The matter of Tax evasion or generation of Black money is not exactly News for Indian economy. Rather it’s a known fact that our economy is dual by nature. There is a formal economy which functions on the basis of official monetary system and in the boundaries of rules and regulations set up by the Government. And there is one parallel economy, informal and illegal one, which operates outside those boundaries. It is very difficult to truly gauge the magnitude of this parallel economy and the money that flows through it. Consequently, this particular subject matter has been in the limelight over the years and there has been extensive debate on the subject.
Over the years, all the successive Governments have tried to deal with this grave problem through various measures such as demonetisation, voluntary disclosure schemes, and bearer bonds and so on. There are a number of enforcement and regulatory agencies working in different ministries that are also involved directly or indirectly to keep checks on tax evasion or accumulation of black money. However, the government hardly had any success with its attempt to curb such practices. On the other hand, the situation has further aggravated due to round tripping of such money to India through complex cross- border structures and devious utilisation.
IDS 2016 and Recent Measures
The Government has really been focusing on uncovering such unaccounted money in the past two years by taking various measures. The Government continued its attempt by declaring The Income Declaration Scheme (IDS), 2016 as Chapter IX of the Finance Act, 2016, and providing a one-time opportunity to taxpayers to come clean by declaring their undisclosed income or assets in India. The IDS scheme provided immunity only under the Income-tax Act, 1961, the Wealth-tax Act, 1957 and the Benami Transactions (Prohibition) Act, 1988. However, Finance Minister has assured that the secrecy will be maintained of these declarations and the information contained in the declaration made under the Scheme will not be shared with any other tax or law enforcement agency.
The IDS 2016 proved to be the biggest ever black money disclosure and around Rs 65,250 crore of undisclosed assets were declared which meant Rs 29,362 crore in tax revenue to the government.
The Finance Minister Arun Jaitely also confirmed the possibility of this figure going even higher. The average declaration per declarant comes to Rs 1 crore, which is quiet significant.
Last year, under a similar scheme for foreign black money holders, assets worth Rs 4,164 crore were declared and Rs 2,428 crore were collected in taxes.
Another arm of the Indian Union, i.e. the judiciary, is now working to tighten the screws on the flow of black money in India. The Supreme Court (SC) has become the latest institution furthering India’s battle against black money. In July 2016 the Supreme Court appointed Special Investigation Team (SIT) submitted its report to the Supreme Court recommending Ban on cash transactions exceeding Rs.300,000 and cash holding limit of Rs1,500,000.
It’s clear that the Government has intensified the fight against black money. But why black money should be such a prime concern for the Government? Of course, existence of black money means less tax collection for the Government. But it’s much more than that. Generation of black income and thereby establishment of parallel economy has severe impact at both social and economic level. But before we go in detail about its impact lets understand more about the Black money first.
Black money and its sources:
National Institute of Public Finance and Policy (NIPFP) defines ‘black income’ as ‘the aggregates of incomes which are taxable but not reported to the tax authorities’. It further explains – black incomes or unaccounted incomes are ‘the extent to which estimates of national income and output are biased downwards because of deliberate, false reporting of incomes, output and transactions for reasons of tax evasion, flouting of other economic controls and relative motives’.
In other words, Black Money can be defined 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.
Back Money is generated by two sources.
Illegal means – It may consist of income generated from illegitimate activities, such as smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, corruption which includes bribe given to and by public officers. Factors leading to their generation are both social and administrative.
Legal Means – It includes legally permissible economic activities, which are not accounted for and disclosed or reported to the public authorities in order to evade taxes or avoid compliances which ultimately results in converting such income into black money. Significant amount of black money is generated through this second source.
There are numerous factors responsible for generation of black money:
- The main cause is high rates of taxes. India is today one of the highest taxed nations. There is a growing tendency of tax evasion among the tax payers. Tax evasion is common in income tax, corporate tax, corporation tax, union excise duties, custom duties, sales tax , etc.
- Inefficient tax laws and compliances: Tax-laws in India are too complicated for a layman to understand them. Even honest assesses are unable to file correct returns, which just fuels the tendency of people to evade tax. Another cause is numerous controls, licenses and other governmental regulations one has to comply with while carrying a business. It has made black money indispensable to businessmen.
- Another biggest reason is the corruption prevailing in the tax collection department. The high rates of taxes induce businessmen to falsify their accounts and they are successful in doing so by bribing the concerned authorities.
- There is an upward tendency of supporting of political parties with the help of black money. A big trade house donating an enormous amount of black money to the political parties is nothing new for Indian politics.
- Privatization has opened up many areas to the private sector as well as to ministers and bureaucrats for making black money. Tenders are invited and are awarded by such people in consultation with the political leaders and involve large scale black money in underhand dealings.
