BCom Parallel Economy Notes Study Material
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BCom Parallel Economy Notes Study Material
MEANING OF PARALLEL ECONOMY
There is no agreed or accepted definition of parallel economy. Actually, it should be considered as part of income and wealth which is outside the control of Reserve Bank of India or outside the control of various rules, regulations and control of Indian Government. It functions parallel to economy whether income is generated by way of tax evasion or other means like corruption, bribery, or normal functions outside monetary control system. It also known as “Black Economy, Illegal Economy’, ‘Uncounted Economy’, ‘Unreported Economy, ‘Unsanctioned Economy’ etc.(BCom Parallel Economy Notes Study Material)
It is termed as parallel economy because it runs ‘Parallel rather than in contradiction with declared social objectives. It ignores the basic objectives economic planning in India. Black money generated through parallel economy is not reported to Government but it engaged in production, consumption, trade and store of wealth. The transactions in parallel economy are not recorded in books of accounts and the profits earned from its investment remain outside the system. This leads to further evasion of taxes, thereby adversely affecting the Government budget.(BCom Parallel Economy Notes Study Material)
DEFINITIONS
Some important definitions of parallel economy are as given below:
“Black money is aggregate of incomes which are taxable but are not reported to tax authorities.” -National Institute of Public Finance and Policy
“The black money income is the sum total of transactions deliberately kept out of the books of accounts by households and business in the economy.” -Dr. Raja Chelliah
“Parallel economy poses a serious threat to stability and growth of the official economy.” -D. K. Rangnekar
EFFECTS OF PARALLEL ECONOMY
The main effects of parallel economy are:
(i) Inflationary Effect: The income which is not controlled by the monetary system and is outside Government control used for conspicuous consumption. When some on get black money, he does not have value for the money and spends part of it on rich food, going to hotel and tours, buying expensive consumable goods like garments, furniture, houses, Gold or other durable and non-durable goods out of proportion of legitimate income. There is tendency to spend unaccounted money on marriages, show off and the like. This tendency though increases the demand of many products and it makes inflationary pressure.(BCom Parallel Economy Notes Study Material)
(ii) Division of Society: Parallel Economy divides the society into haves and not haves and increase disparity of income which results in class conflicts and dissatisfaction among those who do not have it.
(iii) Evasion of Taxes: The financial transactions in parallel economy not recorded in books of accounts and the profits earned from its investment remain outside the system. This leads to further evasion of taxes. It adversely affects on Govt. budget.(BCom Parallel Economy Notes Study Material)
(iv) Loss of Revenue: When permanent assets are purchased from ill-gotten wealth often purchase value is under recorded, only part of the payment is made from accounted money (White money) and other part from unaccounted money (Black money). Thus, the value of property recorded for registration is under reported and Government losses stamps duty on that part.
When unaccounted money is generated through under-reporting of production it leads to evasion of excise duty and sales tax on its sales. Thus, both the Central and State Governments loose revenue.
(v) Adverse Effect on the Economy: The parallel economy has multiplied adverse effect on the economy. It has given big money power to a limited number of people who use part of it. It affects money circulation when parallel economy has considerable proportion of money supply in its control. When black money is used to support criminals or corrupt politicians in illegal activities it increases crimes and criminalization of politics.
In case of smuggling of goods to create black money it adversely affects domestic producers. Many domestic industries like electronics, computers, textiles etc. have suffered because of it. Further Government is not able to regulate and is not able to realise customs duty on such smuggled products.
CAUSES OF PARALLEL ECONOMY
There is some degree of parallel economy all over the world largely for greed of money and save taxes and custom duties. Actually, the biggest cause of parallel economy is human greed for money. But in countries like India lack of banking facilities and the habit to keep the money at homes is also an important cause.
(i) Agricultural Economy: In India agriculture is very important part of GDP but which is exempted from income tax and other taxes. In rural areas there is not enough banking facilities, therefore all funds are not kept in bank deposits which makes part of the rural income outside the banking system and organized money and capital markets.(BCom Parallel Economy Notes Study Material)
(ii) Shortages during Second World War: There was shortage of essential goods during second world war, many suppliers started black marketing products which are short in supply. During war period British Government imposed more taxes, which resulted in evasion of taxes by the businessmen. all cases there was chances to earn black money easily.
(iii) Price Control: When India experienced shortage of many products second world war and there after price and distribution controls were impose on a large number of products like, cement, steel, paper, sugar, chemicals There were some loopholes in their administration, it gave chance to producers and traders to sell part of the supplies above the controlled price. However, the extra price could not be shown in books of accounts to save oneself from penalty under price and distribution controls. Hence black money was generated.
