Black Money

What is black money? Speaking simply, it is any income on which a person should have paid tax, but has not. In this sense, money legally earned may be ‘black’ and illegal money on which tax has been paid would be ‘white’.

A well known author was asked what was his latest piece of fiction. “My last income tax return”, came the reply. Jokes apart, let us look at the matter of black money in this article.

Every year, the government of our country presents a budget listing out the various avenues of incomes and expenses. It has to meet the expenses involved in maintenance of proper administration, defence and security, for promoting peace and prosperity and for development of social, economic and all round growth of the country. For all this the government must have sufficient resources and funds.

One of the important sources of income for the government is Income Tax. Income Tax is collected from entities like individuals, partnerships, companies etc. Whereas companies are subjected to a flat rate of tax, individuals are subject to graded taxation which means that the higher the income, not only is the tax higher in absolute terms but the rate of income tax also goes up.

Even though it is the moral responsibility of every individual to contribute towards the national expenditure for the simple reason that the facilities and amenities provided by the government are enjoyed by one and all, our country faces a peculiar problem in that a vast majority of the population lives below the poverty line. This section of the population which is finding it difficult to get one meal a day obviously cannot be expected to contribute anything to the national exchequer. Another substantial chunk of the population which is technically above the poverty line, barely manages to survive and is not in a position to generate any surplus. That leaves a small minority which is not only able to make two ends meet but is also in a position to save a certain proportion of their income. The Income Tax Act provides that a person earning less than Rs. 1,60,000 p.a.(and even higher amounts in case of women and senior citizens) need not pay any tax. A majority of this minority falls in this category. Therefore only a small fraction of the entire population is in a position to pay taxes. Of this small fraction, a substantial proportion resorts to tax evasion. Thus a miniscule fraction of the entire country’s population contributes towards the government revenue.

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Black Money:
The term ‘black money’ immediately conjures visions of secrecy and illegality. It has become socially tolerable. It is tolerated since it does not involve theft against an individual, through tax evasion by one may increase the tax burden of another.

What is black money? Speaking simply, it is any income on which a person should have paid tax, but has not. In this sense money legally earned may be ‘black’ and illegal money on which tax has been paid would be ‘while’.

The Direct Taxes Enquiry Committee set up by the Government o India in 1970 with Shri K. N. Wanchoo, retired Chief Justic of the Supreme Court of India, as Chairman, explains what the term ‘black money’ means in its final report submitted in December 1971. “It (black money) is as its name suggests, ‘tainted’ money – money which is not clean or which has a stigma attached to it… black is a colour which is generally associated with evil. While it symbolizes something which violates moral, social or legal norms, it also suggests a veil of secrecy shrouding it. The term ‘black money’ consequently has both these implications. It not only stands for money earned by violating legal provisions –even social conscience- but also suggest that such money is kept secret and not a accounted for. Today concealed income and/or undisclosed wealth as well as money involved in transactions wholly or partly suppressed”.

First of all what is the biggest damage done by unaccounted money, or as it is referred to in common parlance, black money? Primarily the government suffers the most because it loses the tax which should otherwise have come to the exchequer.

Secondly the generation of black money through tax evasion throws a greater burden on the honest taxpayers and leads to economic inequality and concentration of wealth in the hands of an unscrupulous few in the country.

Increased tax evasion results in increased black money. Tax evaders use this money to carry on large transactions in the black market, pile up stock of goods and thus bring about artificial scarcity in the open market resulting in higher prices.

The existence of black money is, to a certain extent, responsible for the inflationary pressures, shortages, rise in prices and economically unhealthy speculation in making the balance of payments rather distorted and unreal, and tends to defeat the economic policies of the government by making their implementation ineffective , particularly in the field of credit and investment.

Extent of Black Money
Every fifth rupee transacted in India is black, according to Raju Chelliah Group Report on Black Money. The group estimated the volume of black money generated in the year 1983-84 at Rs. 36,000 crore or 21% of the gross national product. This meant that the average tax fraud daily exceeds Rs. 100 crore. It was not the final count. The Group confessed that it had not accounted for kickbacks in foreign trade, smuggling and foreign exchange racketeering, apart from narcotic and other criminal traffic.

Some economists have gone to the extent of estimating the black money in the Indian Economy to the tune of 98% of the GNP which at present stands at about Rs. 25,000 crore per annum.

What is wrong with black money is really not so much the money itself, as the perception of the manner in which it is earned. Bribes, crimes, such as smuggling forging documents and such other activities are the means adopted for the creation of black money. However, the other way when the role of black money is reprehensible, in addition to being sent abroad, is in commodity speculation. Traders finance the purchase of huge quantities of certain products, hoard it, create an artificial shortage and then release their holdings for an astronomical profit.

Black Money and Damages Caused by it:
Government suffers most because it loses the tax which should otherwise have come to the exchequer.

Secondly the generation of black money through tax evasion throws a greater burden on the honest tax payer and leads to economic inequality and concentration of wealth in the hands of the unscrupulous few in the country.

The existence of black money is to a certain extent responsible for the inflationary pressures, shortages, rise in prices and economically unhealthy speculation in making balance of payments rather distorted and unreal and tend to defeat the economic policies of the Government by making their implementation ineffective, particularly in the filed of credit and investment.

