BLACK ECONOMY: A SERIOUS THREAT
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IRJMST
Vol 5 Issue 6 [Year 2014]
ISSN 2250 – 1959
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2348 – 9367 (Print)
BLACK ECONOMY: A SERIOUS THREAT Riyaz Ali Assistant Professor, Swami Shraddhanand College University of Delhi
Vinay Babbar Assistant Professor, Rajdhani College, University of Delhi
Awadhesh Kr Tiwari Assistant Professor, PGDAV (E) College, University of Delhi Abstract ________________________________________________________________________ ______ Black economy which is also known as parallel economy connotes the functioning of the unsanctioned sector in the economy. It runs parallel rather than in contradiction of the social objectives. The roots of parallel economy are deepening in our economy which tends to be a great threat to our nation. The main objective of this paper is to highlight the how severe is the problem of black money for a developing country like India. This paper attempts to show how the black money is creating dampening impact on investment and enhancing the conspicuous consumption. This paper presents the various estimates of black money by the different experts. Further, it will focus on the challenges and threats of the black economy the country may face. At last, it will also discuss the various steps has been taken by the government over the years and what are the government policies in future to tackle this severe problem. ________________________________________________________________________ Key words: Black Money, Tax Evasion, Parallel Economy, India Defining Black Money There is no single definition of black money in economic literature. In fact, several terms with similar connotations have been in vogue, including „unaccounted income‟, „black income‟, „dirty money‟, „black wealth‟, „underground wealth‟, „black economy‟, „parallel economy‟, „shadow economy‟, „subterranean economy‟, „unsanctioned economy‟ and „underground‟ or „unofficial‟ economy. All these terms usually refer to any income on which the taxes imposed by government or public authorities have not been paid. Such wealth may consist of income generated from legitimate activities or activities which are illegitimate per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and corruption. According to National Institute of International Research Journal of Management Science & Technology http://www.irjmst.com
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IRJMST
Vol 5 Issue 6 [Year 2014]
ISSN 2250 – 1959
(0nline)
2348 – 9367 (Print)
Public Finance and Policy (NIPFP) defines “Black Money is the aggregate of incomes which are taxable but not reported to authorities. Thus, the black money is the unrecorded income whether it is generated though legitimate or illegal means. Such money is not known to the public authorities at time of its generation and is also not disclosed during its possession. Sources of Black Money Black money can be generated through legal as well as illegal means. Non disclosure of income generated through legal activities to the public authorities for the purpose of evading of taxes. Income earned through illegal activities such as smuggling, trafficking, weapons trading, selling counterfeit or stolen goods etc. By Corruption which includes bribe given to and by public officers. Earlier Estimates of Black Money in India 1.) Kaldor‟s estimate- N. Kaldor in his report on Indian Tax Reform estimated the non-salary income on the basis of the break-up of national income into (a) wages and salaries, (b) income of the self-employed, and (c) profit, interest and, rent etc. By excluding wages and salaries from NDP he drew total non-salary income. For various sectors of the economy, he estimated non-salary income above the exemption limit. As per Kaldor‟s estimates the difference of non-salary income above the exemption limit and the actual non-salary income assessed to tax measures the size of the black income was 600 crores in 1953-54. 2.) Wanchoo Committee‟s Estimate- Wanchoo Committee had followed the Kaldor methodology to estimate the black money. According to Wanchoo Committee, the estimated on which tax has been evaded would be Rs. 700 crores and Rs. 1000 crores for the years 1961-62 and 1965-66 respectively. Furthers estimates had stated that around Rs. 1800 crore income was evaded during 1968-69. 3.) Ragnekar‟s Estimate- Dr. D.K. Rangnekar was also the member of Wanchoo Committee showed his dissent over estimates by the committee as underestimates. According to him tax evaded income for 1961-62 was Rs. 1150 crores and, it increased to Rs. 2350 crores by 1965-66. The projections for 1968-69 and 1969-70 were Rs. 2833 crores and Rs. 3080 crores respectively. Dr. Ragnekar concluded that compounded annual growth rate of annual income was 11 percent whereas it was 13 percent for the black money during the same period. 4.) Chopra‟s Estimate- O.P. Chopra has estimated the unaccounted income for a period of 17 years i.e., 1960-61 to 1976-77. Chopra uses a modified methodology recommended by the Direct Taxes Enquiry Committee (DTEC). Since it is difficult to obtain information on non-salary income actually assessed, the DTEC assumed the ratio of evaded income to non-salary assessable income to remain constant to the one observed in 1960-61. Chopra made a significance departure from DTEC approach and consequently finds a larger divergence in the two series from 1973 onwards when the income above the exemption limit registered a significant increase. International Research Journal of Management Science & Technology http://www.irjmst.com
