Context of the menace of black money
The Standing Committee on Finance recently came out with its report on the ‘status of unaccounted income and wealth both inside and outside the country’ in which, after consulting various other agencies concluded that there was no reliable way to quantify black money whether in India or abroad.
What is black money?
- There is no official definition of black money in economic theory.
- The simplest definition of black money could possibly be money that is hidden from tax authorities. That is: earned through illegal activity and earned legally but unreported.
Why is it difficult to measure Black Money?
According to the Standing Committee’s report, the sectors that see the highest incidence of black money include real estate, mining, pharmaceuticals, pan masala, the gutkha, and tobacco industry, bullion and commodity markets, the film industry, and educational institutes and professionals.
As the report also notes, neither are there reliable estimates of black money generation or accumulation and nor is there an accurate well-accepted methodology to make such an estimation.
The estimates of the black money in the system provided by the Standing Committee vary from 7% of GDP to 120% of GDP, highlighting the wide variance in the methods of estimation.
What are some of the methods used?
The monetary method:
This method assumes that the existence of and changes in the share of unaccounted income is reflected in the stock or flow of money in the system. In other words, track the money in the economy and you’ll get an idea of how much has not been accounted for.
Global indicator or input-based method:
In this method, unaccounted income is modelled using a single universal variable with which it is assumed to be highly correlated, therefore these estimates are also called input-based estimates. Basically, the estimated level of activity in these indicators is compared to the reported level of GDP to arrive at an estimate of under-reporting.
One common input used in this method is the quantity of land freight transport. The idea is that matching the actual amount of freight transported in the country to the reported amount of economic activity in the related sectors could give an estimate of how much is not being reported.
A third method to measure black money is a straightforward survey. This one, however, requires voluntary information from people and businesses concealing their incomes and so is prone to inaccuracies.
How can the government curb black money?
There are several ways and the first is through legislative action.
The government has already enacted several laws that seek to formalise the economy and make it necessary to report economic transactions. These include:
Central Goods and Services Tax Act, the various GST Acts at the State levels, Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, Benami Transactions (Prohibition) Amendment Act, Fugitive Economic Offenders Act 2018
Other Measures to curb the menace of black money:
Another method employed by the government to make it harder for transactions to be hidden is to mandate the reporting of PAN for transactions of more than ₹2.5 lakh.
The prohibition of cash receipts of ₹2 lakh or more and a penalty equal to the number of such receipts if a person contravenes the provision.
The Income Tax Department has also started monitoring non-filers of income tax returns using third-party information to identify persons who have undertaken high-value financial transactions but not filed their return.
Source: The Hindu