In the past few years the public discourse on the issue of black money has come in the forefront. Black money is both an economic and a social problem. While in the latter context, it is perceived as a problem with adverse sociological effects on society, like social inequalities, social deprivations, etc.; in the former context, it is perceived as a parallel economy, an underground economy or an unofficial economy that is the consequence of the economic policies of the government and has damaging effects on country's economy and nation's socialist planning development. While problem like poverty affects those people who are poor, unemployment affects those who are unemployed, alcoholism and drug abuse affect those who consume them, black money is a problem which does not affect those who possess it but the common man in society. No wonder, it has been described as a problem with a difference.
The Concept
Black money is tax-evaded income. It can be earned both through legal and illegal means. Its legitimate source is that the income-earners do not reveal their whole income for tax purposes. For example government doctors earning money by private practice even when they get non-practising allowance, teachers earning money through tuitions, examinations and book royalty and not including it in income tax returns, advocates charging much higher fee than shown in their account books, and so forth. Its illegitimate source is bribe, smuggling, black marketing, selling commodities at prices higher than the controlled prices, taking pugree for house, shop, etc., selling house at a high premium price but showing it at a much lower price in the account books, and so forth.
It is possible to convert black money into white money and vice versa. For example, when a person manages to get the receipt from the shopkeeper by paying the sales tax for a commodity but does not purchase it actually, he generates black money as reimbursement is made to him against the receipt. The money not actually paid is the black money in such a case. In such case, the shopkeeper sells the same commodity to another person without giving him any receipt for it. On the other hand, if a person purchases something (say, a TV or an AC, etc.) and pays Rs 35,000 for it out of white money but gets a receipt of only Rs 30,000, the balance of Rs 5,000 becomes black money for the seller. In this case, the white money becomes the black money.
Magnitude of Prevalence
It is not easy to calculate the magnitude of black money in any society. The economists across the world adopted different measures but could not estimate the amount involved in black money. Norway and Sweden used questionnaire method for eliciting answers from persons whether they had participated in illegal activities as buyers or sellers. Italy attempted to estimate the underground economy by finding out the difference between the size of the labour force officially reported and actually employed. This enabled to determine the productivity in the underground sector. The United Kingdom tried to assess parallel economy by comparing the official estimates of the Gross National Product (GNP) made from the consumption side with those made from the income side. In the United States, Guttman assumed that only cash is used in illegal transactions. He tried to find out the difference between currency required for economic transactions in a fixed period and actual currency held outside banks in the same period.
In India, the estimates of black money made so far have followed two distinct approaches, viz., (1) N. Kaldor's approach of quantifying non-salary incomes above the exemption limit of income tax; and (ii) the Edgar Feige's method of working out the transaction income on the basis of currency-deposit ratio and deriving from it the 'black' income of the economy. Kaldor in his report (1956) estimated non-salary income on the basis of the break-up of national income into: (1) wages and salaries, (u) income of the self-employed, and (iii) profit, interest, rent, etc. Excluding wages and salaries from the contribution to net domestic product, he derived total non-salary income. An estimate of the actual non-salary income assessed to tax was made for each sector in order to arrive at the total non-salary income assessed to tax. The difference between the estimated non-salary income above the exemption limit and the actual non-salary income assessed to tat means the size of 'black' income
Causes of Generating Black Money
Unrealistic Tax Laws and Tax Frauds
The increase in taxes and duties compel some people to evade them. The present rules (June 2013) prescribe the limit of Rs 2 lakh as free income for levying income tax. Can a middle-class person survive within this limit in this age of inflation? A mason or a carpenter earns about Rs 500 per day. Even a good gol-gappa seller or a pan shopkeeper earns more than this a day. Assuming that these people work for 365 days in a year, their income will exceed the prescribed income tax limit. And how many of these workers pay income tax? A film actor/actress getting crores of rupees per film has to pay 30 per cent of his/her income as income tax. Instead of paying such a tax, he/she maintains 'double' accounts and evades paying tax and possesses more black money. A doctor with a private practice of more than Rs 5,000 per day, a surgeon charging a fee of Rs 50,000 per operation and doing at least ten opera- tions a month, an advocate charging Rs 5,000 per hearing, a shopkeeper doing a business of more than Rs 10,000 per day, a contractor with a turnover business of Rs 10 crore per year, an industrialist with a profit of lakhs of rupees per year-all are bound to hide their real income to escape paying income tax of 30 per cent of the total income. Indirect taxes, like excise duty, custom duty, sales tax and octroi, etc., also encourage evasion of taxes and increase in black money.
Different Rates of Excise Duty
Within similar products, there are different rates of excise duty. For instance, in textiles and cigarettes, this leads to tax evasion through misclassification of output. In textiles, separate rates of excise are charged for cloth of different varieties Manufacturers regularly downgrade a product to pay lower rates of excise, which generates huge black money. The search and seizure operations have revealed manufacturing to be a big tax evader with 200 per cent jump in 2008-09, just behind real estate, indicating that the sector may have acquired a bigger play in the black or the cash economy.