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IRJMST
Vol 5 Issue 6 [Year 2014]
ISSN 2250 – 1959
(0nline)
2348 – 9367 (Print)
The crucial finding of Chopra‟s study is that after 1973-74, the ratio of unaccounted income to assessable non-salary income has gone up, whereas the Wanchoo Committee assumed this ratio to have remained constant. As a consequence there is a wide divergence between the estimates of Wanchoo committee and those of Chopra. Choprs also concluded that tax evasion is more likely with higher the rate of tax. Table 1: Estimates of Black Income in India Rs. crores Year
1953-54
GNP market prices 9993
at Kaldor
Wanchoo Committee
Ragnekar
Chopra
600 (6.0)
-
-
-
1960-61
14946
-
-
-
916 (6.1)
1961-62
15879
-
700 (4.4)
1150 (7.2)
716 (4.5)
1962-63
16991
-
-
-
837 (4.9)
1963-64
19544
-
-
-
1452 (7.4)
1964-65
22897
-
-
-
1564 (6.8)
1965-66
23948
-
1000 (4.2)
2350 (8.8)
1439 (6.4)
1966-67
27461
-
-
-
1685 (6.1)
1967-68
32036
-
-
-
1816 (5.7)
1968-69
33024
-
1400(4.2)
2833 (8.6)
1318 (4.0)
1969-70
36580
-
-
3080 (8.4)
2714 (7.4)
1970-71
40177
-
-
-
2062 (5.1)
1971-72
43266
-
-
-
1392 (3.2)
1972-73
47750
-
-
-
1795 (3.8)
1973-74
58863
-
-
-
4757 (8.1)
1974-75
69755
-
-
-
8611(12.3)
1975-76
72698
-
-
-
7292(10.0)
1976-77
76937
-
-
-
8098(10.5)
Note: Figures in brackets indicate black income as percentage of GNP at market price in the respective year. International Research Journal of Management Science & Technology http://www.irjmst.com
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IRJMST
Vol 5 Issue 6 [Year 2014]
ISSN 2250 – 1959
(0nline)
2348 – 9367 (Print)
Source: 1.) N.Kaldor, Indian Tax Reform 2.) Direct Taxes Enquiry Committee, Final Report, 1971 3.) O.P. Chopra, Unaccounted Income: Some Estimates, Economic and Political Weekly, Vol. XVII, Nos. 17 & 18, April 24 – May 1, 1982. Recent Position of Black Money in India According to a report released by Global Financial Integrity (GFI) in December 2012, India is among the top 10 developing countries in the world with a black money outflow of $1.6 billion ( Rs. 8,720 crore) in 2010. Total outflow of black money from India since independence until 2010 was $232 billion, generally in the form of corruption, bribery and kickbacks. The cumulative value of illicit assets held by Indians during the same period is estimated to be $487 billion. The BJP, in a 2011 report, had estimated India‟s black economy being worth around $500 billion and $1.4 trillion or about between Rs. 27.5 lakh crore and Rs. 74 lakh crore, while US think-tank Global Financial Integrity had estimated India had lost $123 billion ( Rs. 6.76 lakh crore) in “black money” in 2001-10. This is money that is earned and transferred illegally abroad in tax havens, such as the Cayman Islands, typically to avoid taxes. In the post-reform period of 1991-2008, deregulation and liberalization accelerated the outflow of illicit money from the Indian economy. About a third of India‟s black money transactions are believed to be in real estate, followed by manufacturing and shopping for gold and consumer goods. Factors Responsible for Generation of Black Money 1.) Divergence between the acceptable net rate of return and legally permissible rate of return- It is often believed that the main factor responsible for generation of black money is that one expect a higher net rate of return than the legally permissible rate of return. The Chambers of Commerce and Industry hold a unanimous view that very high rates of taxation leads to more evasion. For instance, at one time, the marginal rate of income tax was as high as 97.5 percent. However, from some analysis it is conceded that higher marginal rates of taxation motivate tax evasion because of its expropriatory nature, but with reduction in marginal rates of taxation there is no guarantee in resorting the tax evasion. 2.) Generation of black money because of controls, licensing system- There is a firm believe that the system of controls, permits, licences and quotas which are associated with maldistribution of the commodities in short supply results in the generation of black money. Since the discretionary power in the hands of those who administers such controls provided them a great scope of corruption. In giving permits, quotas and licences sizeable sums of black money is being generated. Dagli Committee on Controls and Subsidies concurring with DTEC observed: “ Price and distribution controls have in the past led to the generation of black money on a significant scale. Any price control without any adequate machinery of distribution and speedy arrangement for increasing supplies is potentially a source of black money generation”. International Research Journal of Management Science & Technology http://www.irjmst.com
