BLACK MONEY/ DEFACED MONEY Definition: Usually received in cash, from underground economic activity.

. Black money is earned through illegal activity and, as such, is not taxed. Recipients of black money must hide it, spend it only in the underground economy, or attempt to give it the appearance of legitimacy through illegal money laundering. Income, as from illegal activities, that is not reported to the government for tax purposes black money that part of a nation's income that relates to its black economy (Economics, Accounting & Finance / Accounting & Book-keeping) any money that a person or organization acquires illegally, as by a means that involves tax evasion (Government, Politics & Diplomacy) money to fund a government project that is concealed in the cost of some other project. Possible sources of black money include drug trafficking, weapons trading, terrorism, and prostitution, selling counterfeit or stolen goods and selling pirated versions of copyrighted items such as software and musical recordings. Black Money is also the name of the secret world of bribery in international business. Most of the black money is used in land deals, property purchase, gold purchase and corruption. It is common knowledge that in a MP election, while the official spending is Rs 25 lakhs per candidate, no serious candidate spends anything less than Rs 10 crores. The money spent above the official limit will necessarily in high currency notes utilized to purchase votes. Therefore ease of cash transaction through high denominator notes is the fountainhead of the deteriorating political governance system. The acquisition and usage of corruption money by candidate leads to the complete incestual relationship between politicians, bureaucrats, media, contractors and thugs. Thousands of crores of fake currency notes of Rs 500 and Rs 1000 denomination is coming into India from across the border every year. This inflow is perverting the economy and the internal security of India. It is the source of funding for almost all the anti-national activities in India. Each of this note takes around Rs 39 to produce. Over 80% of the population is outside the formal economy, with very few having access to the banking system. The poor, due to variety of reasons including the hierarchical caste system, the lack of education and the receipts of their wages through cash - is kept out of the banking system. Thus they have no credibility in the economy - no bank or government scheme would find them credit worthy. Therefore in times of medical emergencies, crop failure, family functions and other eventualities, they have no option but to turn to the unregulated and exploitative informal sector like moneylender, chit funds etc. Black money or unaccounted money circulating in the parallel economy is a big menace to the economy. It is also a cause of big loss in the tax-revenues for the government. As such it needs to be curbed. Its elimination will benefit the economy in more than one way. It will also generate more revenues for the government. Black money may be defined as the money that is generated by activities that are kept secret in the sense that these are not reported to the authorities. As such this money is also not accounted to the fiscal authorities i.e., taxes are not paid on this money. Contrasted to this is the white money that is shown in relevant accounts and tax paid, if due.

BLACK MONEY : Introduction & Causes

Parallel economy connotes the functioning of an unsanctioned sector in the economy whose objectives run parallel, rather in contradiction with the aroused social objectives. This is variously termed as black economy, unaccounted economy, illegal economy, subterranean economy, or unsanctioned economy. The money involved in black/secret transactions or used in parallel economy (i.e., parallel to the legitimate economy) is very large indeed. Very recently the National Institute of Public Finance Policy has estimated that the sum involved is as much as about Rs4O, OOO crores. This constitutes around 20 per cent of the gross domestic product of the economy. This size of the black money has grown fast over the past many years. A recent estimate puts the size of black money at over 50 per cent of GDP (at factor cost). It is also stated that the annual rate of growth of black money is higher than the annual growth-rate of GDP. The present size of black money is thus very large indeed. The circulation of black money has adversely affected the Indian economy in several ways. It would be of interest to study the impact of black money on the Indian economic and social system. i) It leads to the misdirection of precious national resources. A part of black money is kept in a form that contributes nil/Little to productive activities. (ii) It has enormously worsened the income-distribution, and has thereby undermined the fabric of the fixed income salary class finds itself ever be the lower rung of the income-ladder. They pay taxes. Quite a number among them, though not l the corrupt activities of getting bribes / commissions, etc. But in general they are not able to catch up with the people in business, or in professions, or many of those employed. Many in these categories make black activities. Many high placed official and honest employees earn much less than an average small shopkeeper in big cities like Bombay and Delhi. (iii) The existence of a big-sized unreported segment of the economy is a- big handicap in making a correct analysis and formulation of right policies for it. For example it is not possible to calculate accurately the vital indicators of progress like saving-income ratio, sectorial composition of national income, etc. Nor is it possible to monitor the developments in the economy with precision. Much of these estimates / monitoring of the economy are bound to be guesswork. No wonder the governments policies cannot be firm in their perception and deal weak data base. (iv) Black money results in transfer of funds from India to foreign countries through clandestine channels. Such transfers are made possible by violations exchange regulations through the device of under invoicing of exports and over-invoicing of imports thus finds itself in a paradoxical situation, where capital and more particularly foreign exchange resources are scarce, (the country) becomes a de facto lender of aid and capital to economically advanced and wealthier nations, with the concealed outflow of funds. The situation has worsened further over the years. (v) Black money requires for its protection, proliferation and expansion of a service organisation composed of musclemen, touts and brokers to combat the forces of law and order on the one hand and on the other hand, there are income t ax advisers, or chartered accountants in the pay of black money operators. Then there are contact men, better known as liaison officers who negotiate
BLACK MONEY : Introduction & Causes

favours from top bureaucracy and political bosses through bribes of black money. This has developed a new black money culture in the business world. (vi) Last but not the least; black money has corrupted our political system in a most vicious manner. At various levels, MLAs, MPs, Ministers, party functionaries openly and shamelessly go on collecting funds.

