India And The Black Market

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Sep 20, 2005

BLACK MARKET AND THE INDIAN ECONOMY

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Statistics:

It is said that black money in India accounts for 20 % of GDP. If this is true, then black money generated every year must be around Rs 400,000 crore or $ 80 billion. This is a huge amount, more than the entire budget of the government at the Centre. We have a government that spends about Rs 350,000 crore a year, most of it on itself, and asks for accounts of every paisa. On the other side, we have black money worth Rs 400,000 crore every year, which is just guesswork, and there are no accounts. This money goes into property, which is why real estate prices are so high, and of course five-star hotels. If the government could have all this money, or even a small fraction, there would be no need for revenue or fiscal deficits, and no need for huge borrowings to make two ends meet.

How big is $ 100 billion? It is bigger than you think. It is worth Rs 500,000 crore, which makes it bigger than the central budget. It is more than twice our annual exports. It is equivalent to 30 times what Enron is supposed to have invested on its Dabhol project. It is more than what the US government is expected to pay those who have suffered from the September 11th smash. And, if you must know, it is a fifth of our annual GDP, which is itself a big figure.

Introduction:

The CBDT is hopeful of collecting more than Rs 7,000 crore (Rs 70 billion) as income tax area, the target indicated by Finance Minister P Chidambaram for the current financial year. The board has already collected Rs 3,400 crore (Rs 34 billion) during the first six months of the current fiscal year, compared to Rs 2,700 crore (Rs 27 billion) in the same period a year earlier.

Finance Minister P Chidambaram's Budget speech for 2004-05 shows there were only 27 million taxpayers in the country on the date of the presentation of the Budget. This indicates the tax evasion rampant in the country.

The economy keeps growing and so does the deficit, while the revenues do not increase in the same proportion as the economy grows. There could be a number of reasons for the shortfall, which may vary from year to year like recession in the industrial sector or shortfall in agricultural production. But one factor that has been constant for the last five decades is the tax evasion. There are so many loopholes in the tax system that allows people and organizations to evade taxes with impunity. There are no reliable estimates of the extent of the tax evasion in this country. But some studies show that the size of black money has grown significantly over the past many years If this tax evasion were checked, the Finance Minister would never be faced with shortfall in tax collection and would have a very low fiscal deficit. Therefore, the Finance Minister instead of resorting to increase in tax rates or coming out with amnesty schemes should find other means to increase the revenue collection. One such way is to plug the loopholes, which encourages tax evasion. Most of the tax evasion occurs when transactions are done in cash and never recorded. This has been the experience of many countries and they have come out with measures that discourage cash transactions and encourage recorded transactions. One such mechanism has been the use of debit and credit cards combined with payment through banking mechanism. The Finance Minister should come out with such a provision, which encourages cashless transaction.

As a first measure it may be made mandatory that all salaries above Rs 10,000 per month, both in public and in private sectors, be directly credited to individuals' accounts in their respective banks. Secondly, payments above a certain amount may also be made mandatory through debit / credit cards and through cheque or bank drafts. With electronic banking gaining importance, transfers through banking mechanism will become as easy as receiving or making payments by cash. In most of the countries the use of debit and credit cards for making and receiving payments has reached a point that for buying even one small ball pen payment is made through credit / debit card.

Similarly, payments for the sale and purchase of immovable property, various kinds of consumer goods and services beyond a certain stipulated amount should also be made mandatory through banking channels. While doing so, the Finance Minister will not only be plugging one of the biggest loopholes leading to tax evasion but would also reduce the need for ready cash and hence the printing of currency notes on a large scale.

The biggest chunk of black money is invested in real estate and gold. The circulation of black money in the housing sector is beyond imagination. Since the house tax is based on the current purchase price only one fourth of the money is paid by cheque and the rest in unaccounted cash. Even an honest buyer of flats / houses is forced to pay in black money if he wants to acquire one.

History:

The period 1946-61 was one of the intense creativity. A black or parallel economy emerged both in the wake of the Second World War and the expansion of the economic activity in the post-independence period. Incentives were provided through the taxation laws to promote savings and investment; this made the tax laws more complex. Then, there was the need for larger revenues to finance the plans of economic development. Thorough investigations were, therefore, conducted into the structure of taxation not only with a view to widen the base of income tax but also to look for new taxes and to prevent tax evasion and avoidance. The Income-tax administration came under heavy strain due to the increase in the volume and complexity of its work.

Nature:

There are two powerful ethical props for a different view than the one the court has taken.

1. It is a plain fact that many high-earning persons evade income tax by ruthlessly exploiting the loopholes in the laws. Black money is the outcome of this practice. And neither the income tax department has mounted an effective campaign to hunt out these tax cheats, nor has the court, any court, felt provoked to order a comprehensive crackdown.

2. The widespread ruse of doling out big money to top executives and others by describing it as reimbursement.