Finance minister P Chidambaram’s Budget has proposed a tax of 0.1% on cash withdrawals of Rs 10,000 or more from a bank in a day. This initiative has drawn vociferous protests from citizens. For they feel it is unjust for the government to take away a portion of money which lawfully belongs to an individual. The FM has justified the tax, stating that it would help track large cash withdrawals which leave no trail, and presumably, become part of the country’s black money economy. The concept and quantum of black money has been a subject of intense debate and speculation. FE takes a Closer Look at what is at black money and the government’s latest move to unearth it:
What is black money?
Whatever is earned lawfully is a person’s legitimate income. Lawful earnings mean those earned by engaging in activities permitted by law and society. e.g., working for a company which makes soaps, televisions or other goods is a lawful activity. On the other hand, working for a group engaged in selling narcotics, contract killing or one headed by an outlaw like the now dead Veerappan is not a lawful activity. Hence, salary received while working for such groups cannot be treated as legitimate income. The income earned from these activities is ‘black’ income. It will not become legitimate, even if a person decides to file tax returns.
Secondly, a person may lawfully earn Rs 10 lakh in a year, but cannot appropriate all of it. There are norms for appropriating lawfully ear-ned income. It can only be appropriated after payment of prescribed taxes. The sovereign is entitled to tax income. Appropriating what is the sovereign’s due is misappropriation. The income thus earned is black income.
So, black money is basically income either earned by engaging in unlawful activities or by misappropriating funds which legally belong to the exchequer.
How does black money harm the economy?
Black money is often used to fund unlawful activities. At the same time, ‘black’ income is generated by engaging in unlawful activities. Both are against public policy. Such activities become a threat to the government’s authority. It is imperative for any government to check abductions, contract killing, drug peddling, smuggling etc.
Secondly, as ‘black’ income is generated by cheating the exchequer, it leaves the government poorer and reduces its financial capacity to undertake sovereign and welfare functions. Sovereign functions include making laws, maintaining law and order, etc. In addition, the government undertakes various welfare activities like building roads, bridges, etc.
Also, a high incidence of black money increases the burden on honest taxpayers.
Any official estimates of black money in India?
No. It is very difficult to measure the quantum of black money with any precision. Also, there are definational issues. Experts often disagree on the methodology for defining and measuring black money. However, it may be worthwhile to recall some of the estimates. In the early 1950s, the quantum was estimated at 2% to 3% of the gross domestic product (GDP).
Prof Arun Kumar of Jawaharlal Nehru University, in a 1995 study, estimated it at around 40% of GDP. According to Prof Kumar, the quantum must have gone up by now. Of the estimated 40%, around 32% was supposed to have been generated through tax evasion and the remaining 8% through unlawful activities. Some other estimates have pitched the quantum being as high as 70% of GDP.
Are tax rates responsible for the high incidence of black money?
High tax rates make evasion attractive. But black money generation cannot be wholly attributed to this. Estimates reveal that black money was around 7% of GDP in the 1970s, when income tax rates were as high as 97.5%. Although rates have come down, estimates of black money have gone up. Also, the incidence of black money is very low in countries with high tax rates, like Sweden and Denmark. India has a very low tax-GDP ratio—less than 10%. It is the erosion of respect for law and declining fear of authority that has revved up black money generation. This can be attributed to the unholy nexus among politicians, bureaucrats and businessmen.
Will the cash withdrawal tax help contain black money?
Successive governments have made numerous attempts to unearth black money and check its growth. These include income disclosure schemes, bond schemes, frequent changes in taxation laws and rules etc. Unfortunately, none seem to have had any perceptible impact . If the government is serious about tracking suspicious transactions, a better way would be to ask banks to report deals that are suspect in real time, without alerting the parties involved in the transaction. In addition, the government would need to simplify tax laws, rationalise stamp duties and check corruption in its own rank and file.