The politics of black money thus has corroded the moral fibre of Indian polity. Ministers dole out favours of crores by accepting black money donations of a few lakhs from businessmen. Musclemen and criminals are fed by political parties to capture booths and thus elections are becoming more and more of a farce. National policies are, therefore, being bent in favour of the big business under the pressure of black money. Thus, it is the parallel economy which does the backseat driving, while the political leadership only acts as the mouth-piece of big business to justify the abolition of controls or introduction of a dual system of prices in the name of productivity or national interests. It was due to the pernicious impact of black money on the Indian economy and polity that the Wanchoo Committee concluded: It is, therefore, no

BLACK MONEY : Introduction & Causes

exaggeration to say that black money is like a cancerous growth in the countrys economy which, if not checked in time, is sure to lead to its ruination. Causes for Generation of Black Money There are several factors responsible for the emergence of black money. It would be relevant to discuss those factors so that a correct understanding about the genesis, growth and expansion of black money can be made. The principal factors are: (i) Beginning of the evil: The beginning of this evil can be traced to the Second World War. During this period supplies of industrial goods from the traditional suppliers of the West were cut off. This resulted in severe shortages in many vital lines. The British Government indulged in large inflationary finance for war efforts. This led to price escalation. Taxes too were raised sharply on higher incomes and excess profits. In these circumstances many indulged in black marketing. And at the same time, they evaded taxes. Huge profits were made in respect of goods that were in short supply. This created a psychology of making money out of shortages and not out of production / expansion of sales. These circumstances and the psychology formed the backdrop of what followed subsequently. (ii) Controls and licensing system: The system of controls, permits, quotas and licenses which are associated with misdistributions of the commodities in short supply results in the generation of black money. The Wanchoo Committee explaining this factor as a source of black money observed, In spite of the vigilance exercised by the Government, controls and regulations came to be used by the unscrupulous for amassing money for themselves. Since considerable discretionary powers lay in the hands of those who administered controls~ this provided them with a scope for corruption speed money for turning a blind eye to the violation of controls. All this gave rise to trading in permits, quotas and licenses, malpractices in distribution and in the process; it generated sizeable sums of black money. Price and distribution controls have in the past led to the generation of black money on a significant scale. Any price control without any adequate machinery of distribution and speedy arrangement for increasing supplies is potentially a source of black money generation. Rent control leads to pugree system and is, therefore, another source of black money. Similarly, the system of licenses requires large number of inspectors for completing various formalities and thus good amount of hush money has to be paid. Where controls are not implementable, they have led to harassment and black money generation. (iii) Tax structure: High tax rates and defective tax structure have also been responsible for the existence of black money to a large extent. Take for instance direct taxation. Till recently the tax on income and on wealth was very high to invite evasion. The marginal rate of income tax was as high as 75 per cent. And when it was combined with the tax on wealth, it was still higher. For example, for a person with net wealth ofRs.12 lakh, the combined tax rate came to 95 per cent. And for a person with a net wealth exceeding Rs.18 lakhs, the marginal tax rate exceeded cent percent. This was the situation in respect of personal taxation until a decade ago. The corporate tax rate too was very high. In these circumstances the temptation / gain from tax evasion was substantial. Even in the case of indirect taxes the situation is no better. In fact worse, as the revenue from these taxes constitutes a big proportion of all the tax revenues. For example, in the case of
BLACK MONEY : Introduction & Causes

