The Black Economy In India

It has been reported that, "Black money today is created at every level of the Indian economy". As the 'Parallel Economy' is unaccounted for, the official National Income accounts do not represent the real state of the economy. In light of the statement, Give the future directives on the parallel economy and cite the practical obstacles faced on the path to fight the black economy.

INTRODUCTION

Parallel economy connotes the functioning of 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', 'unsanctioned economy' or 'hidden economy'.

A hidden economy in its broadest sense may contain - a) against the law economy, such as money laundering, smuggling, etc; b) unreported economy including tax evasion; c) unregulated economy, ie monetary activities outside regulations. The money laundering is too little transparency standards in bilateral and multilateral trade with flourishing offshore banking in tax havens has allowed it to grow unabated in past couple of decades. Experts estimate that around 50 per cent of GDP-or about Rs 33 lakh crore of black money-is generated each year through corruption at various levels. While black money which operates within the country can be productive, what goes overseas is seen as non-productive.

Impact of Black Money

The circulation of black money has adversely influenced the Indian economy in a number of ways.

It leads to the misdirection of treasured national resources.

It has enormously worsened the income-distribution. The fixed income salary class finds itself ever be the lower rung of the income-ladder as they pay taxes. They are not able to catch up with the people in business, or in professions, or many of those employed who generate income by black activities. Many high placed official and honest employees earn much less than an average small shopkeeper in big cities like Bombay and Delhi.

The existence of the big-sized unreported segment of the economy is a- big handicap in making the correct analysis and formulation of right policies for this.

Black money ends in transfer of funds from India to foreign countries through clandestine channels. Such transfers are made possible by violations exchange regulations through these devices of under - invoicing of exports and over-invoicing of imports etc.

Black money requires because of its protection, proliferation and expansion of something organization made up of musclemen, touts and brokers to combat the forces of law and order on the main one hand and on the other hand, there are tax advisers, or chartered accountants in the pay of black money operators. You can find contact men, liaison officers, Dallas, who negotiate favors from top bureaucracy and political bosses through bribes of black money.

Black money has corrupted our political system in a most vicious manner. At various levels, MLAs, MPs, Ministers, party functionaries openly go on collecting funds for party or elections. Ministers dole out favors of crores by accepting black money donations of a few lakhs from businessmen National policies are, therefore, being bent and only the best business under the pressure of black money.

Causes inflations- The politics of black money thus has corroded the moral fiber of Indian polity. Ministers dole out favors of crores by accepting black money donations of a few lakhs from businessmen. National policies are, therefore, being bent in favor of the best business under the pressure of black money.

Due to the pernicious impact of black money on the Indian economy and polity that the Wanchoo Committee concluded: "It is, therefore, no exaggeration to state that black money is similar to a cancerous growth in the country's economy which, if not checked in time, is sure to lead to its ruination".

Survey on Bribery and Corruption

India lost a staggering $462 billion in illicit financial flows due to tax evasion, crime and corruption post-Independence, according to a written report released by Washington-based Global Financial Integrity.

The document on the "Survey on Bribery and Corruption" was released at the first total annual fraud conference organized by the Association of Certified Fraud Examiners here on June 21, 2011. The report explained that 68% of India's aggregate illicit capital loss occurred after India's economical reforms in 1991, indicating that deregulation and trade liberalization actually contributed to or accelerated the transfer of illicit money abroad. Reports that wealth is stashed in offshore destinations and tax havens also would go to indicate the extent of the issue, the report said.

The KPMG India Fraud Survey 2010 suggested that today India is confronted with another kind of challenge. It is not about petty bribes, popularly known as 'bakshish' anymore, but scams to the tune of a large number of crores that highlight political and industry nexus which if not checked can have far reaching effect on the economy. India has been facing governance challenges from within at various levels for a long period. "Rigid bureaucracy, complex laws and long-drawn judicial process deter folks from considering legal recourse in corruption cases. India has around 35 million court cases pending.

