PARALLEL ECONOMY (BLACK MONEY)

Issues of tax evasion, corruption and black money continue to' occupy centre stage. According to a 2006 report of the
Swiss Banking Association, Indian Nationals hold 1,456 billion US dollars in Swiss Bank deposits. A Global Financial
Integrity Study estimates the flight of gross illicit assets from India during 1948-2008 at a staggering 462 billion dollars: A
high level committee on black money set up by Government estimates Black Money to be more than 50% of India's GOP.
Causes
Complex tax structure and high rates of taxation. Various kinds of physical and administrative controls.
High stamp duties on real estate transactions. Relatively low salaries of government officials.
Hawala transactions and under-invoicing/over-invoicing of Funding of elections.
exports/imports to siphon off money through hawala. Absence of deterrent punishment.
Smuggling, black marketing, hoarding, etc. Fast declining moral standards
Prominent sectors generating black money in India are film industry, construction, real estate transactions, elections,
large-scale manufacturing and smuggling.
CONSEQUENCES
Under-estimation of national income Misallocation of country's scarce productive resources
Aggravation of inequalities from production of essential goods to luxury goods.
Conspicuous consumption Mars incentive for hard work.
Inflation Destroys the moral fibre of society and corruption.

Measures to address the problem of Black Money

First set of measures are those that aim at preventing generation of further black money as follows:
Simplifying and rationalising tax structure so as to minimise Relaxing and minimising various kinds of physical controls
evasion, avoidance and ambiguities. (like quota), administrative hassles and other such
Reducing Stamp Duty on real estate transactions. restrictions/ regulations which give rise to discretionary
State funding of elections and imposing ceiling on election powers and widen the scope of black money generation
expenses of various political parties with strict audit. through bribes and kickbacks.
Awarding deterrent and strict punishment to those Enactment of a suitable and fool proof Lok Pal Act to
indulging in black money transactions. address corruption in bureaucracy and political level.
Second set of measures are those that aim at unearthing black money already generated. These are as follows:
1. Demonetisation of currency notes of high denomination like RS.1 000, 500 notes. assumption is that people hold a
large chunk of black money in high denomination notes, this measure has been adopted in India twice since
independence (the last time in 1978) but has not been successful, as people may be holding black money in form of
gold, bullion, jewellery, real estate, etc.
2. Voluntary Disclosure Scheme under which government provides amnesty to those who have evaded taxes, by giving
them opportunity to declare the amount of evaded income/taxes without attracting any penalty but imposing
highest prevailing rate of income tax. This scheme has been introduced at least four times since independence. Last
time it was introduced in late 1990s under which government was able to unearth substantial amount: A major flaw
of this scheme is that it rewards e dishonest 'and penalizes honest tax payers who have regularly paid taxes.
3. Issue of bonds by government under which those who have black money are given an opportunity to subscribe to
these bonds which may provide some tax relief on maturity income of these bonds. government can use funds so
mobilised for some social welfare programmes like low cost housing, clearance of slums, etc. Some such bonds were
introduced in India during 1980-82.
Most of the above measures may fail to have any impact as is borne out by the Indian experience. The most effective
way to address the problem lies in-
(a) Strong political will
(b) Breaking the fast growing nexus between bureaucrats, politicians and corporates
(c) State funding of elections
(d) Awarding exemplary punishment to those generating black money
(e) A strong meaningful Lok Pal Bill.
MC Joshi committee on black money
Government appointed a high-level committee headed by MC Joshi then CBDT Chairman in June 2011 to study
generation and curbing of black money. Committee finalised its draft report on 30 January 2012. Its key observation and
recommendations were:
(a) Two major national parties (Indian National Congress, BJP) claim to have incomes of merely 500 crore (US$91
million) and 200 crore (US$36.4 million). But this isnt "even a fraction" of their expenses. These parties spend
between 10,000 crore (US$1.82 billion) and 15,000 crore (US$2.73 billion) annually on election expenses alone.
(b) Change maximum punishment under Prevention of Corruption Act from present 3, 5 and 7 years to 2, 7 and 10 years
rigorous imprisonment and also changes in the years of punishment in the Income Tax Act.
(c) Taxation is a highly specialised subject. Based on domain knowledge, set up all-India judicial service and a National
Tax Tribunal.
(d) Just as USA Patriot Act under which global financial transactions above a threshold limit (by or with Americans) get
reported to law enforcement agencies, India should insist on entities operating in India to report all global financial
transactions above a threshold limit.
(e) Consider introducing an amnesty scheme with reduced penalties and immunity from prosecution to the people who
bring back black money from abroad.