BLACKMONEY – Should there be a

policy to convert black money to white ?

Sourav Agarwal 07927803

07927816 Ramesh Thamotharan

ENVIRONMENTAL ECONOMICS AND POLICY

What is Black Money ?

• Concept

• How does it flow in the Economy ?

Why Black Money is Generated ?

1. Tendency of people to increase Purchasing Power.2. Conducting Transaction illegal in nature.3. Inflation.4. Corruption.5. Laws.6. Perception about Government.

Government, Its Policy, and Black Money

Government is a expected to function for maximum good of all.

Not possible !!

Deviations do Exist and so do Anarchicts.

Government should act as a regulator and interfere as minimum as possible.

Parallel economy as % of GDP

• Developed countries – 8 to 20 %

• Transition countries – 20 to 30 %

• Developing countries – 25 to 50 %

Size of parallel economy

• Rs 3034 crores in 1967-68

– 9.5 % of GDP

• Rs. 46,867 crores in 1978-79

– 49 % of GDP

– a 15-fold increase in 12 years

• During 80s parallel economy grew faster than the GDP

– 46.7 % vs 40 % (between 1980 and 1989)

Impact

• High taxes result in cash transactions that go unaccounted

• Under-declaration of deals skews market info

• Affects the process of capital allocation

• Upsets accuracy of economic forecasts

• Erosion of public confidence on the system that leads to a vicious cycle

Have there been policies?

• Tax amnesties have been provided

• Permanent (Settlement Commission) and temporary (VDIS)

• To promote better tax compliance

• In return for immunity from prosecution

Tax Amnesties in IndiaYear Authority Income

disclosed

(INR Crores)

Revenue

Collected

(INR Crores)

Total

Revenue

(INR Crores)

% of total

revenue

1951 N/A 70.20 10.89 N/A N/A

1965 Finance Act 52.18 30.80 N/A N/A

1965 Finance Act (2) 145.00 19.45 N/A N/A

1975 Voluntary

Disclosure

1587.89 249 2204 11.29

1985 Finance Act

1985

10778.34 458.79 11858 3.87

1997 Finance Act

1997

33776.90 9729.02 38895 25.01

The participants believe

• Black money cannot be eradicated altogether

• Although black money goes unrecorded it still trickles down to improve level of well-being

• Participants feel so because

– It provides G&S that are sometimes unavailable formally

– It lubricates the working of the formal economy

– Helps realize entrepreneurial endeavours

Would regulations help ?

• Frequent tax audits and high penalties for evasion

• Incentivisation of above-board transactions

• Value Added Tax (VAT) encourages better compliance

• Vigilance helps to a large extent (RTI, CVC)

• Risk of being caught is not worth taking beyond a point

Are we getting there ?

• High value transactions demand PAN

• Cash transactions should be discouraged

• Tax structures are being rationalized

• Deductions will be phased out

• Tax payment process has been simplified

The way out

• Why should there be a policy?

– Size of the parallel economy is reason enough

– The economic impact of not having one is very high

• How should the policy be ?

– A mix of temporary and permanent provisions

– More incentives for above-board transactions

– Coupled with reduced taxes and better vigilance

THANK YOU