Besides lack of manpower and poor infrastructure facilities, other factors hindering the anti-corruption drive include lack of teeth in the legal framework, " the study said.

"A lot of respondents mentioned that organizations pay bribes to win and retain businesses. This is an average scenario where organizations have a tendency to overlook the implications of encouraging these practices and frequently look only at short term benefits achieved. They neglect to recognize that what spent some time working in their favor could also land into trouble later and lead to adverse consequences for them, " the report said.

The study noted that another key area where business is impacted is in the area of mergers and acquisitions. "Nearly 37% respondents opined that the corruption could impact the valuation of your company thereby denying shareholders of a fair price. Moreover, it could also make it problematic for them to find a suitable business partner, thereby seriously impacting the growth prospects of the business enterprise, " the analysis said.

MEASURES TAKEN BY GOVERNMENT TO TACKLE BLACK MONEY

There is no reliable information about the amount of money of Indians in undisclosed bank accounts beyond your jurisdiction of the united states. There are many estimations predicated on various assumptions and presumptions which might not exactly be correct. Further there's a marked difference in the quantity of these estimates.

A proposal for getting a report conducted to estimate the quantum of black money both outside and inside the country was already approved by Union Finance Minister. The next Government institutes have been approved in March, 2011 for conducting separate studies on black money

National Institute of Public Finance and Policy (NIPFP);

National Institute of Financial Management (NIFM);

National Council of Applied Economic Research (NCAER).

Memorandum of understanding has been signed between CBDT and each of three institutes on 21. 03. 2011. The study will be completed within a period of 1. 5 years from the date of MOU.

Government has formulated a five pronged technique to tackle the menace of black money which is really as below

Joining the global crusade against black money,

Creating a proper legislative framework,

Setting up institutions for dealing with Illicit Funds,

Developing systems for implementation (new manpower policy);

Imparting skills to the manpower for effective action (constant training for skill development).

In line with above strategy, the Government has taken several steps in the last two financial years, the details which are discussed in this posting.

Joining the global crusade against black money:

Black money will not limit itself to the geo- political boundaries. It transcends borders and has become a global problem. The countries around the world have started a concerted global effort and as part of global effort against black money, India has played a proactive role in pointing out deficiencies in the assessment of varied countries by the Peer Review Band of the Global Forum. Government is also playing a dynamic role in making certain these countries remove the deficiencies to bring more transparency. India has joined the duty Force on Financial Integrity and Economic Development in order to bring greater transparency and accountability in the financial system. India has joined as the 34thmember of Financial Action Task Force (FATF) on 25th June 2010. FATF membership is important as it will help India to build the capacity to fight terrorism and trace terror funds also to successfully investigate and prosecute money laundering and terrorist financing offences. India has joined the Asia Pacific Group (APG)against Money laundering. The 14th gross annual Plenary of Asia Pacific Group (APG) was held in Kochi from 18-22 July, 2011. More than 320 delegates from 41 jurisdictions, observers and different organizations attended the Plenary which was inaugurated by the Union Finance Minister. India is the co-chair of this forum till July 2012. India has gained Membership of the Eurasian Group (EAG)in December 2010.

India has joined the Egmont Groupwhich is an international network fostering improved communication and interaction among Financial Intelligence Units (FIU). India can be an active member of G 20 and has played a key role both in identifying issues and drafting communiqus. Inside the G 20 Seoul Summit, November 11-12, 2010, a clause "countries to further enter into Tax Information Exchange Agreements wherever required by the partner country" was incorporated in the communiqu at the instance of India.

