ASSIGNMENT ON PUBLIC FINANCE

TAX EVASION, BLACK MONEY AND PARALLEL ECONOMY IN INDIA

 ASSIGNMENT ON
PUBLIC FINANCE

TAX EVASION, BLACK MONEY AND

PARALLEL ECONOMY IN INDIA

Submitted to- Submitted by-

Dr. Farah Hussain Amalendu Saha (MCI15001)
Assisstant Professor Bhaswati Barman(MCI15013)
Department of Commerce
Tezpur University

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ACKNOWLEDGEMENT

The success and final outcome of this project required a lot of guidance and assistance from
many people and we are extremely fortunate to have got this all along the completion of our
assignment. Whatever we have done is only due to such guidance and assistance and we would
not forget to thank them.

First, and most of all, we would like to thank Dr. Farah Hussain for giving us the opportunity to prepare
a project on ‘Tax Evasion, Black Money and Parallel Economy in India’. We are extremely grateful to
her for providing all the support and guidance.

Last, but, not the least we thanks our family, friends and acquaintances for their constant
support.

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 CONTENTS
1. Introduction…………………………………………………… 4
2. Objective…………………………………………………….....5
3. Methodology…………………………………………………...6
4. Tax Evasion, Black Money and Parallel Economy in India
a. Defining tax……………………………………………..7
b. Rationale of taxation………………………………….....7-8
c. Types of Taxe…………………………………………...8-10
d. Tax evasion……………………………………………...10
e. Black Money…………………………………………….10-11
f. Parallel Economy………………………………………...11
5. Causes, Sources and Effects of Black Money………………….12-14
6. Magnitude of Black Money in India…………………………….15
7. Governement Measures………………………………………….16-18
8. Conclusion……………………………………………………….19
9. References……………………………………………………......20

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INTRODUCTION
The extent and amount of black money in India is very huge. The issue of black money has
been brought forth in many discussions, schemes, news articles etc. by the youth and the
parliament. The ever growing and enormous amount of black money in India has given rise to
another economy, which runs alongside the legal economy, and is called the PARALLEL
ECONOMY (shadow economy). This economy consists of all those consumption, income,
production, employment, exchange and distribution which are unaccounted for or are illegal in
nature. One of the major reasons of such and economy existing in the country is TAX
EVASION. Taxes are amount which are collected, from the public as a mandatory financial
charge or some other type of such levy, by the Government of a nation to fund various public
expenditures. Tax evasion refers to an act of avoiding or escaping the tax burden by various
illegal means.

India is a developing nation. There are many issues such as unemployment, poverty, illiteracy,
over-population, black money, corruption etc. The problem of black money being one the
major problem among these, The Government, irrespective of their ideologies, should aim at
eradicating it. This assignment discusses the various reasons of black money in India, its causes
and sources. It also states the present scenario of black money in India and its impact on the
Indian economy. Lastly, it discusses about the various measures and schemes taken by the
Government to curb black money in the nation.

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OBJECTIVE
 To understand what is tax evasion, black money and parallel economy and draw a
relation between them
 To study the causes, sources and extent of black money in India and its impact on the
economy.
 To find out the present scenario of Black Money in India and the steps taken by the
Government to control it.

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 METHODOLOGY
 All the data and information used in preparation of the project is retrieved from
secondary sources such as books, journals and various websites.
 Tables are used to represent data collected from various sources.

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TAX EVASION, BLACK MONEY AND
PARALLEL ECONOMY
Defining Tax- Bastable has defined tax as, “a compulsory contribution of wealth of a person or a body
of persons for the services of the public powers”. According to Taussig, “the essence of a tax, as
distinguished from other charges of Government, is the absence of direct ‘quid-pro-quo’ between tax
payers and the public authority”. Thus tax is a mandatory financial charge or some other type of levy
imposed upon a taxpayer by a governmental organization in order to fund various public expenditures.
From the above definitions it can be seen that there are two important characteristics of Tax-
1) It is a compulsory contribution
2) There is no direct benefit from the Government for such contribution which is called the ‘quid-
pro-quo’.
Taxes are periodically collected and thus are an assured source of income of the Government. Since, it a
mandatory charge, evading taxes is punishable by law.
Rationale of taxation- there are no direct benefits that taxpayers get from the government in lieu of
paying taxes. Thus, questions arises as to what is the rationale behind collecting a part of individual income
as taxes? The primary rationale of tax is that it is a regular source of revenue for the Government.. In a
developing economy like India, where, aim is to have economic growth as well as social welfare, rationale
of taxation can be as follows-
1) REVENUE GENERATION – tax collected from the tax payers are a major source of revenue
for the government, which is used for various public expenditures. Any step taken to introduce
new tax measures or strengthen the presen tax measure is done to increase the revenue base of
the government. This, in turn, increases the extent of Governmental activities. Aim is to expand
the tax base so that maximum amount of taxes can be collected without having adverse effect on
the living standards of the people. Its purpose, also, is to collect tax by keeping the collection cost
at minimum.
2) REGULATION OF PRIVATE EXPENDITURE- tax is collected from private entities to control
and regulate their expenditure. This is known as the sumptuary objective. Collecting taxes from
private entities reduces their disposable income and hence, they spend less of their income on
activities which are not desirable for social welfare. High rate of taxes on sin goods like, tobacco
and alcohol will discourage people from consuming them and such expenses can be diverted to
desirable activities. Also, import duties help to reduce competition of the local products and hence
help them have a competitive edge over the tax induced imported goods, in regards to the price.

