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 a parallel economy. Actually, it should be considered as part of income and wealth which is outside the control of the Reserve Bank of India or outside the control of various rules, regulations, and control of the Indian Government. It functions parallel to the economy whether income is generated by way of tax evasion or other means like corruption, bribery, or normal functions outside the monetary control system. It knew as the “Black Economy, Illegal Economy’, ‘Uncounted Economy’, ‘Unreported Economy, ‘Unsanctioned Economy’ etc. (BCom Parallel Economy Notes Study Material)

It is termed a parallel economy because it runs ‘Parallel rather than in contradiction with declared social objectives. It ignores the basic objectives of economic planning in India. Black money generated through a parallel economy is not reported to Government but engaged in production, consumption, trade, and store of wealth. The transactions in the 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 the 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 a parallel economy are:

(i) Inflationary Effect: The income which is not controlled by the monetary system and is outside Government control is used for conspicuous consumption. When some on getting black money, he does not have value for the money and spends part of it on rich food, going to hotels 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 a tendency to spend unaccounted money on marriages, showing off, and the like. This tendency though increases the demand for many products and it makes inflationary pressure.

(ii) Division of Society: Parallel Economy divides the society into haves and not the haves and increases the disparity of income which results in class conflicts and dissatisfaction among those who do not have it. (BCom Parallel Economy Notes Study Material)

(iii) Evasion of Taxes: The financial transactions in the 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. It adversely affects on Govt. budget.

(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 another part from unaccounted money (Black money). Thus, the value of property recorded for registration is under-reported and the Government losses stamp 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 lose revenue. (BCom Parallel Economy Notes Study Material)

(v) Adverse Effect on the Economy: The parallel economy has multiplied adverse effects 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 a parallel economy has a 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 the criminalization of politics.

In the 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 realize customs duty on such smuggled products. (BCom Parallel Economy Notes Study Material)

CAUSES OF PARALLEL ECONOMY

There is some degree of the parallel economy all over the world largely for the greed for money and saving taxes and customs 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 money at home is also an important cause. (BCom Parallel Economy Notes Study Material)

(i) Agricultural Economy: In India agriculture is a very important part of GDP but is exempted from income tax and other taxes. In rural areas there are 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 a shortage of essential goods during the second world war, and many suppliers started black marketing products which are short in supply. During the war period, the British Government imposed more taxes, which resulted in the evasion of taxes by the businessmen. In all cases, there were chances to earn black money easily.

(iii) Price Control: When India experienced a shortage of many products second world war and thereafter price and distribution controls were imposed on a large number of products like cement, steel, paper, sugar, and 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: The government of India imposed heavy restrictions on the outflow of foreign exchange. The Government also desired that all flow of foreign exchange should be through the official channel. The official exchange rate was much lower than the market rate. Sometimes the difference was as high as 50 percent or more. Thus, people who wanted dollars, they were purchased them at the market rate. There are some other sources of black money like underreporting exports, over-invoicing of imports and transfer funds, etc. (BCom Parallel Economy Notes Study Material)

(v) High Rate of Taxation: In India, the rate of excise, customs, and income tax is very high. The high rate of these taxes induces the public to avoid a declaration of exact income. This evasion largely goes unchecked and thus, sets in a chain reaction for the 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 the industry is being forced to make political donations. For a 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 in the wrong way and no one objected to it.

(vii) Illegal Real Estate Transactions: In real estate constructions, purchases and transfers 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 the full amount in accounted money. All the big builders pay to hush money for allotment of a particular site resulting in the creation and transfer of illegal money, very often buildings are not constructed as per the site plan, and thus to get a completion certificate again big amount has to be paid to concerned officers. (BCom Parallel Economy Notes Study Material)

In the case of the transfer of the real estate, both parties agree to make transactions at a 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, commissions, etc. by corrupt politicians and Government servants. (BCom Parallel Economy Notes Study Material)