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IRJMST
Vol 5 Issue 6 [Year 2014]
ISSN 2250 – 1959
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2348 – 9367 (Print)
3.) Donation to political parties- Big business houses often make large sums of donations to the political parties especially the ruling party to gain undue favours and, to influence the policies in their favour. They fund the political parties with black money, it is a general view that they should pay a certain charge out of the black money to the coffers of political parties. 4.) Ineffective enforcement of laws- The Government have plethora of tax laws such as income tax law, sales tax, stamp duties, excise duty etc., but their enforcement is very weak because of widespread corruption in these departments. Officials have made corrupt practices as their part of work culture. They take bribes and let the black money goes unchecked. Impact of the Black Money on the Economic and Social System The origination of the parallel economy because of growing proliferation of black money in every sector of the economy has serious impacts and devastating influences on the working of the Indian economy. It would be of our interest to study the impact of black money on the economic and social system of our country. 1.) Loss to the State Exchequer- The direct effect of the black income is the loss of revenue to the government because of tax evasion. Moreover, tax evasion does not include loss of revenue resulting from unreported production or illegal economic activity. Government always fails to realize the tax revenue targets as a consequence of large amount of tax evasion. Direct Taxes Enquiry Committee also mentioned regressive effects of tax evasion as “ Black money and tax evasion which go hand in hand have also the effect of seriously undermining the equity concept of taxation and warping its progressiveness. Together, they throw heavy burden on the honest taxpayer and widens the inequalities of income”. 2.) Increases conspicuous consumption- Black money at the disposal of businessmen and capitalists lead to conspicuous consumption or creates demand for nonessential articles. Further, it has demonstration effect on all classes of the society. As a consequence, the consumption pattern is tilted in favour of the rich and elite classes, at the cost of encouraging the production of articles of mass consumption. This type of consumption have adverse effect on production and distorts the objectives of planning. 3.) Leads to inflation- Because of black money, the money in the system is more than the government expects. Further, black money creates demand for commodities above the normal level which leads to higher inflation because of supply side constraints. Thus, such inflation badly affects the poorer sections of the society. 4.) Diversion of resources- Black money has encouraged the purchase of real estate and investment in luxury housing. There is large scale under-valuation of property and lot of black money is made white. Because of such under-valuation government also loses tax revenues or stamp duties. Further, such investments also pushed up the property prices and, makes it out of reach for a layman. International Research Journal of Management Science & Technology http://www.irjmst.com
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IRJMST
Vol 5 Issue 6 [Year 2014]
ISSN 2250 – 1959
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2348 – 9367 (Print)
5.) Transfer of funds to abroad- Black money results in transfer of funds to foreign countries through confidential channels. Such transfers are made possible by violations of foreign exchange regulations. Generally, exporters may underinvoicing their exports and imports makes their imports over-invoices which creates a paradoxical situation for the country. It badly affects the developing country like India which has scarce foreign exchange resources. Research study by Indian Institute of Finance, Delhi has estimated capital flight from India to USA for the three year period from 1993 to 1995 to be of the order of US $ 15.8 billion at US/World average prices. 6.) Corruption- Since corruption has created the black money, at the same time such black money also used to pay bribes to the politicians and top bureaucrats. People by doing this try to influence government decisions and moulds the government policies in their favour. Also, party functionaries openly and shamelessly go on collecting funds. 