(iv) Foreign Exchange Regulation: Government of India imposed heavy restriction on outflow of foreign exchange. The Government also desired that all flow of foreign exchange should be through official channel. The official exchange rate was much lower than market rate. Sometimes difference was as high as 50 percent or more. Thus, people who wanted dollars, they were purchased it on market rate. There are some other sources of black money like, under reporting exports, over invoicing of imports and transfer funds etc.
(v) High Rate of Taxation: In India the rate of excise, customs and income tax are very high. The high rate of these taxes induce public to avoid declaration of exact income. This evasion largely goes unchecked and thus, sets in a chain reaction for generation of black money at the wholesale, retail as well as production levels.(BCom Parallel Economy Notes Study Material)
(vi) Political Finance: Various political parties need huge funds for election expenditure. So industry is being forced to make political donations. As for long time political contribution was prohibited under the Companies Act, it had to be financed almost wholly from black money. If a business house donated some amount of money it generated many times more by wrong way and no one object it.
(vii) Illegal Real Estate Transactions: In real estate constructions, purchases and transfer there are various types of illegal activities because no one is willing to pay full price in accounted money and if someone wants to pay so the seller is not willing to accept full amount in accounted money. All the big builders pay hush money for allotment of a particular site resulting in creation and transfer of illegal money, very often buildings are not constructed as per site plan and thus to get a completion certificate again big amount has to be paid to concerned officers.
In case of transfer of real estates, both parties agree to make transactions at the lower price while settling the rest amount in cash. Thus, the scope of generating black money gets increased.(BCom Parallel Economy Notes Study Material)
(viii) Corruption: The big deals of purchases contracts and projects are decided by corrupt politicians and public servants. Sometimes thousands of crores are involved and one who gets the deal earns huge profits. Therefore, for big projects and purchases a big amount has been offered and many cases have been reported in State Assemblies and Parliament from time to time regarding accepting bribes, kickbacks, commission etc. by corrupt politicians and Government servants.(BCom Parallel Economy Notes Study Material)
(ix) Ineffective Enforcement of Tax Laws: Govt. of India and State Government have imposed various tax laws pertaining to income tax, sales tax. stamp duties, excise duty etc. but their enforcement is very poor due to wide. spread corruption in these departments. The high rate of these taxes and weak enforcement induces businessmen to avoid recording of exact transactions. Thus, he soft attitude towards tax compliance by tax authorities has led to generation of unreported money.(BCom Parallel Economy Notes Study Material)
(x) No Punishment to Defaulters: The Government has set up a number of organisations to curb corruption like CBI and vigilance commission. There are also heavy penalties for corruption under various act and the courts have the powers to penalize those who are found guilty. But a corrupt official politician is left off without any or little punishment, it encourages others to corrupt. When one feels that there is no punishment, he wants to make maximum amount of easy money which is single largest cause of increasing corruption and mounting amount of unaccounted money in the system,
EVOLUTION OF A POLICY PACKAGE TO CONTROL PARALLEL ECONOMY
The structure of mixed economy that prevails in India, the main objective of national economic policy is controlling black money and tax evasion. Our Prime Minister Mr. Narendra Modi has been emphasized on it by his priministrial speech. There are some measures suggested for controlling the parallel economy in India:
(i) Rationalisation of Tax Structure: In this regard various economists are aimed at reduction of tax rates. The marginal tax rates on higher incomes should be reduced, there should be liberalisation of tax laws regarding depreciation and writing off of capital. There should be complete exemption of savings from taxation and direct taxes should be indexed to cost of living etc. Obviously, reducing rates of direct taxes or providing more and more legal avenues of tax avoidance considerably reduce the overall burden of business classes and common man.(BCom Parallel Economy Notes Study Material)
(ii) Removal of Controls that are considered Unnecessary: A school of thought believes that controls and licensing procedures are all unnecessary, they hinder productivity, obstruct the free play of market forced and should therefore, be withdrawn. But the logic of the Dagli Committee is not to abolish price controls, but to rationalise them and support them with an effective system of distribution.
(iii) Appropriation of the Gains of Investment of Black Income in Real Estate: A very significant outlet for black income is investment in real estate. Speculation in real estate business is unchecked in urban areas. These investments result in very high “Capital Gains”. A very large portion of black income gets congealed in such residential buildings. Dr. Amit Bhaduri suggested that the most effective way to attack black money system is to appropriate the gains from property specialation. He, therefore recommends the selling up of a corporation in each state and the Union Territory to deal in transactions in real estate property, where all private buyers and sellers will have to transfer through the corporation for legalisation of urban property transactions. The basic idea can, therefore, be put in a nutshell: neither nationalisation or “ceiling’ on urban private property; but nationalisation of all private transactions in urban real estate. Thus, the ultimate aim of this suggestion to limit the investment of black income in real estate. (BCom Parallel Economy Notes Study Material)
(v) Establishment of the Institution of Ombudsman: For a long time in India the institution of ombudsman has been required, on the pattern on the basis of the recommendations of the Administrative Reform Commission (1966), a Lokpak Bill was introduction in the Lok Sabha (1968-69). The Bill was passed by the Lok Sabha, but could not be passed in Rajya Sabha. However, it has not been passed so far to become a law. The bill, however excludes from its preview, the President and Vice-President of India, the Speaker of Lok Sabha. the Chief Justice of India or any other Judges of Supreme Court, The Comptroller and Auditor General of India, the Chief Election Commissioner and other Election Commissioner and the chairman and the other members of Union Public Commission. It may be noted that eight unsuccessful attempts have been made so far to pass legislation in the parliament to make it mandatory for ministers and legislators to ensure annual declaration of their assets and liabilities.
