Thursday, 14 July 2016

Black Money Menace

Money can be got from three sources - earnings, inheritance & gifts/borrowings. Any other way is corruption and black money.

During Second World War time high inflation and essential commodities shortages people made huge profits by dealing in items in short supply than from production and expansion of business. This has resulted in commodity hoarding activity and black money generation by traders. Post independence, license raj policy led to its misuse by a coterie of power to amass unaccounted wealth in return for favors to some businesses. Today people from all walks of life talk and deal with black money so casually indicating social acceptance of corruption & black money.
  • Black money refers to the income on which tax has been totally or partly evaded. 
  • Part of this money is utilized for consumption and part for hoarding or investment.
  • It causes huge losses in tax revenues to the government.
  • The circulation of black money gives rise to a ‘parallel economy’.
  • The money involved in illegal transactions is estimated to nearing 50% of GDP.
  • Annual growth rate of black money in India is higher than the annual growth-rate of its GDP.
  • Black money cripples the free flow of a country's resources in the right direction.
  • Black money also widens the income gap.
  • Lower rung of the salaried individuals do not see their incomes rising unlike those in the higher echelons who has access to black money sources.
  • Tax rates on higher incomes and excess profits prompted many to resort to black marketing and tax evasive measures.
  • In the past, the marginal income tax rate was as high as 75% (while it was even 100% when combined with wealth taxes) prompting individuals to evade taxes. 
  • Widespread corruption in almost all the departments has rendered tax laws enforcement very weak and ineffective.
  • During past 30-40 years, real estate and precious metals & stones have become safe parking for unaccounted black money especially for corrupt politicians, bureaucrats & businessmen. This has led to sharp rise in real estate prices and today a owning home has just become unaffordable for lower & middle classes.
  • Black money is also parked in so-called safe tax havens overseas and this way, country also unwittingly becomes a ‘de facto’ lender of capital to more advanced and wealthier nations.
  • High tax rates prompted businessmen to evade them, which set off a chain reaction down to the wholesale, retail and production levels.
  • Millions of rupees are spent on marriages, functions, parties, all sourced from untaxed funds. With excellent rapport between black money operators and politicians, the Income Tax. department fails to arrest the menace. Voluntary Disclosure Schemes produced limited results.
  • It is only the rich who evade taxes.
  • India is actually a capitalist economy and black money cannot be entirely controlled. However, it can be limited and brought to manageable limits.
  • Black money needs ‘muscle power’ for its protection and proliferation as well as accounting experts, liaison officers who negotiate between black money operators and political leaders, threatening to corrupt the entire social and political fabric of the country.
  • Weak justice disposal systems and low conviction rates make corruption a high profit and low risk activity.

Remedial measures:
  1. Mandatory moral & ethical education.
  2. Create awareness among citizens that obtaining services is their right and they need not and should not pay bribes and promote corruption.
  3. Demonetization of high value currency notes.
  4. Discourage cash payments by providing incentives for payments in any mode other than cash.
  5. Promote payments using credit & debit cards, bank transfers, linking Aadhaar numbers to all bank accounts and transactions should be made mandatory enabling tracking.
  6. Stringent penalties and punishments for violations.
  7. Simplify tax structures and minimize stamp duties with incentives for compliance.
  8. Make tax evasion so much expensive and unprofitable.
  9. Corruption is off shoot of high profits and low risk. Take measures to make it high risk and low profit activity.

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