The factors responsible

The factors responsible for the generation of black money have been analyzed in the Report of the Wanchoo Committee. Some of the principal causes are summarized as follows:

1.      High rates of taxation under the direct tax laws; they breed tax evasion and generate black money.

2.      Economy of shortages and consequent control and licenses leasing to corruption in issuing licences and permits.

3.      Donation of black money encouraged by political parties to meet election expenses and for augmenting party funds and also for personal purposes.

4.   Exclusion of agricultural income from the purview of central income tax encourages tax payers to attribute substantial portions of their non-agricultural incomes to incomes from agricultural operations.

Measures taken for checking tax evasion

The problem of black money is not a new or a recent problem. It has been there almost since the Second World War and it has been continuously engaging the attention of the Government. The government has adopted various measures with a view to curbing black money. It introduced several changes in the administrative set up of the tax department from time to time. The Government amended Income Tax Act, 1922, with a view of conferring power on the tax authorities to carry out searches and seizures and this power was elaborated and made more effectual.

Non-levy of deterrent penalties and ineffective prosecution machinery have also been important factors for increasing tax evasion in India. It is true that with the passage of time penalty and prosecution provisions have been made more stringent, but the fact remains that taxpayers have been subjected to very moderate penalties and very few cases of fraudulent evasion are prosecuted before the courts.

The problem of black money is not a new or recent problem. It has been there almost since World War II, and has been continuously engaging the attention of the government. The government has adopted various measures with a view to curbing black money. It has introduced several changes in the administration set-up of the tax department from time to time. The government amended the Income Tax Act, 1922, with a view to conferring power on the tax authorities to carry out searches and seizures and this power was elaborated and made more effectual.

Quite apart from the legal and administrative measures taken for the purpose of curbing evasion of tax, certain steps were also taken to tackle the black money built up out of the past evasions. In 1946, high denomination note were demonetized so as to bring within the net of taxation black money earned during the war. Then came the Voluntary Disclosure Scheme, 1951, popularly known as the Tyagi Scheme to facilitate the disclosure of suppressed income by offering certain immunities from penal provision. Nearly a decade and a half later, a second scheme of voluntary disclosure was introduced. This scheme was popularly known as ‘Sixty Forty’ scheme: it enabled tax payers to disclose suppressed income by paying 60% of the concealed income as tax and bringing the balance of 40% into their books.

Closely following the Sixty-Forty Scheme came another scheme known as the ‘Black Scheme’. These together resulted in a disclosure of Rs. 267 crores only. Later on, in 1975, another such scheme was introduced in which Rs. 680 crores of income was disclosed and Rs. 232 crores recovered in Income Tax. No doubt, the National Emergency which witnessed a large number of searches and seizure operations contributed to the success of this scheme in 1975 but still the declared income constituted hardly one per cent of the national income. The justification for any voluntary disclosure scheme mainly rests on the argument that we should take drastic steps against those who try to conceal income in future but we should be liberal in the case of already concealed income. Three years later, the Janata government demonetized one thousand and above rupee currency note which yielded Rs. 700 – 800 crores.

When it was realized that efforts to detect black money and a uncover it had failed, the government enacted the Special Bearer Bonds (Immunities and Exemptions) Act 1981, providing for the issues of Special Bearer Bonds (SBB) with effect from February 02, 1981. The object of these bonds was to mop up black money and to bring it out in the open. The SBB 1981, bearing no name and of the face value of Rs. 10000 were issued at par and the holders of the bonds were entitled to receive Rs. 12000 in 1991 – implying a simple return of 2 per cent per annum. The novel feature of this scheme was that it conferred complete anonymity to the subscribers or possessors of bonds and was independent of the tax system. There was no limit to investment in these bonds. No income, wealth, gift or capital gains taxes were to be charged in respect of such bonds. The bond holders, (expect public servants) had immunity from disclosing the source of money and were not liable to any penalty of prosecution on the ground of merely possessing such bonds.

The total sale under the SBB scheme which was introduced with such fanfare amounted to only Rs. 373 crores up to April 30, 1981 (when the scheme expired). Scepticism in the minds of people as to whether the government would honour its commitment, and the meagre return of these bonds, were mainly responsible for the lukewarm response received by SBBs.

During 1985-86, the government announced, through a series of circulars issued by the Central Board of Direct Taxes, its intention to waive penalties or interest to grant special immunities from prosecution if an assessee discloses his income/wealth of the earlier years.

Then came the Indira Vikas Patra, where black money could be invested at rates as high as 20 per cent per annum (far more than what one would earn on investment of one’s legitimate money). This was in stark contract to the two per cent return on SBBs and ironically this time it was the extremely high rate of return that was responsible for distrust in the minds of the people as to the actual intention of the government to honour these bonds on maturity. This fear was reinforced when a little later the Rajiv Gandhi government collapsed to be replaced by V P Singh as Prime Minister. Subsequently, we have seen the Voluntary Deposit Scheme, the Foreign Exchange Remittance (Immunities) Scheme and the Foreign Exchange Bonds and the disclosure scheme announced by P Chidambaram in 1997 where those having black money were invited to disclose their income and pay tax @ 30 per cent, when the normal rate of tax was 40 per cent. And yet, for all the measures taken, black money continues to be generated and distributed. Doesn’t this merit a lot of thought?

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