government, revenue from customs and central excise duties has been as much as 80 per cent of the total revenue. Hence even a small fraction of the evaded tax runs into crores of black money. According to the National Institute of Public Finance Policy the excise evasion is rampant in such sectors as copper, cotton fabrics and plastics. It is also suggested by the Institute that the taxevasion through the underestimation of production and sales is most pronounced in manufacturing, trade, hotels and restaurants. (iv) Donation to political parties: Ever since the Government decided to ban donations to political parties in 1968, it prompted businessmen to fund political parties, especially the ruling party, with the help of black money. Ostensibly, this decision was taken to reduce the influence of big business on the electoral process, but in practice what happened was precisely the opposite. Businessmen everywhere have by now learnt that they should pay a certain charge out of the black money to the coffers of political parties and then be sure that the political leaders will only bark but not bite. Big business, in the process, has been able to tame the political leadership. This is evidenced by the relaxation of various controls, permitting business houses to enter areas reserved for the public sector, putting a large number of banned items on the Open General License list etc. The political instability witnessed in the country in -various states has resulted in widespread horse-trading of the MLAs at the state levels and MPs at the Central level. In this process of buying political support, black money plays a crucial role. Consequently the determination of the ruling political party to curb black money has become very weak. As a consequence, businessmen feel they have an unfettered license to spin black money, pay a small part to the political parties as donations and then enjoy the rest the way they like.Unless the link between black money and political power is broken, there is no hope of controlling the generation of black money or its link with crime. (v) Ineffective enforcement of tax laws : Whereas the Government has an armoury of tax laws pertaining to income tax, sales tax, stamp duties, excise duty etc., their enforcement is very weak due to widespread corruption in these departments. . The high rates of these taxes induce businessmen to avoid recording of these transactions. This evasion largely goes unchecked and thus sets in a chain reaction for the generation of black money at the wholesale, retail as well as production levels. (vi) Generation of black money in the public sector: Every successive five-year plan is planned for a larger size of investment in the public sector. The projects undertaken by the public sector have to be monitored by the bureaucrats in Government departments and public sector undertakings. Tenders are invited for the various works and these tenders are awarded by the bureaucracy in consultation with the political bosses. Thus, a symbiotic relationship develops between the contractors, bureaucracy and the politicians and by a large number of devices costs are artificially escalated and black money is generated by underhand deals. Instability of the political system has given a further momentum to this process. Since the ministers are not sure of their tenure and in a majority of cases, the tenure is very short, the principle Make hey while the sun shines is adopted by most of them. The larger number of scandals that are unearthed by the Opposition only support the contention that huge investment in the public sector is a big potential source for black money generation. In this process, bureaucrats act as brokers for political leaders and thus the nexus between business, bureaucracy and politicians promotes the generation of black money.

BLACK MONEY : Introduction & Causes

(Vii) Ceiling on depreciation and other business expenses: Government has imposed restriction It has also circumscribed expenses on advertisement, entertainment, guest houses, payment of perquisites to directors. The purpose of these restrictions is to protect the shareholders and consumers from the unscrupulous action of businessmen. But businessmen feel that these restrictions are unjustified. They take the maximum advantage of these provisions but do not like to part with the remaining part of by various clandestine devices; they convert it into black money and use it either for conspicuous production to satisfy the wants of the rich and elite sections of society. An Indian is affected at every step by the black economy. The education of a child, a visit to a doctor, policeman who extort money..electricity or water departments all demands black economy - Prof. Arun Kumar\

A hidden sector of the economy where private cash transactions go unreported. It is a sector of economic activities involving illegal economic activities including buying and selling of drugs. This definition excludes transfer incomes, like capital gains and bribes. The definition also eliminates multiple counting of incomes That part of an economy that is hidden from the government and on which taxes are not paid. Most of the black economy is on the hand of top 3% population so that the disparity (between these people and the bottom 40 per cent) is considerably higher (five times) than what the white economy data suggests. Size of the black economy was 40 per cent in 1995-96, that implies an additional GDP due to the black economy of 40 per cent in that year. Profit (P) = Revenue (R) Cost (C) (1) Profit may be white (what is declared) or black (what is not declared). The declared profit appears in the income statement of the business and is called the balance sheet profit. The undeclared profit or black profit is called off-balance sheet profit.It accrues directly to the management of the business.
BLACK MONEY : Introduction & Causes

P = White Profit (Pw) + Black Profit ( Pb) (2) Further, P = Actual R Actual C (3) Black Profit (Pb) is generated by declaring lower revenue and/ or overstating costs The size of the black economy is estimated to be 40 per cent of GDP for 1995-96 [Kumar 1999]. Of this 8 per cent comes from illegal activities and 32 per cent from legal activities. Two Sources of Black income are a. Overstated Costs b. Under invoiced revenue

 Then overstated costs would contribute half of the black profits (Pb) from legal activities or 16 per cent of GDP. According to the economist magazine it is estimated that in 1998 the worlds black economy accounted for a missing $9 trillion worth of output a volume of output almost equivalent that of U.S. Black income generation process, with the most plausible available assumptions, results in overestimation of employment and wages by 5 per cent. According to the economist magazine it is estimated that in 1998 the worlds black economy accounted for a missing $9 trillion worth of output a volume of output almost equivalent that of U.S. Black income generation process, with the most plausible available assumptions, results in overestimation of employment and wages by 5 per cent. Introduction of two schemes in Union Budget 2005- 06 1. Banking Transaction Tax (BTT) 2. Fringe benefit Tax (FBT) The value added tax (VAT) has also been billed as a scheme to tackle black income generation in indirect taxes. It is supposed to lead to better compliance. Services tax collection has shown high buoyancy. Many more services are progressively being brought under the net of this tax. In the union budget for 2005-06, additional funds are allotted to employment generation and to the social sectors (education, health, etc).

SOME QUESTIONS TO PONDER UPON

How is the government going to tackle the twin and interrelated problem of black economy and unemployment? Is black economy really an evil? Is there a way to estimate and curb the black economy?
BLACK MONEY : Introduction & Causes

Are we as individuals also responsible in contributing in growth of parallel / black economy