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 3) REDISTRIBUTION OF INCOME- tax is collected to reduce the income inequality between the
rich and the poor. This is done by collecting more taxes from the high income earning people and
using those to provide facilities like education and health to the poorer section of the society for
their welfare. They are also used to provide certain benefits to the poor like unemployment
benefits, subsidized goods etc. to the section on the society to has very low income and thus help
in eradicationg proverty.
Types of taxes- the classification of taxes can be depicted with the help of the diagram below

TAX

DIRECT TAX INDIRECT TAX

INCOME TAX
SALES TAX

WEALTH TAX
VAT

PROPERTY TAX
EXCISE DUTY

DEATH DUTY
CUSTOM DUTY

GIFT TAX

Direct tax- These are the taxes whose impact and incidence lie on the same person i.e the
assesse and the burden of tax cannot be shifted to others. Various types of direct taxes are
1. Income Tax- it is the annual tax levied by the Government on individual and business
income.

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 2. Wealth Tax /Property Tax- it is the tax imposed on the wealth or assets owned in the
form of land, building, gold, credit instruments, cash, etc. ‘Wealth’ means whether
‘property’ or ‘capital’. Hence, wealth and property tax are the same thing.
3. Gift Tax- it is the tax levied on transfer of wealth during lifetime of the donor. Such
transfer increases the paying capacity of the individual and hence it is said to be rational
to collect taxes from them.
4. Death Duty- it is a form of personal wealth tax which is levied on the transfer of
property from one individual to another in case of death of the property owner.

Indirect tax- these are the taxes whose impact and incidence do not lie on the same person i.e.
the assesse and the burden can be shifted. Burden of tax shifted at every level till a point where
the ultimate burden is borne by the final consumer. Various types of indirect taxes are-

1. Sales tax- it is the tax levied on sales. The basis of levying sales tax is volume of sales
of goods.
2. Value Added Tax (VAT)- it is the tax levied, not on the total value of the good, but, on
the value added to it by the seller. The tax payable is calculated only on the net value
of the product.
3. Customs Duty- it is the tax on internationally traded goods i.e. exports and imports.
4. Excise Duty- it is the duty or tax on manufactured goods which is levied at the point of
manufacture of goods, rather than sale.

Comparison chart of direct tax and indirect tax

Basis Direct tax Indirect tax

Nature Direct taxes are progressive i.e. Indirect taxes are regressive i.e. the
amount of taxation increases with burden of tax is more on low income
increase in income. group if people.
Impact and It falls on the same person i.e. the It falls on different persons i.e. the impact
incidence assesse may be on one person and the incidence
on someone else.
Inflation Direct tax helps in reducing the Indirect taxes promotes inflation.
inflation.

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 Burden Burden cannot be shifted in direct Burden can be shifted in indirect taxes
taxes
Tax evasion Tax evasion is possible in direct Tax evasion is hardly possible in indirect
taxes tax because it is included in the price of
the goods and services.

Direct tax is comparatively better form of tax with regards to its nature, impact and incidence,
possibility of shifting tax burden and control over inflation. But, one of the major problem that
is associated with direct tax is possibility of tax evasion in huge amounts. Tax evasion is one
of the major sources of black money in India.

TAX EVASION
Tax Evasion refers to the intentional non-payment or underpayment of taxes by individuals,
organizations or corporations. It is an illegal practice of not paying taxes, by not reporting
income, reporting expenses not legally allowed, or by not paying taxes owed. Tax Evasion is a
criminal offence and is punishable by law. Under Chapter XXII of the Income Tax Act,1961
evading tax can be punishable by charging hefty penalties along with the tax amount and/or
giving a term of jail of maximum 7 years.