Control Policy
Another cause of black money is the price control policy of the government. In selecting commodities for control and in determining their prices, the government fails to take into account the elasticities involved in demand and supply. For example, according to the report of the National Council of Applied Economic Research (NCAER) for the year 1981, black money worth Rs 840 crore was created in the Indian economy over the period of nine years from 1965-66 to 1974-75 as a result of the operation of price controls in six commodities viz., cement, steel, paper, vanaspati, automobile tyres and fertil izers. Similarly, as a result of control on sugar, about Rs 400 crore of black money were generated in the year 1991-92. Regulation of foreign exchange also leads to over-invoicing of imports and under-invoicing of exports and black-marketing of currency. Thus, the more stringent the measures of control and the more regulated an economy, the greater will be the effort to violate it, which will increase hoarding, fraud, artificial scarcity and the resultant black money.
Quota System
Yet another source of black money is the quota system. The import quota, the export quota and the foreign exchange quota are generally misused by selling them at a premium. Unrealistic controls spawn a culture which encourage corporates to break the tax laws, particularly FERA laws. When the government came out with a scheme a few years ago (1992-93) to allow exporters to import goods without paying any customs duty, ingenious ways were devised to make money even out of this scheme, i.e., the way of over-invoicing exports to get more import benefits as well as avail of the tax setoffs given to exports. During 1992-96, the Directorate of Revenue Intelli- gence (DRI) and the customs authorities detected 605 such cases. One export house (Ganpati Exports) benefited as much as Rs 85 crore (India Today, November 30, 1996).
Scarcity
Black money is also caused by scarcity and defective public distribution system. When essential goods become scarce, people have to pay higher than the controlled prices, which generates black money. The scarcity of cooking gas, cement, kerosene, sugar, refined oil, etc., for example, in the part, have always resulted in illegitimate transactions and black money.
Inflation
The increase in prices of commodities like petrol, etc. in international market, increase in prices of commodities due to high increase in duties and taxes imposed by the government, the conspicuous consumption created by people with unaccountable money, diverting resources from production to specu lation-all these cause inflation which in turn creates black money.
Elections and Political Funding
Each election in the country involves lakhs of crores of rupees. In the present times, for contesting Lok Sabha election, a candidate normally spends more than five crore rupees and for Vidhan Sabha election, more than one crore. It is estimated that a single Lok Sabha election alone could see political parties spend around Rs 10,000 crore to pay for poll expenses. Politicians also need to draw on business resources to nurse their constituencies. Given the mind-boggling numbers, black money naturally is built into the system. For funding politicians, even honest corporate houses have no option but to find ways to generate unaccounted for money. Since the expenditure allowed by law for a candidate is limited and the companies are allowed to give up to 5 per cent of their profit in a year as donations to political parties for elections (as per Section 293A of the Companies Act, 1956), the elections are generally financed by the black money holders. These people expect political patronage and economic concessions which are obtained with the consent and the connivance of political elite in power in the form of artificial controls on commodities, laxity in the means of distribution, etc. All these methods generate black money.
Real Estate Transactions
Real estate transactions are always seen as a big generator of black money as transaction values are depressed to evade stamp duty and also absorb cash. This is largely the reason why the maximum number of evasion cases relates to this sector-123 in 2008-09 (The Economic Times, 17 November 2009). In these days, due to rising prices, purchasing a house and/or land is considered to be very profitable. There is a growing tendency of transforming the rural agricultural land to urban residential land due to the paucity of building sites in the urban areas. Establishing unapproved colonies on agricul tural land is illegal. The transaction value shown by the colonizers in regestration deeds is much less than the actual amount or the market value, This enables the seller of the land to evade capital gain tax. The high rates of samp duty-ranging between 14.5 per cent and 28 per cent in different ganes-is a major cause for under-valuation of property and unreported deals, or both. The suggestion is that if duties are reduced to 2 per cent to 3 per cent, will prevent evasion. Another hurdle is the Urban Land Ceiling Act, which reduces the supply of land and creates a black market.
According to Wikipedia, the real estate sector in India constitutes about 11 per cent of its GDP. bout a third of India's black money transactions are Nelieved to be in real estate sector. The proposed Real Estate Bill, it is hoped, will go a long way in checking the huge flow of black money into this sector.
Privatization
Privatization has opened up a new area to the private sector as well as to politi- cians and bureaucrats for making black money. One recent example is the allotment of 26 spectrum by the Ministry of Communication in which the minister concerned rode roughshod over departmental colleagues to give contracts to favoured companies. Likewise, through the allotment of coal mines, many ministers, including PMO, have been accused of having made huge black money. It is expected that many scams will come to light for making black money through privatization.
Agricultural Income
The unwillingness of the governments to bring agricultural income in the ambit of income tax has also contributed to generation of black money. Big industrial houses, over the past few decades, have entered the agriculture sector in a big way by acquiring large farms, growing and producing nothing. The black money accrued from other sources is sought to be converted into white by showing it on the agricultural income account. Taxing agricultural income may help contain this phenomenon.
Social Effects
Besides the economic effects, there are many social consequences of black money also. In economic terms, black money robs the exchequer of its due share, increases economic inequality and hampers programmes of economic development. Socially, it increases social inequality, creates frustrations among honest people, increases crimes like smuggling, bribery, etc. and adversely affects social service programmes for the uplift of the poor and the weaker sections of society. It also distorts the measurement of true rates like growth rate, inflationary rate, unemployment rate, poverty, etc. which in turn affects the government policies for containing these problems.
Black Money In India