Parallel Economy

Parallel economy, based on the black money or unaccounted money, is a big menace to the Indian 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.

In a general way, we can define black economy 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 (he fiscal authorities i.e., taxes are not paid on this money.

An estimate by Suraj B. Gupta had put the size of black money at over 50 per cent of GDP (at factor cost) in 1987-88. It is also stated that annual rate of growth of black economy is higher than the annual growth rate of GDP.

According to Global Financial Integrity Study of 2009, $ 1.4 trillion belongs to Indians were parked in safe havens abroad. $ 1.4 trillion is equivalent to Rs. 70 lakh crore, more than India’s national income of around Rs. 50 lakh crore.

A statement from the Swiss Central Bank declared that Indians have $2.5 billion deposits in various Swiss Banks. It is suspected that the deposits of Indians in tax havens are mostly being withdrawn and shifted to a third country; making it difficult for the government to gather any further details once the accounts are closed.

Harmful Effects of Parallel Economy:

The circulation of black money has adversely affected the economy in several ways. First, is the misdirection of precious national resources? A part of black money is kept in a form that contributes nothing/little to productive activities. Again, much around half to two third is squandered away on ostentatious consumption of goods and services.

Second, it has enormously worsened the income distribution, and has thereby undermined the fabric of the society.

Third, 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. Nor. it is possible to monitor the development in the economy with precision.

Fourth, the black money has eroded the social values of the society. The undeclared income is ‘earned’ by illegitimate ways. This is spent in undesirable and vulgar manner.

What are the Measures Taken by the Government to Control Parallel Economy?

Since black money is a big evil, it is of utmost urgency that we get rid of it, and make the economy function in a healthy manner. In this regard, certain measures have already been adopted by the government.

1. Special Schemes:

The government at various times adopted special schemes to eliminate black money. The schemes have been of various types. One such scheme was the Voluntary Disclosure Scheme, This was adopted long back in 1951, and then twice in 1965 and again in 1975. Under these schemes, those declaring their income were not to be punished. Some success was achieved.

A scheme introduced in 1991-92 Budget envisaged that the people with unaccounted money, if deposit the same with the National Housing Bank, will be given complete immunity from enquiry and investigation. The government would deduct 40 per cent of such deposits with the rest belonging to the depositors.

Another scheme, the latest one, is like the earlier ones (of 1951, 1965 and 1975) of voluntary disclosure of income introduced in 1997. Such people were to pay the tax and keep the declared income with them. The government realized over Rs. 10,000 crore as taxes.

2. Tax Efforts:

The second set of measures relates to tax efforts. One bears upon the tax rates. The underlying approach is that, a reduction in tax rates will dampen the urge for concealing income to evade taxes. Second, concerns the efforts at raising tax revenues through administrative measures.

These consist of simplification of tax laws and tax procedures and more importantly the procedure of tax raids. These measures too have yielded some results. The government has also sought to curb growth of black money through measures like making it mandatory for property registrars, banks, RBI, mutual funds, companies issuing shares and debenture to report high-value transactions.

Cash withdrawal tax introduced in 2005-06 is also another measure to curb black money. Integration of state level VAT into a country wide goods and services tax would also facilitate the process of bringing all economic activities within tax information network’s reach.

Controlling Parallel Economy in India

1. Checking Tax Evasion:

As evasion of taxes has been considered as the major root of the generation of black income. Thus, the government has undertaken various administrative and legal measures to check evasion of both direct and indirect taxes. These measures were undertaken as per the recommendations of various commissions and committees such as Taxation Enquiry Commission (1953), Kaldor’s recommendation for Indian Tax Reform (1956), Direct Taxes Administrative Enquiry Committee (1958) and Direct Tax Enquiry Committee (1991). The Commissions and Committees pointed out various loopholes and weaknesses in tax laws and suggested various measures to check evasion of taxes.

2. Demonetization:

Demonetization of high denomination currency has also been suggested from different levels. In India demonetization was done for the first time in 1946 and the value of demonetized notes was about Rs. 144 crore. Demonetization of high denomination currency worth Rs. 1,000 and Rs. 5,000 and Rs. 10,000 was again attempted in 1978. Till August 1981, notes worth Rs. 125 crore was demonetized. Thus demonetization as a measure of checking black money is not at all successful and it is also very much unpopular.

3. Voluntary Disclosure Scheme:

The government introduced voluntary discloser schemes in different times to unearth black money. This scheme was first introduced in 1951 which resulted disclosures amounting to Rs. 71 crore and tax collection of Rs. 11 crore. Again the scheme (VDS) was introduced in 1965 with a provision of 60 per cent tax on disclosed income which resulted disclosures worth Rs. 146 crore and tax collection of Rs. 68 crore.

Again as per the recommendation of the Direct Tax Enquiry Committee, the Government again utilized this scheme (VDS) for both income and wealth. Accordingly, this scheme disclosed Rs. 1,578 crore and tax collection of Rs. 248.7 crore as income tax and wealth tax. The 1997-98 Budget again introduced the Voluntary Disclosure Scheme to unearth black money.

4. Special Bearer Bond Scheme:

Government introduced special bearer bond scheme in 1981 in order to canalize unreported money. Accordingly, the Special Bearer Bonds, 1981 of the face value of Rs. 10,000 each were issued for a period of 10 years at 2 per cent rate of interest per annum. As per 1982-83 budget, a total to Rs. 875 crore was subscribed under the Special Bearer Bond Scheme.

5. Reduction of Tax Rates:

In order to make the taxes more productive, the government has been reducing the peak rate of personal income tax from 61.9 per cent to 54 per cent in 1990-91 and then to 40 per cent in 1992-93 budget and then finally to 30 per cent in 1997-98 Budget. Thus reduction of personal income and corporation tax are expected to increase tax revenue by more than 25 per cent in 1994-95. The share of direct taxes in GDP has also increased from 2.1 per cent in 1990-91 to 2.8 per cent in 1994-95 as a result of reduction in tax rates.

6. Economic Liberalization:

Introduction of economic liberalization has removed the regime of controls and regulations and thereby the extent of black economy would be reduced gradually.

7. Other Measures:

The Government has also introduced some other measures to contain the growth of black income in the country which includes—Deposit in the National Housing Bank in 1991. NRI-foreign exchanges remittance, issuing National Development Bonds in US dollars, controlling the election expenses incurred by the candidates, conducting searches, seizures, raids and other steps to plug loopholes in the tax-administration etc.

The 1995-96 Budget has also introduced a new scheme where undisclosed income detected as a result of search shall be assessed separately at a flat rate of 60 per cent. But unfortunately, all these measures are introduced in India half-heartedly, and thus the grip of parallel economy is gradually being strengthened.

Had there been a sincere attempt to control the generation of black income in the country by the government, bureaucrats, tax administrators etc., the network of parallel economy might have been checked and the country might have experienced a better economic situation characterized by better level of living for the common people, moderate inflation and rational economic decisions.