BLACKMONEY – Should there be a
policy to convert black money to white ?
Sourav Agarwal 07927803
07927816 Ramesh Thamotharan
ENVIRONMENTAL ECONOMICS AND POLICY

What is Black Money ?
• Concept
• How does it flow in the Economy ?

Why Black Money is Generated ?
1. Tendency of people to increase Purchasing Power.
2. Conducting Transaction illegal in nature.
3. Inflation.
4. Corruption.
5. Laws.
6. Perception about Government.

Government, Its Policy, and
Black Money
Government is a expected to function for
maximum good of all.
Not possible !!
Deviations do Exist and so do Anarchicts.
Government should act as a regulator and
interfere as minimum as possible.

Parallel economy as % of GDP
• Developed countries – 8 to 20 %
• Transition countries – 20 to 30 %
• Developing countries – 25 to 50 %

Size of parallel economy
• Rs 3034 crores in 1967-68
– 9.5 % of GDP
• Rs. 46,867 crores in 1978-79
– 49 % of GDP
– a 15-fold increase in 12 years
• During 80s parallel economy grew faster than
the GDP
– 46.7 % vs 40 % (between 1980 and 1989)

Impact
• High taxes result in cash transactions that go
unaccounted
• Under-declaration of deals skews market info
• Affects the process of capital allocation
• Upsets accuracy of economic forecasts
• Erosion of public confidence on the system
that leads to a vicious cycle

Have there been policies?
• Tax amnesties have been provided
• Permanent (Settlement Commission) and
temporary (VDIS)
• To promote better tax compliance
• In return for immunity from prosecution

Tax Amnesties in India
Year Authority Income Revenue Total % of total
disclosed Collected Revenue revenue
(INR Crores) (INR Crores) (INR Crores)
1951 N/A 70.20 10.89 N/A N/A
1965 Finance Act 52.18 30.80 N/A N/A
1965 Finance Act (2) 145.00 19.45 N/A N/A
1975 Voluntary 1587.89 249 2204 11.29
Disclosure
1985 Finance Act 10778.34 458.79 11858 3.87
1985
1997 Finance Act 33776.90 9729.02 38895 25.01
1997

The participants believe
• Black money cannot be eradicated altogether
• Although black money goes unrecorded it still
trickles down to improve level of well-being
• Participants feel so because
– It provides G&S that are sometimes unavailable
formally
– It lubricates the working of the formal economy
– Helps realize entrepreneurial endeavours

Would regulations help ?
• Frequent tax audits and high penalties for
evasion
• Incentivisation of above-board transactions
• Value Added Tax (VAT) encourages better
compliance
• Vigilance helps to a large extent (RTI, CVC)
• Risk of being caught is not worth taking
beyond a point

Are we getting there ?
• High value transactions demand PAN
• Cash transactions should be discouraged
• Tax structures are being rationalized
• Deductions will be phased out
• Tax payment process has been simplified

The way out
• Why should there be a policy?
– Size of the parallel economy is reason enough
– The economic impact of not having one is very
high
• How should the policy be ?
– A mix of temporary and permanent provisions
– More incentives for above-board transactions
– Coupled with reduced taxes and better vigilance

THANK YOU