Tax evasion is one of the major sources of black money in India among various other sources.

BLACK MONEY
Income and wealth earned by evading taxes or illegally and which remain unrecorded are
referred to as black money. There is no proper definition of black money. It is known by
different names like ‘black income’, ‘black wealth’, ‘dirty money’ etc.

The National Institute of Public Finance and Policy (NIPFP) in its 1985 report on Aspects of
Black Economy, defined ‘black income’ as ‘the aggregates of incomes which are taxable but
not reported to the tax authorities’. Further black incomes or unaccounted incomes are ‘the
extent to which estimates of national income and output are biased downwards because of
deliberate, false reporting of incomes, output and transactions for reasons of tax evasion, flouting of
other economic controls and relative motives’.

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The huge amounts of black money give rise to an illegal economy with unaccounted income,
production, consumption, employment, exchange and distribution. Such full-fledged economy
which may run alongside the legal economy is called the PARALLEL ECONOMY

PARALLEL ECONOMY
Parallel economy means functioning of an unsanctioned sector in the economy whose
objectives run parallel and in contradiction with the objectives of official or sanctioned or
legitimate sector in the same economy (Rajaram, 2006, 577). A parallel economy leads to
inflationary pressure on the economy as the money supply is much more than that is estimated
by the Government and are accounted for.

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BLACK MONEY: CAUSES, SOURCES AND EFFECTS

CAUSES OF GENERATION OF BLACK MONEY

Black Money is a result of the criminal mentality of people. There are two types of people who
provide helping hands in the generation of black money:

1) People who earn their money through illegal means.

2) People who earn money legally but do not report to the public authorities.

Thus following are certain reasons for generation of black money:

1. Second World War after Influence: During the Second World War, the import of many
goods was cut down. As a result, there was shortage in the supply of goods in many
essential fields. This gave a chance to the industrialists to make money illegaly out of
shortages in items that ultimately led to generation of black money.
2. Controls and licensing system: People feel it as a burden to pay for permits and licenses
as it time consuming and a very tiresome process. As a result they try to avoid such
payments and receive their licesnses illegaly.
3. Higher rates of taxes: Whenever taxes are imposed on people, it makes them upset as
they need to pay a part of their income to government. It is a common mentality among
the mass. This mentality gets stronger when they need to pay a higher rate and as a
result they start vading taxes. Higher rates of taxes have resulted in the growing
tendency of tax evasion, thereby creating black money in the economy.
4. Funding of Political Parties: Many big businessmen often fund political parties for their
own interest. Because if their party comes into power they can earn money by any
means without the interference of the government. Mostly such donations are made out
of the black money earned by the industrialists.
5. Agricultural Income: A high level of exemption is given on income from agricultural
land. Thus it is seen that many big industrial houses acquire agricultural land and then
shows their illegal income as income from agricultural land thereby converting their
black money into white.
6. Transactions in urban real estate: Real estate business has been a significant source for
generating black money in India. Undervaluation of property is one common practise
made by the real estate sheeps to earn black money.

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 7. Other Factors: Black money generation in a country like India also results from various
other activities like Smuggling, bribery, property deals, concealment of income by
professionals etc.

SOURCES OF BLACK MONEY IN INDIA

Following are certain areas through which a person earns black money in India:

 Income Tax Evasion.

 Corporate Tax Evasion.
 Bribes, illegal commissions.
 Unaccounted Stock market profit.
 Goods supply to market.
 Interest earned from unorganized credit market

EFFECTS OF BLACK MONEY IN INDIA

The flow of black money in the economy or the presence of parallel economy has seriously
affected the economic system of the country. Following are some of the impacts of black money
in the economy:

1. False Information about the economy: The government of any nation develops its
policies and measures on the basis of the information it has about the economy. The
parallel economy in which black money flows is outside the purview of economic
policies. Thus it becomes very difficult to believe in the data’s relating to national
income, per capita income; gross domestic product of the nation as these
macroeconomic parameters does not include black money in it.
2. Impact on Fiscal System: The main source of revenue for the government is taxation.
Thus whenever there is tax evasion made by people it seriously affects the fiscal system
of the nation. Such revenue loss of the government even though cannot be felt in the
short run but has long-run implications. It reduces the built-in elasticity of the tax
system. Thus, in the long run, the government in order to raise a given target of revenue
is obliged to depend increasingly on discretionary hikes in tax rates.

