to a certain limit. However, there should not be any limit on depositing demonetized notes in bank accounts. But then the depositors will have to reveal the source and legitimacy of amount deposited.
Western nations rarely issue high denomination notes. In England, notes higher than £ 50 and in the US notes higher than $100 are rare. Shopkeepers are reluctant to accept high denomination notes. Most Europeans report that they have never seen a 500 euro note, and there are very few retailers willing to accept 500 euro note.
In most Western countries, payment for a taxi or a cup of coffee can be made through mobile phone; large payments made by cheque or credit card. Sweden is the first European country which has become almost cashless. There, even the children's pocket money is credited to their credit cards. It is suggested that all transactions over Rs 10,000 be done through cheques or credit cards. This is the easiest way to document economy and widen the tax net. In the bargain black economy, hundi/hawala, etc, will almost come to a standstill. The big question is will the politicians be willing to take this step?