Q40:-HOW BLACK MONEY AFFECTS INDIAN ECONOMY

BLACK MONEY

The core of a legitimate economy is white 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 follows from this fact that black money goes unaccounted for during a country's tax assessment period.
The massive circulation of black money could pose a big menace to a country’s economy and has the potential to undermine the entire fiscal structure of a country. It also causes huge losses in tax revenues to the government. The evil of black money does not revolve around a particular country but is a global phenomenon, although in poorer countries the threat from it is more pronounced than in relatively wealthier ones.

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

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.

Indian black-money

India currently tops the list for black money in the entire world with almost US$1,456 billion in Swiss banks (USD 1.4 trillion approximately) in the form of unaccounted money.According to the data provided by the Swiss Banking Association, India has more black money than the rest of the world combined Indian Swiss bank account assets are worth 13 times (1300%) the country’s national debt, and, if this black money is brought back to the country, India has the potential to become one of the richest countries in the world.

The proliferation of a parallel economy

Black money is generated through activities that are kept hidden from the purview of authorities. Taxes are not paid on this money. Contrasted to this is the white money that is shown in relevant accounts and tax paid, if due. The circulation of black money gives rise to what is referred to as a ‘parallel economy’-- an economy that stands diametrically opposite to a legitimate economy. Parallel economy has various monikers and are also referred to as ‘black economy’, ‘unaccounted economy’, ‘illegal economy’, ‘subterranean economy’, or ‘unsanctioned economy’.
India, for instance, which has of late witnessed a shocking number of black money hoarders being exposed, the money involved in illegal transactions (parallel economy) is estimated to account for anywhere between 20% and 50% of the country’s GDP. Experts even maintain that the amount of balk money generatein India could be double of Some observers even maintain that the annual rate of growth of black money in India is higher than the annual growth-rate of its GDP.

The genesis

The genesis of black money can be attributed to several factors. However, the most widespread tale on black money is associated with World War II. The supply of industrial goods to the Allies was cut during the War from their traditional suppliers, leading to a severe shortage of vital necessities. This prompted the British Government to indulge in excessive inflationary finance tactics for its war efforts, leading to a sharp rise in the prices of commodities. Tax rates on higher incomes and excess profits were also raised, prompting many to resort to black marketing and tax evasive measures. People made huge profits by dealing in items in short supply giving rise to a psychology that more money could be made from shortages than from production and expansion of business.

Controlling flow of black money

The menace of black money stares Indian economy in its face. Ironically, one of the main causes for the continued and widespread prevalence of black money in India is the government’s apathy and leniency. Moreover, following the abolition of the Gift Tax Act, black money racketeers have found more lee-way in generating such unaccounted money. The Act, constituted in April 1958, stated that all gifts in excess of Rs 25,000, in the form of cash, draft, check or others, received from one who doesn't have congenital relations with the recipient, were taxable

Misuse of productive resources

Black money in an economy tends to cripple the free flow of a country's resources in the right direction. It also widens the income gap. Salaried individuals, especially those in the lower rung of the corporate ladder, do not see their incomes rising unlike those in the higher echelons as it can be safely assumed that the latter group has huge sources of unaccounted income, the vindication of which comes from news reports almost on a daily basis.
An impediment to a country's growth indicators
The presence of unaccounted money acts as a block on the right assessment of a country's progress. The assessment of a country's progress is dependent on the accurate calculation of the savings-to-income ratio and sector-wise composition of national income. The floating of black money could Again, black money is usually parked in so-called safe tax havens overseas, which is a huge drain on the national exchequer. This way, a country also unwittingly becomes a ‘de facto’ lender of capital to more advanced and wealthier nations.

CONCLUSION:

There had been umpteen talks and voluntary disclosure schemes in the past for checking evasion and black money, but no perceivable results have come. Rather, the quantum of black money in circulation has increased substantially in volume. There is one sure medicine: eliminate the population and both unemployment and inflation will be eliminated. So long as cash transactions continue to be made, tax evasion will be there and black money will continue to be generated.

REFERENCE:

http://www.flame.org.in/blackmoney.htm
http://www.echeat.com/essay.php?t=28005
http://en.wikipedia.org/wiki/Black_market