- Agricultural earnings have always been outside the purview of income tax. Big industrial houses, over the past few decades have entered the agriculture sector. Transforming the black money from other sources and presenting it in the agricultural returns account has become such a common practice.
Key sectors deeply involved
Almost every sector in India generates and uses black money for its survival in the market. However there are few sectors which are deeply impacted by it.
Real Estate: It has estimated that about a third of India’s black money transactions are generated through Real Estate transactions, followed by Manufacturing, and purchase of Jewellery and Consumer Goods. Due to rising prices of Real Estate, the taxes applicable on Real Estate transactions in the form of stamp duty and capital gains have gone up which in tune result into tax evasion through under-reporting of transaction price. This leads to both generation and absorption of black money at the same time. The buyer has the option of using his black money by paying cash in addition to the documented sale consideration.
India is one of the leading gold markets in the world. Gold Reserves in India averaged 439.56 Tonnes from 2000 until 2016, reaching an all-time high of 557.76 Tonnes in the first quarter of 2016. Naturally, Gold market becomes a large segment for generation of black money. The black money holders can protect the value of their black money from inflationary depreciation by investing in bullion and Jewellery. It is also a liquid asset which can be converted into cash at short notice which is again quiet convenient for black money holders. Tax authorities have estimated purchases of gold bullion and Jewellery as the second-largest parking space for black money, next to Real Estate.
The Fast Moving Consumer Goods (FMCG) sector is very vulnerable to counterfeiting. These counterfeiters merely copy the packaging style of a renowned brand. And as buyers are generally average household consumers, they are ignorant of such malpractices.
Due to the illegality nature the business, this industry is not registered. It results in tax evasion of Excise Duty on manufacture and job work, Service tax on services such as transporters, VAT on sale of products and so on. As a result, the entire industry functions on black money.
Hotels & Hospitality
The incidence of tax evasion in small and midsized hotels and restaurants/banquets is large. Such institutions persuade their customers to pay a part amount of the bill by way of cash which saves the applicable service and other related taxes, thereby making some or whole of the transaction black income for them. And as the customers are large in number and not registered under any law, being the general consumer, the black money becomes untraceable for tax authorities.
As betting is illegal in India, it creates a wide scope for black money generation. In India, only betting on horse racing, lotteries conducted by state governments and casinos in certain states are permissible.
According to 2012 FICCI and report by KPMG, betting in India is a INR3,00,000 crore market and if taxed at a rate of 20 percent, the exchequer can earn revenue of INR12,000 crore to INR19,000 crore every year. Cricket betting is such a widespread in the country and there is huge amount of money that flows through illegal gambling black-market.
Magnitude of Black Money:
There are no reliable estimates of black money generation or accumulation neither is there an accurate well-accepted methodology for making such estimation. By its very nature, as the black money is not accounted for, it’s a huge challenge.
An IMF study (1990) estimated the flight of capital from India during the period 1971-86 at US$20-30 billion, or US$1-2 billion every year. This estimate was later revised in 2001 to US$ 88 billion over the 1971-97 period, a sum that is roughly equivalent to 20 per cent of net real debt disbursements to the economy from 1971 to 1997. In other words, for every dollar of external debt accumulated by India from 1971 to 1997, private Indian residents accumulated 20 cents of external assets.
A report by Business Standard published in January, 2013 estimated Black Money at 30 % of GDP, or INR 28 lakh crore. A report by NIPFP in December 2012, estimated black money at above INR 10 lakh crore or 10 percent of the GDP.
According to the report of Illicit Financial Flows from Developing Countries: 2004-2013, India is a fourth leading county among the developing nations in the world with total illicit financial flows of USD 510,286 million from 2004 till 2013.
A chain Email, which first started circulating on the Internet in early 2009, states that Indians have more money in the Swiss banks than all other countries combined. It claims that as per a Swiss Banking Association report in 2006, bank deposits in the territory of Switzerland by nationals of a few countries are as under: India, US$1456 billion, Russia, US $470 billion, UK, US$390 billion, Ukraine, US$100 billion, China, US$96 billion. (Source: The White Paper on Black Money_May 2012 by Ministry of Finance)
How Black money is affecting the Indian Economy
Generation of black money and hiding of income does hamper government’s revenue generation from taxation, but it has more severe impacts which pose a serious threat to Indian economy.
Underestimation of GDP: As an enormous volume of income is diverted to this unaccounted sector resulting in growing continuation of parallel economy of the country, it underestimates the GDP of India significantly.
The ‘per capita income’ of India has not growing in line with the other advanced countries despite the liberal measures taken by the government since early 1990s. Even after several decades of planning and push in the right direction, India still remains much behind in terms of per capita income.
