BLACK MONEY CONVERTABILITY

FOR the Common Good

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 laws ?

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 India

Year Authority Income disclosed Revenue Collected Total Revenue % of total revenue

1951 N/A

70.20

10.89

N/A

N/A

1965 Finance Act

52.18

30.80
19.45

N/A
N/A

N/A
N/A

1965 Finance Act (2) 145.00

1975 Voluntary Disclosure

1985 Finance Act 1985

1587.89
10778.34

249
458.79

2204
11858

11.29
3.87

1997 Finance Act 1997

33776.90

9729.02

38895

25.01

Would regulations help ?

Incentivisation of above-board transactions Value Added Tax (VAT) encourages better accounting Vigilance may help a little (RTI, CVC) Risk of being caught is not worth taking beyond a point Frequent tax audits and high penalties for evasion

The way out

Why should there be a law ?
Size of the parallel economy is reason enough The economic, social impact of not having one is very high

How should the law be ?

A mix of temporary and permanent provisions More incentives for above-board transactions Coupled with reduced taxes and better vigilance