Creating a proper legislative framework:

The Government has been constantly looking to strengthen the legislative frame work to regulate generation of black money in the country as well as control the flight of such illicit fund to foreign shores. In pursuance of this India has so far completed negotiations of 22 new Tax Information Exchange Agreementswith various tax heavens. Nine of the agreements are also approved by the cabinet. India has initiated procedure for negotiation with 75 countries to broaden the scope of Article concerning Exchange of Information to specifically allow for exchange of banking information and information without domestic interest. As on date, it includes completed negotiation with 18 existingDouble Tax Avoidance Agreement (DTAA) countries to update this short article. These agreements have also been initialed. 22 new DTAAs have also been finalized where the Exchange of Information Article is good international standards. In a nutshell negotiations/renegotiations of DTAAs with 40 countries have been completed. DTAAs with Switzerland (amendment), Norway (revised), Mozambique (new), Colombia (new), Ethiopia(new), Georgia(new), Taipei(new), Lithuania(new) and Tanzania(revised) have been signed.

The protocol amending our tax treaty with Switzerland was signed on 30th August 2010 and has been approved recently by the Swiss Parliament (on 17thJune 2011). After following a mandatory constitutional process the DTAA can be operational. It'll enter force when Switzerland completes its internal process. Upon entry into force it'll allow India to acquire banking information (as well as information without domestic interest) from Switzerland in specific cases for a period beginning with 1st April 2011. There are certain countries or territories outside India which do not effectively exchange information with India as an anti-avoidance measure. The Government has enacted legislation to prescribe a tool box of counter measures against these non-cooperative jurisdictions. For this purpose, section 94A has been inserted in to the Income-tax Act through Finance Act, 2011. This section gives an enabling capacity to the Central Government to notify any country or territory outside India, having regards to lack of effective exchange of information by it with India, as a notified jurisdictional area. After the country/territory so is notified as a non-cooperative jurisdiction, transactions with residents of such country/territory are subject to higher withholding, certain disallowances and the transactions are also subject to transfer pricing regulations. THE FEDERAL GOVERNMENT has proposed the next specific new measures for unearthing black profit the Direct Taxes Code Bill:For the intended purpose of levy of wealth tax, taxable assets have been defined to add deposits in banks located outside India in case there is individual, unreported bank deposits in case of others, fascination with a foreign trust or any other entity (apart from foreign company) and any equity or preferential shares in a controlled foreign company.

The General Anti Avoidance Rule (GAAR)has been incorporated to cope with aggressive tax planning devices used to circumvent tax laws. Specific Controlled Foreign Company (CFC) rules have been incorporated to bring to tax passive income earned by residents from substantial shareholding in companies located in low tax jurisdictions. A reporting requirement has been introduced which makes it obligatory for resident assesses to furnish details of their investment and interest in any entity outside India in the proper execution and manner as may be prescribed.

According to the Global Financial Integrity Report, major channel for illicit outflow is transfer of funds through mispricing which accounts for 77. 6% of total illicit outflows. The existing transfer pricing provisions of the government, that have been introduced in the entire year 2001 aren't detailed provisions as compared to transfer pricing provisions of developed countries. It was felt that there surely is need to upgrade these transfer pricing provisions to meet the challenges of growing intangible economy and various complex cost sharing arrangements. According to directions of FM, DGIT (International Taxation) has constituted a committee to look into the issue of revising the transfer pricing provisions. The committee has already submitted its interim report which is under consideration. Preventing Money Laundering Act (PMLA)was amended on 1st June 2009, whereby the predicate offences listed in the Schedule of the Act were substantially increased. This amendment has tremendously widened the scope of Money Laundering Investigations.

Setting up institutions for dealing with Illicit Funds;

Government has decided to create Exchange of Information (EoI) Cell for an effective exchange of information to curb tax evasion. Efforts are on to place the cell set up under Foreign Tax Division of CBDT. Government has approved the creation of the Directorate of Income Tax (Criminal Investigation), in the Central Board of Direct Taxes. The DCI will perform functions in respect of criminal matters having any financial implication punishable as an offence under any direct tax law. Government has create Income tax Overseas Units in two Indian Missions abroad. Eight more such units are being setup in today's Financial Year to strengthen information exchange mechanism. In order to augment the reach of the Directorate of Enforcement, the federal government has approved upgradation of five existing Zonal offices as Regional offices and five existing Sub Zonal offices as Zonal offices. It has also approved creation of a new Zonal office and 16 new Sub zonal offices of Enforcement Directorate in the united states. THE PROCEDURE of filling up the additional posts sanctioned by the federal government as also for upgradation of the existing offices and setting up of new offices of Enforcement Directorate has started. As per the Action Plan, the Ministry of Finance is filling the Group A posts of the Directorate in three phases.

