10 Main Causes of Black Money in India – Explained!

Ten Main Causes of Black Money in India are: 1. Unrealistic Tax Laws and Tax Frauds, 2. Different Rates of Excise Duty, 3. Control Policy, 4. Quota System, 5. Scarcity, 6. Inflation, 7. Elections in a Democratic System and Political Funding, 8. Real Estate Transaction, 9. Privatisation, 10. Agricultural Income.

1. Unrealistic Tax Laws and Tax Frauds:

The increase in taxes and duties compels some people to evade them. The present rules (September 1999) prescribe the limit of Rs. 50,000 (excluding standard deduction of Rs. 20,000) as free income for levying income tax. Can a middle-class person survive within the limit in this age of inflation?

A mason or a carpenter earns about Rs. 150 per day in a city and Rs. 150 to Rs. 200 per day in the metropolitan areas. Even a good ‘gol-gappa’ seller or a pan shopkeeper earns more than Rs. 300 a day. Assuming that these people work for 300 days in a year, their income will exceed the pre­scribed income tax limit. And how many of these workers pay income tax?

A film actor getting Rs. 30 or 40 lakh per film had to pay 40 per cent of his income as income tax up to March 1997 which has now (in 1999) been reduced to 30 per cent with no standard deduction. Instead of paying such a high tax, he maintains ‘double’ accounts and evades paying tax and amasses more and more black money.

A doctor with a private practice of more than Rs. 500 per day, a surgeon charging a fee of Rs. 5,000 to 10,000 per operation and doing at least ten operations a month, an advocate charging Rs, 2,000 per hearing, a shop-keeper doing a business of more than Rs. 5,000 per day, a contractor with a turnover business of Rs. 10 crore per year, an industrialist with a profit of millions of rupees per year—all these people are bound to hide their real income to escape pay­ing income tax of 30 per cent of the total income. Indirect taxes, like excise duty, customs duty, sales tax and octroi, etc., also encourage eva­sion of taxes and increase in black money.

Tax evasion by big companies and corporations is suspected to be around Rs. 400 crore a year in the form of excise duty and Rs. 3,500 crore in the form of customs duty. The excise duty evasion detected in five years, from 1991 to 1996, by the Directorate General of Anti-Evasion in­creased from Rs. 562 crore in 1991-92 to Rs. 1,236 crore in 1995-96, while the amounts involved in FERA violations increased from Rs. 663 crore in 1994-95 to Rs. 1,447 crore in 1995-96.

Overall estimate of excise and customs duty evasion (i.e., combin­ing the two duties) ranges at anywhere between Rs. 7,500 crore and Rs. 10,000 crore or slightly over a tenth of the total collections from these two duties.

The FERA violations of around Rs. 300 crore by a top company (ITC) came to light in the last quarter of 1996. If this could happen in the case of one reputable firm, can others lag behind? The cases of a few min­isters in Narasimha Rao’s government (like Petroleum and Communication Ministers) being involved in corruption cases of more than Rs. 25 crore each point out the nexus between politicians and big business and the emergence of black money in the country.

In a survey in 1996 conducted by the World Economic Forum of 200 business executives from 49 countries in the world on specified index of corruption in tax evasion, India was ranked 40 (i.e., as dishonest) and corporate ensuring honesty were ranked 46. If income taxes are further reduced, there is more likelihood of hid­ing less and thereby increasing the revenue. This was demonstrated in 1993-94 when the maximum rate of income tax was lowered to 40 per cent. Besides, fixing a reasonable tax amount for shopkeepers and other self-employed persons also resulted in greater tax collection as more peo­ple entered into the tax net.

2. Different Rates of Excise Duty:

Within similar products, there are different rates of excise duty. For in­stance, in textiles and cigarettes, this leads to tax evasion through misclassification of output. In textiles, separate rates of excise are charged for cloth of different varieties. Manufacturers regularly downgrade a product to pay lower rates of excise. This alone generates Rs. 1,000 crore a year in black money. For the entire manufacturing sector, including steel, evasion in excise, custom and sales taxes accounts for over Rs. 50,000 crore in black money every year.

3. Control Policy:

Another cause of black money is the price control policy of the govern­ment. In selecting commodities for control and in determining their prices, the government fails to take into account the elasticity’s involved in demand and supply.

For example, according to the report of the Na­tional Council of Applied Economic Research (NCAER) for the year 1981, black money worth Rs. 840 crore was created in the Indian econ­omy over the period of nine years from 1965-66 to 1974-75 as a result of the operation of price controls in six commodities, viz., cement, steel, pa­per, vanaspati, automobile tyres and fertilisers.

Similarly, as result of control on sugar, about Rs. 400 crore of black money were generated in the year 1991-92. Regulation of foreign exchange also leads to over-invoicing of imports and under-invoicing of exports and black-marketing of currency. Thus, the more stringent the measures of control and the more regulated an economy, the greater will be the effort to violate it which will increase hoarding, fraud, artificial scarcity and the resultant black money.