7.) Last but not the least, black money also encourages investment in bullion and precious stones. There are people who believe that almost 70% of the total gold investment in our country is black money. Further, it leads to conspicuous consumption and has adverse effect on growth through its demonstration effect. Measures taken by the Government to curb the black money Government has taken number of steps to unearth the black money over the years. Some important measures are as under: 1.) Measures to check tax evasion- Tax evasion is one of the main cause for the generation of black money. Therefore, the government has checked the loopholes in tax laws and, thus undertaken various administrative measures. Most of these measures were based on the recommendations of various committees and commissions, such as , the Tax Enquiry Commission (1953), N Kaldor‟s proposals for Indian Tax Reform (1956), the Direct Taxes Administrative Enquiry Committee (1958), Recommendations by the Administrative Reforms Commission (1969), the Direct Tax Inquiry Committee (1971). Most of these recommendations pertained to improvement in tax laws. 2.) Voluntary Disclosure Schemes- From time to time, Government had launched various voluntary disclosure schemes. Under these schemes Government reduces the tax rates on high incomes so that large amount of overall income to be disclosed voluntarily. Up to 1968 Rs.519 crores of concealed income was disclosed on which Rs.131 crores were paid as tax. However, the Direct Tax Inquiry Committee (DTEC) was not in favour of such schemes as such schemes placed a premium on fraud and are unfair to the honest tax payers. Ignoring the view of DTEC, the Government again introduced Voluntary Disclosure Scheme in !975. As a consequence, a sum of Rs. 746 crores was realized as tax. 3.) Special Bearer Bond Scheme- This scheme was introduced in 1981 for canalizing unaccounted money for productive purposes. The Special Bearer Bonds of the face value of Rs. 10000 each were issued at par with a maturity period of 10 years. The bond holders were entitled to receive Rs. 12000 at the time of maturity. International Research Journal of Management Science & Technology http://www.irjmst.com
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IRJMST
Vol 5 Issue 6 [Year 2014]
ISSN 2250 – 1959
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2348 – 9367 (Print)
Thus, these bonds carried 2 per cent interest per annum with lock in period of 10 years. Complete immunity was granted to the bond holders from being questioned about possession of bonds or about the sources of money. As per data provided in budget 1982-83, these bonds were subscribed to the tune of Rs. 964 crores. 4.) Voluntary Disclosure Scheme (VDS) (1997)- In 1997 then the finance minister announced a Voluntary Disclosure Scheme in his budget speech. The scheme was quite simple. Irrespective of the year or nature of the source of funds, the amount disclosed either as cash, securities or assets, charged to tax at 30 per cent for individuals and 35 percent for corporations. Table below showing the incomes declared and, amount of tax collected under various VDS Schemes: Table 2: Declarations Under Various VDS Schemes Schemes Incomes Declared VDS 1951 70.2 VDS 1965 197.2 VDS 1976 746.1 VDS 1997 33000
Rs. Crores Tax Collected 10.9 50.3 249.0 10500
5.) Amnesty Scheme- the Finance Ministry has also introduced Amnesty Schemes from time to time that allows tax defaulters to pay a tax, waiving the penalty and interest. Using these schemes, a defaulter could disclose their wealth and convert them to legal money. No more questions will be asked. These schemes help Government to rake up the taxes and bring huge amount to legal money back into the Indian market. White Paper on Black Money On 21st May, 2012 the finance minister Shri Pranab Mukherjee tabled the White paper on Black Money in the Lok Sabha. According to the Paper, black money is a serious issue because it has a „debilitating effect‟ on governance and public policy and this affects the poor disproportionately.
The Paper defines black money as: „assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession‟.
The Paper provides an overview of how manipulation of financial records and accounting techniques are used to generate black money.
The paper also highlighted certain sectors as being more vulnerable to black money issues. These sectors include land and real estate, bullion and jewelry, financial markets, public procurement, the non-profit sector, informal sector and cash economy.
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IRJMST
Vol 5 Issue 6 [Year 2014]
ISSN 2250 – 1959
(0nline)
2348 – 9367 (Print)
The Paper does not provide an estimate of the amount of black money currently generated in India. It cites a lack of uniformity, unanimity or consensus about the best approach to be used to measure black money.