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3. Create inequalities: The possession of black money creates income inequalities. The
hoarding of excess money leads to purchase of non essential products. A rise in the
consumption of non essential products leaves less resource for investment in priority
areas. As a result the rich gets richer and the poor become poorer.

4. Misguiding on resource allocation: When there is black money in the market, the
amount of money in the economy is higher than the government expects. This leads to
the improper and ineffective decision making of policies by the government. As a result,
black money distorts resource allocation and often leads to wasteful use of money.

5. Implications for monetary policy: The existence of black liquidity in the market is the
one which creates problems for authorities to regulate the economy. Black Liquidity is
defined as the accumulation of black savings from black income in the form of cash
and other readily convertible assets like gold and silver. It is the existence of the sizeable
black liquidity in the market that misguides the government to divert credit from urgent
to less urgent

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MAGNITUDE OF BLACK MONEY IN INDIA
 The Wanchoo Committee used a method of comparative study between national income
and tax assessment to arrive at the unaccounted magnitude in India. The final report which
was published in 1971 showed the following data
Year Black money (amount Percentage change (%)
in Rs.)

1954-55 700 crores -

1965-66 1000 crores 42.85

1968-69 1400 crores 40

Source- Direct Taxes Enquiry Committee(Wanchoo Committee), final report, 1971.

• In survey reports of the International Monetary Fund, it is found that black money in India
reports as much as 50% of its GNP. It amounts to Rs. 16,12,980 crores in 2005-06 at
current prices or Rs. 12,90,380 Crores at constant prices of 1999-2000.

• In recent times Raja J. Chelliah committee estimated black money to be around 35% of
India’s Gross National Product . It can be put at around Rs. 28,00,000 crore in 2012-2013.

• The figures may be different but India’s magnitude is ever increasing and, it’s one of the
highest as compared to the developed countries of the world like, USA, Japan etc.

CURRENT STATUS OF BLACK MONEY IN INDIA

1. As per the recent stats given by Swiss Bank the quantum of bank deposits held by
Indians in their names and in their benami names in Swiss bank was around Rs.12,740
crore at the end of 2011 which is around 13 times larger than our country’s foreign debt.

2. India is one of largest depositors of illicit money in offshore tax havens and developed
country banks with a total deposit of $500 billion.

3. Also, as per the Global Financial Integrity (GFI) report, “the present value of illicit
assets held abroad account for around 72% of India’s underground economy ($462
billion) and which has estimated to be around 50% of India’s GDP (Total value - $640
billion.)”

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 GOVERNMENT MEASURES
1. Penalties and Prosecutions: Tax evasion is a serious problem to the nation. It stops a major
revenue source of the government. In order to control this and punish the guilty, the law
provides monetary penalties and imprisonment against the tax evaders.
2. Settlement Commissiom: The settlement commission was established in the year 1976 with
the recommendation of the Wanchoo Committee. The objective of the settlement
commission was to provide a mechanism for the quick and final disposal of the cases where
tax evaders were willing to make confession and face the consequences.
3. Statutory Provisions: The law in order to prevent creation of black money in the economy
has provided certain provisions in its act. These are:
 Compulsory filing of tax returns by everyone with taxable income,
 Compulsory maintenance of accounts by businessman and professionals and
their compulsory audit,
 Compulsory canalising of transactions involving payment exceeding ₹10,000
through banks, etc.

4. Tax Raids and Seizures: As and when the income tax department receives any concrete
information about a person hoarding black money, it conducts raids on the premise of the
people suspected and seizes all unaccounted or undeclared assets. It is one of the significant
weapons used by the income tax department to check black money in the economy.
5. Schemes for the disclosure of Black Money: The government of India on 1st October 1991
introduced five new schemes to unearth black money and to increase foreign exchange
reseve in the nation. These schemes are:
a) Scheme One: The State Bank of India issued Bharat Development Bond which
permitted the Non Resident Indians (NRIs) to deposit foreign reserves of US
dollars and British pounnds for 5 years. The bonds were sold upto January 31,
1992. Government also announced a rebate of income tax on the interest earned
from such bonds.
b) Scheme Two: Under this scheme any person residing in a foreign country could
send foreign exchange (no upper limit) to any citizen of India without declaring
its source. The inflow amount of foreign exchange was exempted under Foreign
Exchange Regulation Acts. The Scheme was just an attempt to increase foreign

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 exchange reserve in the country and and to bring back the unaccounted money
of Indians stored in foreign countries.
c) Scheme Three: Under this scheme any person could deposit his black money in
National Housing Bank. This scheme was open upto 31st January, 1992. The
depositor could withdraw 60% of his deposit for personal use and the remaining
40% shall be used for constructing low cost houses for the poor.
d) Scheme Four: This was an ammendment to clause 273A of the Income Tax Act.
Under this scheme, the government gave one more chance to the people having
black money to disclose their unaccounted income. The persons could avail this
opportunity only once in a life time.
e) Scheme Five: Under this scheme, the government allowed exemptions from
penalties on the declared black money and assets, if and only if the tax payer is
declaring his black money at the time of assessment.