4. Quota System:

Yet another source of black money is the quota system. The import quota, the export quota and the foreign exchange quota are generally mis­used by selling them at a premium. Unrealistic controls spawn a culture which encourage corporate to break the tax laws, particularly FERA laws. When the government came out with a scheme a few years ago (1992-93) to allow exporters to import goods without paying any customs duty, ingenious ways were devised to make money even out of this scheme, i.e., through over-invoicing exports to get more import benefits as well as avail of the tax setoffs given to exports. During 1992-96, the Di­rectorate of Revenue Intelligence (DRI) and the Customs authorities detected 605 such cases. One export house (Ganpati Exports) benefited as much as Rs. 85 crore {India Today, November 30, 1996).

5. Scarcity:

Black money is also caused by scarcity and defective public distribution system. When essential goods become scarce, people have to pay higher than the controlled price, which generates black money. The scarcity of cooking gas, cement, kerosene, sugar, refined oil, etc., has always resulted in illegitimate transactions and black money.

6. Inflation:

The increase in prices of commodities like petrol, etc., in international market, increase in prices of commodities due to high increase in duties and taxes imposed by the government, conspicuous consumption in­dulged in by people with unaccounted money, diverting resources from production to speculation—all these cause inflation which in turn creates black money.

7. Elections in a Democratic System and Political Funding:

Each election in the country involves an expenditure of thousands of crores of rupees. For contesting Lok Sabha election, a candidate normally spends more than one million rupees and for contesting Vidhan Sabha election, one spends more than Rs. 5 lakh in the present times.

It is esti­mated that a single Lok Sabha election alone could see political parties spend around Rs. 1,000 crore to pay for poll expenses. Politicians also need to draw on business resources to nurse their constituencies. Given the mind-boggling numbers, black money naturally is built into the sys­tem.

For funding politicians, even honest corporate houses have no option but to find ways to generate unaccounted-for money. Since the ex­penditure allowed by law for a candidate is limited and the companies are allowed to give up to 5 per cent of their profits as donations to political parties for elections, elections are generally financed by black money holders.

These people expect political patronage and economic concessions which are obtained with the consent and the connivance of political elite in power in the form of artificial controls on commodities, laxity in the means of distribution, etc. All these methods create black money.

8. Real Estate Transaction:

Estate transaction is an important source of generating black money. In these days, purchasing a house and/or land is considered to be very profit­able. There is a growing tendency to transform rural agricultural land into urban residential land due to paucity of building sites in the urban ar­eas.

Establishing unapproved colonies on agricultural land is illegal. The transaction value shown by the colonisers in registration deeds is much less than the actual amount of the market value. This enables the seller of the land to evade capital gain tax. According to an estimate, illegal transac­tion of property alone generates about Rs. 2,000 crore of black money in a year, assuming that there are about 50 lakh transactions in urban prop­erty every year.

The high rates of stamp duty—ranging between 15.4 per cent and 28 per cent in different states—are a major cause of under-valuation of prop­erty and unreported deals, or both. The suggestion is that if duties are reduced to 2 per cent to 3 per cent, it will prevent evasion. Another hur­dle is the Urban Land Ceiling Act, which reduces the supply of land and creates a flourishing black market. Roughly over Rs. 13,000 crore a year are generated through the real estate route.

9. Privatisation:

Privatisation has opened up a new area to the private sector as well as to ministers and bureaucrats for making black money. Take the example of the Ministry of Communication in 1996 in which the minister concerned (in Narasimha Rao’s government) had the authority of sanctioning con­tracts and licences worth Rs. 1,50,000 crore.

The minister rode roughshod over departmental colleagues to give contracts to favoured companies. While the case is still pending (in October 1999) against the former minis­ter in the courts, the Income Tax Department alone was said to be thinking (in November 1996) of realising from him a fine of Rs. 20 crore for violating the income tax rules.

However, it could not do so. The for­mer Union Steel Minister (in Narasimha Rao’s government) was another powerful person who had been accused of having made huge black money of Rs. 16 crore by clearing the privatisation of a mine at a very low price to one concern in September 1995.

A public outcry finally saw the deal getting shelved, though the minister managed to get away. The Petroleum Ministry also was involved in a scam relating to privatisation. The ministry threw open select oil fields in 1992.

In one deal, a particular concern was awarded a contract for an oil field and the former Petroleum Minister is alleged to have received Rs. 7 crore for helping the group in getting the contract. It is expected that many scams will come to light for making black money through privatisation.

10. Agricultural Income:

The unwillingness of the rulers on political grounds to bring agricultural income in the ambit of income tax has also contributed to generation of black money. Big industrial houses, over the past few decades, have en­tered the agriculture sector in a big way by acquiring large farms, growing and producing nothing. The black money accrued from other sources is sought to be converted into white by showing it on the agricultural in­come account. Taxing agricultural income may help contain this phenomenon.

Submitted by : Dr. Paige, Category : Corruption, Tag : Black Money