The Paper describes the institutions currently in place responsible for dealing with black money issues. These include the Central Board of Direct Taxes (CBDT), the Enforcement Directorate (ED), the Financial Intelligence Unit (FIU-IND) and the Central Board of Excise and Customs (CBEC). The Central Economic Intelligence Bureau (CEIB), the National Investigation Agency (NIA), and the High Level Committee (HLC) act as coordinating agencies.
The Paper also describes the framework the Government of India has employed to tackle black money. It is a five pronged strategy which involves: (i) joining the global crusade against black money, (ii) creating an appropriate legislative framework, (iii) setting up institutions for dealing with illicit money, (iv) developing systems for implementation, and (v) imparting skills to personnel for effective action.
The Paper stresses the need for any long term strategy to be based on public acceptance, political consensus and the commitment to implement it.
The Paper proposes a strategy to curb black money generation from legitimate activities based on four pillars:
Reducing disincentives against voluntary compliance – this could involve measures like rationalization of tax rates and reducing transaction costs by providing electronic and internet-based services to pay tax.
Reforms in sectors vulnerable to generation of black money – the Paper proposes various policy initiatives to prevent black money generation in certain vulnerable sectors of the economy. For instance, in the area of real estate, the Paper proposes deducting tax at source on payments made on real estate transactions. In the cash economy, the Paper recommends that the Government provide tax incentives for use of credit/debit cards.
Creation of effective credible deterrence –policies should create enough disincentives for black money generation. The Paper believes the introduction of the Goods and Service Tax (GST) will be an important step in this process. Other measures proposed include strengthening the direct tax administration, strengthening of the prosecution mechanism and enhancing exchange of information.
Supportive measures – some of the measures suggested by the Paper include creating public awareness and public support, enhancing the accountability of auditors and participating in international efforts. With regards to repatriation of
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IRJMST
Vol 5 Issue 6 [Year 2014]
ISSN 2250 – 1959
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2348 – 9367 (Print)
money overseas, the Paper suggests a onetime partial benefit of immunity from prosecution for voluntary disclosure. Conclusion From the above discussion we can conclude that the share of black money in our economy is on increasing. Because of insurgence of black money income inequalities have widens among different sections of the society. Further it has diverted the investment from productive activities like manufacturing to less productive such as real estate, bullion etc. However, over the years Government has also taken some steps to curb the functioning of black money but that was not sufficient. All the efforts of the Government have done half-heartedly. There is no doubt that existence of black money has a significant impact on social, economic and political levels of our lives which has a significant effect on the institutions of governance and conduct of public policy in the country. So, the Government should deal with these severe problem on priority basis. Strong policy measures with strong political will is required to tackle this problem. At last we conclude with this : So we can’t say that India is a poor nation. Infact, India is amongst the Richest Nations if Stashed Black Money is brought back & converted to White Money and fresh generation of Black Money is put to an end. Bibliography
http://www.prsindia.org/parliamenttrack/report-summaries/white-paper-on-blackmoney-2345/ finmin.nic.in/reports/WhitePaper_BackMoney2012.pdf
Rani,Kavita and Dr. Kumar, Sanjiv, Black Money In India – A Conceptual Analysis published in PARIPEX - INDIAN JOURNAL OF RESEARCH, ISSN - 2250-1991, Volume : 3 | Issue : 1 | Jan 2014.
White Paper on Black Money, May 2012, Ministry of Finance, Department of Revenue,Central Board of Direct Taxes, New Delhi.
http://www.hindustantimes.com/business-news/black-money-india-ranked-8among-150-countries/article1-974147.aspx. Datt, Gaurav and Mahajan, Ashwani (ed.) 2012, Indian Economy (65th Revised Edition), Ch. 23. S. Chand and Company Ltd. New Delhi. Arora, Rajni, Black Money in India : Present Status and Future Challenges, published in International Journal of Science, Engineering and Technology Research (IJSETR), ISSN: 2278 – 7798, Volume 1, Issue 5, November 2012 http://en.wikipedia.org/wiki/Indian_black_money
IGNOU, Study Material on Indian Economic Policy block-6 Governance of the Economy of MEC course. International Research Journal of Management Science & Technology http://www.irjmst.com
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