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India registers a growth rate of about six percent in the economy. But unfortunately its underground economy or black economy also seems to be thriving. Almost everyone accepts that black money is one of the most menacing problems the country faces today. Politicians, bureaucrats, policy makers, tax administrators all agree that some concrete measures are required to contain the problem. One viewpoint is that until and unless we act with firm commitment, the goals of stable economic growth and distributive justice would continue to elude us.
Causes
There are various factors for generation of black money, including evasion of taxes levied by the government and misuse of various laws and regulations. Apart from tax evasion, many other activities like smuggling, drug trafficking and gambling, private tuition by salaried teachers, private practice by publicly employed doctors and private consultation by technocrats whose salary is paid by the government, generate black money.
Black money harms the society in more than one way. In the first place it leads to loss of revenue to the public exchequer. This results in reduction of budgetary allocation for social sectors like education, health, housing and other civil infrastructure, Secondly, wasteful expenditure coupled with sudden spurt of purchase by the people having black money develops an inflationary pressure and brings about some kinds of distortion in the economy. Thirdly, black money and the resultant inflation lead to inequitable distribution of income and national resources and give rise to other economic and social problems. Fourthly, purchasing behaviour due to black money leads us to a situation where the market driven allocation of resources is not the true reflection of the societal needs. Black income is mostly invested in activities, which tend to be less productive such as purchase of gold and property with the hopes of making capital gains. Lastly, the prevalence of black economy implies that some transactions such as those in the property and real estate market are made in black money. This leads to generation of more black money.
Concrete Steps
The government has taken a number of steps to curb black money. Searches, seizures, surveys, and scrutiny of income tax returns are being done by the Income Tax Department. Amendments have also been made to the Finance Act 2004 to intensify efforts to curb black money. These include prosecution for falsification of books of accounts and taxing of gifts worth more than Rs. 25, 000 to unrelated persons.
Schemes aimed at unearthing the ‘black money’ an euphemism for concealed and unaccounted for income and wealth on which taxes have been evaded, can take many forms. These include demonetization of high denomination currency notes and amnesty schemes.
There have been two editions of the Voluntary Disclosure of Income Scheme under which black incomes and assets could be declared, the tax paid at current rates and amnesty availed from penalty and prosecution. The tax amnesty schemes, however, have their ethical and egalitarian aspects, which have been hotly debated and even contested in the courts of law in the past.
As the National Common Minimum Programme requires the Government to introduce special schemes to unearth black money and assets, the Union Finance Minister, Shri P. Chidambaram in this year’s budget (2005-2006) came out with some concrete measures to deal with the problem. These include introduction of Cash Withdrawal Tax.
Cash Withdrawal Tax
The Cash Withdrawal Tax imposes some financial burden on the person who is withdrawing large amount in cash from the banks. The same tax is not payable by a person who is withdrawing the money in small instalments or making payment through cheque. One may provide an ethical angle to the issue by raising a few questions. Can such consideration be an argument for dispensing with a tax that could be a potent instrument to keep a tab on huge cash transactions involving black income or money? Given the ground reality in India is it justified to raise a hue and cry about the levy of the tax? The per capita income in India is around Rs.30, 000 only. How many people are really going to be affected by this nominal tax on a cash withdrawal of Rs. 25,000 a day by an individual? As the Finance Minister Mr. Chidambaram has pointed out that banking system too is a well-known system for laundering. There are in general several possible means of money laundering. Moreover, the Finance Minister has assured that the Tax department would keep a ‘trail’ of only withdrawal running into lakhs and crores of rupees.
In the case of real estate like land and buildings it is a common phenomenon that the vendor often insists that his consideration amount be paid in cash. He also resorts to lowering the value of the property transacted. Such practice deprives the Government of stamp duties and also converts a part of the black money of the purchaser to white money. At the same time the vendor gets a chance to hide, from the tax authorities, a sizable portion of his receipts. In order to make a dent in the problem, the Government has passed the Prevention of Money Laundering Act 2002, which seeks to prevent practices like falsification of books of accounts and claiming to make gifts to unrelated persons.
Transaction Through Cheques
We should keep in mind that encouraging people to make transactions through cheque will go a long way in plugging a potential source of black money. The Cash Withdrawal Tax is expected to dissuade people from going in for cash transaction not only due to the tax as such but also the ‘trails’ the tax authorities will keep on such cash transactions. As the Finance Minister has said “I must have a tax trail of suspicious transactions. We want to zero in on suspicious transactions.” Shri Chidambaram, while strongly defending the Banking Transaction Tax has made it clear that it was not something that was invented by him but was in vogue in many countries. For him the ultimate objective of this tax is to weed out black money by persuading people to make more transactions in cheque, as he put it in his own inimitable style, “We also want to push people into cheque economy and plastic card economy.”
The two measures proposed by the Finance Minister — the Cash Withdrawal Tax and the directive to the banks to report to the Government all deposits, which are exempt from TDS on interest — are expected to check the generation and growth of black money. But the Government is not going to stop at this only. If required, further measures will be taken to grapple with the problem, as our Finance Minister has assured in his budget speech, “I intend to observe the results of these steps before I propose any further measures.”
*Director (News), All India Radio, Kolkata
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