The Causes of Black Money Generation

Topics: Tax, Progressive tax, Taxation Pages: 7 (2485 words) Published: January 20, 2013
Causes for Generation of Black Money
There are several factors responsible for the emergence – of black money. It would be relevant to discuss those factors so that a correct understanding about the genesis, growth and expansion of black money can be made. The principal factors are: (i) Beginning of the evil: The beginning of this evil can be traced to the Second World War. During this period supplies of industrial goods from the traditional suppliers of the West were cut off. This resulted in severe shortages in many vital lines. The British Government indulged in large inflationary finance for war efforts. This led to price escalation. Taxes too were raised sharply on higher incomes and excess profits. In these circumstances many indulged in black marketing. And at the same time, they evaded taxes. Huge profits were made in respect of goods that were in short supply. This created a psychology of making money out of shortages and not out of production / expansion of sales. These circumstances and the psychology formed the backdrop of what followed subsequently. (ii) Controls and licensing system: The system of controls, permits, quotas and licenses which are associated with misdistributions of the commodities in short supply results in the generation of black money. The Wanchoo Committee explaining this factor as a source of black money observed, “In spite of the vigilance exercised by the Government, controls and regulations came to be used by the unscrupulous for amassing money for themselves. Since considerable discretionary powers lay in the hands of those who administered controls~ this provided them with a scope for corruption – ‘speed money’ for turning a blind eye to the violation of controls. All this gave rise to trading in permits, quotas and licenses, malpractices in distribution and in the process; it generated sizeable sums of black money.” Price and distribution controls have in the past led to the generation of black money on a significant scale. Any price control without any adequate machinery of distribution and speedy arrangement for increasing supplies is potentially a source of black money generation. Rent control leads to “pugree system” and is, therefore, another source of black money. Similarly, the system of licenses requires large number of inspectors for completing various formalities and thus good amount of hush money has to be paid. Where controls are not implementable, they have led to harassment and black money generation. (iii) Tax structure: High tax rates and defective tax structure have also been responsible for the existence of black money to a large extent. Take for instance direct taxation. Till recently the tax on income and on wealth was very high to invite evasion. The marginal rate of income tax was as high as 75 per cent. And when it was combined with the tax on wealth, it was still higher. For example, for a person with net wealth ofRs.12 lakh, the combined tax rate came to 95 per cent. And for a person with a net wealth exceeding Rs.18 lakhs, the marginal tax rate exceeded cent percent. This was the situation in respect of personal taxation until a decade ago. The corporate tax rate too was very high. In these circumstances the temptation / gain from tax evasion was substantial. Even in the case of indirect taxes the situation is no better. In fact worse, as the revenue from these taxes constitutes a big proportion of all the tax revenues. For example, in the case of government, revenue from customs and central excise duties has been as much as 80 per cent of the total revenue. Hence even a small fraction of the evaded tax runs into crores of black money. According to the National Institute of Public Finance Policy the excise evasion is rampant in such sectors as copper, cotton fabrics and plastics. It is also suggested by the Institute that the tax-evasion through the underestimation of production and sales is most pronounced in manufacturing, trade, hotels and restaurants....
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