Developing systems for implementation:

Government has doubled the strength of Foreign Tax Division, which handles the task of exchange of information. The Directorate of International Taxation and Transfer Pricing in the TAX Department have also been strengthened as major area of the flow of illicit money beyond India takes place through mispricing of international transaction. In the bid to strengthen the Enforcement Directorate, the federal government has approved creation of 1318 new posts at various levels. The procedure of filling up of the posts has already been started by the Deptt. of Revenue.

Imparting skills to the manpower for effective action:

As an integral part of capacity building and skill development, 51 senior Officers were sent abroad for specialized training in the field of International Taxation and Transfer Pricing in F. Y. 2010-2011. Since skill up gradation in international tax and transfer pricing require substantial time and resource, a posting policy has been approved which provides that officers may be posted in the Directorate for the period not less than five years. Apart from the above the federal government has also taken the next measures-

The Government has constituted a Committee on 27th May, 2011 under the Chairmanship of Chairman, Central Board of Direct Taxes (CBDT) to look at ways to strengthen laws to curb the generation of black profit the country, its illegal transfer abroad and its own recovery. The Committee include Member (L&C), CBDT, Director Enforcement (ED), Director General of Revenue Intelligence (DRI), Director General (Currency), Joint Secretary (FT&TR), CBDT; Director, (FIU-IND) as Members.

The Committee will examine the existing legal and administrative framework to cope with the menace of generation of black money through unlawful means including, inter alia, (a) Declaring wealth produced illegally as national asset; (b) Enacting/amending laws to confiscate and recover such assets; and (c) Providing for exemplary punishment against its perpetrators. The Committee will also check with all stakeholders and submit its report within an interval of half a year. 6. 1 The second meeting of the Committee on the Black-Money was held on 29th July, 2011 and it's been decided that the Committee would hold its next meeting in September 2011 and in the meanwhile; (i) Letters have been written to various Industry Associations, Voluntary Organizations, ICAI, ICWAI and NASSCOM requesting them to give suggestions/views on existing legal and administrative framework available under the various laws to cope with the menace of generation of black money through against the law means, (ii) A lot more than 3300 comments on the issue of black money have been received from the public via-e-mail that are being examined. (iii) Ideas for increasing the respective laws sent by the organizations, as well as gist of useful recommendations received through email, would be compiled and circulated. (iv) Reminders will be sent to industry and trade associations, ICAI and ICWAI for expediting their suggestion. (v)Letters are also issued to Chief Commissioners of Income Tax (Cadre Controlling Authorities), Director Generals of Income Tax (Training), National Academy of Direct Taxes, requesting them to give suggestions/views on existing legal and administrative framework available under the many laws to cope with the menace of generation of black money through illegal means.

PRACTICAL OBSTACLES FACED ON THE PATH TO FIGHT THE BLACK ECONOMY

Pricing

Goods acquired illegally take 1 of 2 price levels

They may be cheaper than legal market prices. The supplier doesn't have to pay for production costs or taxes. Normally, this is the situation in the underground economy. Criminals steal goods and sell them below the legal selling price, but there is absolutely no receipt, guarantee, and so forth.

They may be more expensive than legal market prices. The merchandise is difficult to acquire or produce, dangerous to take care of or not common legally, if at all. If goods are illegal, such as some drugs, their prices can be vastly inflated over the expenses of production.

Black markets can form part of border trade close to the borders of neighboring jurisdictions with little or no border control if there are substantially different tax rates, or where goods are legal on one side of the border but not on the other. Products that are commonly smuggled such as this include alcohol and tobacco. However, not all border trade is illegal.