Diversion of income to wasteful consumption causing growth to stall: As discussed earlier, black money holders use their undisclosed income to purchase of real estate, luxury housing or jewellery, which if brought into the official system it can be invested into much productive resources. This flow of underground money has caused Indian economy to stall on its growth. It is estimated that if all the money in the underground economy could be diverted to our main economy, our economy would grow by more than thrice in no time.
Fuelling Inflation: Unreasonable hike in real estate prices is a classic example of how black money pushes the inflation in upward trend. It also causes the prices of commodities to increase to a level beyond normal. Even if the Government tries to control the credit flow in the market by taking necessary measures, the amount of black money present upsets the move.
Widening the gap: Parallel economy results in inequitable distribution of income. As the tax evaders keep the money stashed away and put the additional pressure on inflation; the middle and lower classes have to pay the price. It widens the gap between the rich and the poor taking the disparity of wealth to new heights.
Lack of Technology: Significant portion of black money is tied onto real estates and jewellery etc. which can be used to solve the problem of shortage of capital. This has the direct impact on the upgradation of technology in all sectors. IT can help to resolve the backwardness in each and every sector.
Unemployment: Because of inadequate growth (industrial and otherwise) due to lack of capital, widespread unemployment is prevalent and perhaps the most striking symptom of inadequate development in India. Unlike developed economies where the unemployment is cyclical, in India it is chronic due to slow or no growth in many sectors.
Corruption: Corruption is a cause as well as an effect of black money. Black money has corrupted our political system in a most vicious manner and at various levels; MLAs, MPs, Ministers and party functionaries openly go on collecting funds. People with black money are willing to or forced to bribe the administrators and politicians to help them get away with the irregularities which in turn again generate more black money. So it’s a vicious circle.
Well… the list is unending. The purpose of listing down some of the major severe consequences of Black money is to explain the magnitude of the damaging impact it has on the Indian economy; which is why it becomes the primary concern for the Government. I had initially planned to list down the measures a government should take to curb this problem. But I changed my mind as I felt the Government already knows what needs to be done and they have sufficiently enough force of advisors and experts to guide them. Instead, I thought it’s more crucial to discuss about our role as an individual and an Indian citizen in all this.
A personal note
Historically, there have been numerous measures taken by successive Governments to deal with this monstrosity of black money. But the success rate is almost negligible. There are several reasons behind it; I have discussed some of them above. But in my personal opinion, one of the biggest hurdles to solve this situation is lack of response or the awareness in the general public.
The problem of black money has crept into each level and so deep that it has become part of our everyday lives. And the worst and most unfortunate part is that we all have grown so used to it that some of us don’t even notice it anymore.
Each one of us, including myself, calls names to politicians for the corruption and black money and so on. But we forget that we are part of that system too. We conveniently ignore the fact that in a way we contribute to that system. How many of us have submitted fake medical reimbursements bills or fake rent receipts to our respective employees in order to reduce the Tax deduction? How many of us ask for a bill at a grocery store or even at a restaurant or a hotel? How many of us prefer to do some transactions in cash? How many of us have donated money over and under the table to get admission at medical or engineering college?
There is huge difference in ‘Tax planning’ and ’Tax evasion’. Isn’t it our duty to keep check on ourselves so that we don’t cross that line? Can’t we make a conscious choice to not be part of any such transactions? It may look like a negligible or insignificant thing to do. Many people might feel how does it going to have any impact on such a huge national level problem. But if some of us, a certain % India’s population no matter how small it is, makes this conscious choice; can you imagine the exponential impact of that?
When India got attacked and we responded in a successful surgical strike; Indian Army, Air and Naval forces got a huge support across India. The reaction of general public was out of patriotism. But where is that spirit when it comes to tax matters and compliances? Evading taxes is not at all a patriot act, it’s exactly the opposite. Don’t you think that if the Black money comes into our official economy, in a way it will provide an additional support to our armed forces because the Government will have sizable resources at its disposal ? Don’t you think that it becomes our duty as an Indian citizen not to participate in any kind of tax evading activity?
Many of you might feel that this article has turned into an emotional conversation than an economic one. But due to the recent events I couldn’t help but mention this connection.
All I am trying to say that the fight against the black money has to be at ethical, socio-economic and administrative levels. At the ethical level, we have to reinforce value / moral education at individual level and build good character citizens, particularly highlighting the ills of tax evasion and black money. At the socio-economic level, the thrust of public policy should be to discourage conspicuous wasteful consumption / expenditure, encourage savings, frugality and simplicity, and reduce the gap between the rich and the poor.
The recent actions of the Government show its commitment to abolish ‘Black Money’. But in my opinion it is not entirely possible to eradicate black money unless major and radical changes take place at social and individual level. In the end, it call comes down to the value system we hold as an individual and as a citizen of our country.