6. Voluntary Disclosure of Income Scheme: In the annual budget of 1997-98, the then finance
minister P. Chidambaram had introduced a scheme called Voluntary Disclosure of Income
Scheme (VDIS). The main objective of the scheme was to unearth black money from the
economy. The main Slogan of the scheme was “30% tax and 100% mental relief “.Under
this scheme the individual had to pay 30% tax and the companies had to pay 35% tax on
their disclosed black money. This scheme proved effective and was quite successful in
achieving its objective. A record of 4.66 lakh people (including corporations) made a
disclosure of income amounting to ₹33,000 crores and government earned a tax revenue of
₹10,500 crores from the disclosed income.

7. New Legislation: Budget 2015 proposed a new legislation to deal with the black money
parked abroad.
Following are the key features mentioned in the legislation:
a) 10 years Rigorous Imprisonment in case of tax evasion related to foreign assets.
In addition to this, a penalty of 300 % with no recourse to Income-tax Settlement
Commission.
b) Any person found to be involved in the act of concealment of income/evasion
of income in relation to a foreign asset, to be made a predicate offense under the
Prevention of Money Laundering.

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 c) Foreign Exchange Management Act was amended to ensure punishment in such
cases.
8. Demonetization: India, even after 70 years of independence has been struggling with
the issue of corruption, poverty, and unemployment. The main reason for the existence
of such issues is the existence of parallel economy which nullifies the efforts of
economic development. For the transformation of the economy and to minimize the
flow of black money from the economy, demonetization is considered to be the bold
step of a government. In India, the citizens of the country have experienced
demonetization three times. The first was on 12th January 1946, where currency notes
of ₹1000, ₹5000 and ₹10,000 were taken out of circulation. However, this didn’t last
for long as these currencies were again introduced in the year 1954. The second phase
of demonetization happened on 16th January 1978 when again the notes of ₹1000,
₹5000 and ₹10,000 were taken out of circulation from the market. This time,
demonetization took place on the night of 8th November 2016. The governments
banned the use of old ₹500 and ₹1000 notes and instructed to change them with new
₹500 and ₹2000 rupee notes through banks or post office.This gave very less time for
the hoarders of black money to convert their money into white. Thus the hoarders were
left with only two options. Either they had to exchange their money in banks or throw
away their black savings. If they exchanged their black money through banks, the
officials would come to know about their illicit income and be charged with
investigation thereby curbing black money out of such persons. Thus the
demonetization of 2016 was a historical event for the country which was quite
successful in meeting its objectives.

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 CONCLUSION
The urge to make more money is the main reason that tempts people to commit fraud.
Generation of black money and its flow in the economy is one of the major issues that need to
be solved. Government, no doubt through its schemes and policies has tried a lot to minimize
this problem and bring black money out of the economy , but it needs to make its acts more
stringent to solve this. Moreover the people involved in such frauds and crimes should
understand that the money they are trying to save only acts as hindrance to the development of
the nation they live in.

So it is not right to say that India is a poor nation. In fact it is one of the richest country in the
world with its wealth concealed in the form of black money.

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 REFERENCES
1. CA Lalit Mohan Agarwal (2012). “White Paper on Black Money”, Journal of
Securities Academy & faculty for e-education, vol.72.
2. Manpreet Kaur & Akriti (April, 2015). “Black Money In India – Current Status and
impact on economy”, Abhinav National Monthly Refereed Journal of Research,
Volume4, Issue 4.
3. P. Saniya, (2016). “Parallel economy in India: A Critical Analysis of some recent
developments”, © Medwell Journals 2016.
4. Dr. Swaty Wadhwa & Sonal Pahwa (July 2017). “Curbing Black Money: Is
Demonetization the right move? ”, International Journal of Informative & Futuristic
Research, Volume 4, Issue 11.
5. Choudhury, R.K. and Chakraborty, R.C. (2014), Public Finance and Fiscal Policy,
Fourth Revised Edition, P.P. 449, 235-237.
6. Direct Taxes Enquiry Committee(Wanchoo Committee), final report, 1971.

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