Consumer Issue

Even when the underground market offers lower prices, consumers still have a motivation to buy on the legal market when possible, because

They may prefer legal suppliers, as they are better to contact and can be held accountable for faults;

In some jurisdictions, customers may be charged with a offense if indeed they knowingly participate in the black economy, even as a consumer;

They may feel at risk of being hurt while making the offer;

They may have a moral dislike of black marketing;

In some jurisdictions (such as England and Wales), consumers in possession of stolen goods will keep these things taken away if they're traced, even if they did not know they were stolen. Though they themselves commit no offense, they remain left without goods and no cash back. This risk makes some averse to purchasing goods that they think may be from the underground market, even if in fact these are legitimate (for example, items sold at an automobile boot sale).

However, in a few situations, consumers can actually be in an improved situation when working with black market services, particularly when government regulations and monopolies hinder what would otherwise be a legitimate competitive service. For instance

Unlicensed taxicabs. In Baltimore, it's been reported that lots of consumers actively prefer against the law taxis, citing that they are more available, convenient, and priced fairly.

Illegal Drugs

From the late 19th and early 20th centuries, many countries started out to ban the keeping or using of some recreational drugs, like the United States' war on drugs. Many people nonetheless continue to use unlawful drugs, and a black market exists to provide them. Despite law enforcement efforts to intercept them, demand remains high, providing a huge profit motive for organized criminal groups to keep drugs supplied. The United Nations has reported that the retail market value of unlawful drugs is $321. 6 billion USD.

Although police agencies intercept a fraction of the against the law drugs, and incarcerate thousands of wholesale and retail sellers, the very stable demand for such drugs and the high profit margins encourages new distributors to enter the marketplace without an increase in the retail price. Many drug` legalization activists draw parallels between your against the law drug trade and the Prohibition of alcohol in america in the 1920s.

In the uk, it is not illegal to have drugs, but it is illegitimate to have them. This can lead to the unintended consequence that those in possession may swallow the data; once in the torso they may be committing no crime.

Prostitution

Prostitution is illegal or highly regulated generally in most countries around the world. These places form a classic study of the underground economy, because of regular popular from customers, relatively high pay, but labor intensive and low skilled work, which attracts a continual supply of workers. While prostitution exists in every country, studies show that it tends to flourish more in poorer countries and in areas with large numbers of unattached men, such as around military bases.

Prostitutes in the black market generally operate with some degree of secrecy, sometimes negotiating prices and activities through codewords and subtle gestures. In countries like the Netherlands, where prostitution is legal but regulated, illegal prostitutes exist whose services are offered cheaper regardless of the legal requirements or procedures- health checks, standards of accommodation, and so on.

In other countries such as Nicaragua where legal prostitution is regulated, hotels may necessitate both parties to recognize themselves, to avoid the rise of child prostitution.

Learning from the Article

Through this post we learn that:-

Introduction to Black Economy in India.

The Measures taken by Government to curb Black Economy.

The Challenges faced while tackling Black Economy

CONCLUSION

Parallel economy is a fresh threat for the Indian economy. In India parallel economy is expanding very rapidly. Government of India introduced commissions under Kaldor, Wanchoo, Rangnekar, Chopra, and Gupta for estimating black economy. There are plenty of factors like Controls and Licensing System, Higher Rates of Taxes, Ineffective Enforcement of Tax Laws, Inflation, Funding of political parties etc. that influence its growth. In India amount of black money are increasing continuously which badly impacts the monetary growth of the country. Such money is a new challenge for Indian economy. Indian economy is badly influenced by black money as it is underestimating GDP, increasing inequality of income, increasing illegitimate activities etc. Within the last 50 years, the government has at various times announced several schemes offering opportunities to bring black money overboard however the result are not so effective. Some of these schemes are: introducing the scheme of Special Bearer Bonds, demonetizing high denomination currency notes, stringent raids and scheme of voluntary disclosures. These instruments are expected to reduce the quantity of the black economy.

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