However Lok Aayukta, the Ombudsman at the State level has been set up in Andhra Pradesh, Bihar, Gujarat, Himanchal Pradesh, Karnataka, M. P., Rajasthan and U.P. but in several states, for several years, the Lok Aayukta was not appointed. A study made by Shukla and Singh (1988) observed that, “while the institution has potentiality and scope for operation, it may or may not be allowed to operate freely by other structures/systems of the society.”
The hard reality that, while political leaders talk of maintaining integrity and honesty, but when it comes to brass tracks, they create hurdles to pass legistiation binding them to social norms. Today the crucial issue, the relationship develops between the capitalist classes, the bureaucracy and political structure are big hurdles for the economy.
MEASURES TAKEN BY GOVERNMENT
The Government has always shown concern to curb black money because it erodes the power and authority of the Government and leads to undesired affect on the economy. The various measures taken by Government to check tax evasion and black money are as below:
(i) Checking Tax Evasion: Tax evasion is a measure cause of generation of black money towards parallel economy. To curb this practice Government has formed various committees such as Administrative Reforms Commission (1969), Direct Tax Enquiry Committee (1971) and Kelkar Tax Reforms Committee (2002). The committees have suggested various measures to check tax evasion and Government is still trying to implement these suggestions.
(ii) Voluntary Disclosure Scheme (VDS): In 1951, it was the first time when Govt. of India introduced the VDS scheme. This scheme allows a person to declare his black money by paying tax at highest slab rates without disclosing his source of income and without paying any penalty. The scheme not show very good result but later on it picked up very well.
(iii) Reduction in Tax Rates: Govt. of India has been reduced tax rates and amendment in tax slabs many times. These high tax rates were gradually brought down. However, in Union Budget 2014-15 there was no change in the tax rates but it provides relief to small and marginal taxpayer and senior citizens. The budget (2014-15) proposed to increase personal income tax exemption limit by Rs.50,000 that is from Rs.2 lakh to 2.5 lakh in the case of individual taxpayers who are below the age of 60 years. Similarly, budget proposed to raise the exemption limit from Rs.2.5 lakh to 3 lakh in case of senior citizens. The education cess for all taxpayers is continue at 3 percent.
(iv) Simplification in Tax Provisions: Govt. has simplified tax provisions and tax forms to easy understand and to reduce unnecessary control in the form of licences, permits, quotas, subsidies etc.
(v) Special Bearer Bond Scheme (SBBS): Under this scheme any holder of black money or unaccounted money purchase these bonds without being questioned about his source of income and identity. According to SBBS 1981 of face value of 10,000 each were issued for a period of ten years at rate of interest of 2% per annum.(BCom Parallel Economy Notes Study Material)
(vi) National Housing Bank Scheme: NHBS was introduced in 1991-92. Under which person could make deposits with National Housing Bank and person depositing money does not have to disclose his source of income. 40% of deposits bill be deducted by the Government in the form of tax.
(vii) Control on Election Expenses: Election Commission of India has put a limit on election expenses for canvassing during election to discourage political parties from accepting donations from businessmen, traders, big business houses, industrialists etc.(BCom Parallel Economy Notes Study Material)
(viii) Tax Deduction at Source (TDS): Government of India has been created a provision for TDS. It can be deducted at source in case of income from salary, casual incomes like, lottery, crossword puzzles, bating, horse-race etc; interest of deposits, interest on securities, bonds etc. This system helps in checking evasion of tax.(BCom Parallel Economy Notes Study Material)
(ix) Bringing Black Money from Swiss Bank: It is the common agenda of current Modi’s Government. Recently due to international pressure, the Swiss Bank agreed to disclose the names of account holders. But it is not enough to bring black money from Swiss Bank. It has been estimated that India has the amount of $ 1,456 Billion stacked in Swiss Bank accounts. Narendra Modi has been announced many times about bringing black money from Swiss Bank buy it will be time taking process.(BCom Parallel Economy Notes Study Material)
BCom Parallel Economy Notes Study Material
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BCom Parallel Economy Notes Study Material