PARALLEL ECONOMY (BLACK MONEY) Issues of tax evasion, corruption and black money continue to' occupy centre

stage. According to a 2006 report of the Swiss Banking Association, Indian Nationals hold 1,456 billion US dollars in Swiss Bank deposits. A Global Financial Integrity Study estimates the flight of gross illicit assets from India during 1948-2008 at a staggering 462 billion dollars: A high level committee on black money set up by Government estimates Black Money to be more than 50% of India's GOP. Causes Complex tax structure and high rates of Various kinds of physical and administrative taxation. controls. High stamp duties on real estate transactions. Relatively low salaries of government officials. Hawala transactions and under-invoicing/over- Funding of elections. invoicing of exports/imports to siphon off Absence of deterrent punishment. money through hawala. Fast declining moral standards Smuggling, black marketing, hoarding, etc. Prominent sectors generating black money in India are film industry, construction, real estate transactions, elections, large-scale manufacturing and smuggling. CONSEQUENCES Under-estimation of national income Misallocation of country's scarce productive Aggravation of inequalities resources from production of essential goods to Conspicuous consumption luxury goods. Inflation Mars incentive for hard work. Destroys the moral fibre of society and corruption. Measures to address the problem of Black Money First set of measures are those that aim at preventing generation of further black money as follows: Simplifying and rationalising tax structure so as Relaxing and minimising various kinds of to minimise evasion, avoidance and physical controls (like quota), administrative ambiguities. hassles and other such restrictions/ regulations Reducing Stamp Duty on real estate which give rise to discretionary powers and transactions. widen the scope of black money generation State funding of elections and imposing ceiling through bribes and kickbacks. on election expenses of various political parties Enactment of a suitable and fool proof Lok Pal with strict audit. Act to address corruption in bureaucracy and Awarding deterrent and strict punishment to political level. those indulging in black money transactions. Second set of measures are those that aim at unearthing black money already generated. These are as follows: 1. Demonetisation of currency notes of high denomination like RS.1 000, 500 notes. assumption is that people hold a large chunk of black money in high denomination notes, this measure has been adopted in India twice since independence (the last time in 1978) but has not been successful, as people may be holding black money in form of gold, bullion, jewellery, real estate, etc. 2. Voluntary Disclosure Scheme under which government provides amnesty to those who have evaded taxes, by giving them opportunity to declare the amount of evaded income/taxes without attracting any penalty but imposing highest prevailing rate of income tax. This scheme has been introduced at least four times since independence. Last time it was introduced in late 1990s under which government was able to unearth substantial amount: A major flaw of this scheme is that it rewards e dishonest 'and penalizes honest tax payers who have regularly paid taxes. 3. Issue of bonds by government under which those who have black money are given an opportunity to subscribe to these bonds which may provide some tax relief on maturity income of these bonds. government can use funds so mobilised for some social welfare programmes like low cost housing, clearance of slums, etc. Some such bonds were introduced in India during 1980-82.

Most of the above measures may fail to have any impact as is borne out by the Indian experience. The most effective way to address the problem lies in(a) Strong political will (b) Breaking the fast growing nexus between bureaucrats, politicians and corporates (c) State funding of elections (d) Awarding exemplary punishment to those generating black money (e) A strong meaningful Lok Pal Bill.

MC Joshi committee on black money Government appointed a high-level committee headed by MC Joshi then CBDT Chairman in June 2011 to study generation and curbing of black money. Committee finalised its draft report on 30 January 2012. Its key observation and recommendations were: (a) Two major national parties (Indian National Congress, BJP) claim to have incomes of merely 500 crore (US$91 million) and 200 crore (US$36.4 million). But this isnt "even a fraction" of their expenses. These parties spend between 10,000 crore (US$1.82 billion) and 15,000 crore (US$2.73 billion) annually on election expenses alone. (b) Change maximum punishment under Prevention of Corruption Act from present 3, 5 and 7 years to 2, 7 and 10 years rigorous imprisonment and also changes in the years of punishment in the Income Tax Act. (c) Taxation is a highly specialised subject. Based on domain knowledge, set up all-India judicial service and a National Tax Tribunal. (d) Just as USA Patriot Act under which global financial transactions above a threshold limit (by or with Americans) get reported to law enforcement agencies, India should insist on entities operating in India to report all global financial transactions above a threshold limit. (e) Consider introducing an amnesty scheme with reduced penalties and immunity from prosecution to the people who bring back black money from abroad.