(ix) Ineffective Enforcement of Tax Laws: Govt. of Indian and State governments have imposed various tax laws pertaining to income tax, and 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 the recording of exact transactions. Thus, the soft attitude towards tax compliance by tax authorities has led to the generation of unreported money. (BCom Parallel Economy Notes Study Material)

(x) No Punishment to Defaulters: The Government has set up a number of organizations to curb corruption like CBI and the vigilance commission. There are also heavy penalties for corruption under various acts 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 the maximum amount of easy money which is the single largest cause of increasing corruption and the mounting amount of unaccounted money in the system. (BCom Parallel Economy Notes Study Material)

EVOLUTION OF A POLICY PACKAGE TO CONTROL PARALLEL ECONOMY

In the structure of a 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 emphasized this in his premenstrual 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 liberalization 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 the cost of living etc. Obviously, reducing rates of direct taxes or providing more and more legal avenues of tax avoidance considerably reduces the overall burden on business classes and the 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 forces, and should, therefore, be withdrawn. But the logic of the Dagli Committee is not to abolish price controls but to rationalize 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 an investment in real estate. Speculation in the 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 the black money system is to appropriate the gains from property speculation. (BCom Parallel Economy Notes Study Material)

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 legalization of urban property transactions. The basic idea can, therefore, be put in a nutshell: neither nationalization nor “ceiling’ on urban private property; but nationalization of all private transactions in urban real estate. Thus, the ultimate aim of this suggestion is to limit the investment of black income in real estate.

(v) Establishment of the Institution of Ombudsman: For a long time in India the institution of an ombudsman has been required, on the pattern on the basis of the recommendations of the Administrative Reform Commission (1966), a Lokpal Bill was introduced 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 law. The bill, however, excludes from its preview, the President and Vice-President of India, and the Speaker of Lok Sabha. the Chief Justice of India or any other Judges of the 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 the 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 the 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, Himachal 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 is that, while political leaders talk of maintaining integrity and honesty when it comes to brass tracks, they create hurdles to passing legislation binding them to social norms. Today the crucial issue, the relationship develops between the capitalist classes, the bureaucracy, and the political structure is a big hurdle for the economy. (BCom Parallel Economy Notes Study Material)

MEASURES TAKEN BY THE 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 effects 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 the generation of black money towards the parallel economy. To curb this practice Government has formed various committees such as the Administrative Reforms Commission (1969), the Direct Tax Enquiry Committee (1971), and Kelkar Tax Reforms Committee (2002). The committees have suggested various measures to check tax evasion and the Government is still trying to implement these suggestions. (BCom Parallel Economy Notes Study Material)

(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 the highest slab rates without disclosing his source of income and without paying any penalty. The scheme does not show very good results but later on, it picked up very well.

(iii) Reduction in Tax Rates: Govt. of India has reduced tax rates and amended 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 the small and marginal taxpayers and senior citizens. The budget (2014-15) proposed to increase the 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, the budget proposed to raise the exemption limit from Rs.2.5 lakh to 3 lakh in the 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 easily understand and reduce unnecessary control in the form of licenses, permits, quotas, subsidies, etc.

(v) Special Bearer Bond Scheme (SBBS): Under this scheme, any holder of black money or unaccounted money purchases these bonds without being questioned about his source of income and identity. According to SBBS 1981 face values of 10,000, each was issued for a period of ten years at a 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 the deposit will 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 elections to discourage political parties from accepting donations from businessmen, traders, big business houses, industrialists, etc.

(viii) Tax Deduction at Source (TDS): The government of India has created a provision for TDS. It can be deducted at source in case of income from salary, casual incomes like the lottery, crossword puzzles, bating, horse-race, etc; interest of deposits, interest on securities, bonds, etc. This system helps in checking the 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 the Swiss Bank. It has been estimated that India has the amount of $ 1,456 Billion stacked in Swiss Bank accounts. Narendra Modi has announced many times about bringing black money from Swiss Bank but it will be time taking process. (BCom Parallel Economy Notes Study Material)

BCom Parallel Economy Notes Study Material

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