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INTRODUCTION

In the present situation Indian Government is facing many economical and political problems.

The economical problems like

’ Inflation
’ oor educational standards
’ oor Infrastructure
’ Corruption
’ Tax Evasion
’ Existence of ³Black Money´
’ Balance of ayments deterioration
’ ½igh levels of debt
’ Inequality has risen rather than decreased
’ ëarge Budget Deficit
’ Illegal import

olitical roblems like

’ Terror attacks from outside

’ ar threats from akistan, China
’ Terror attacks within India like Maoist
’ Boundary problems with akistan and China
’ roblem in Kashmir

Over here I would like to discuss the economical problems of India. India is well known for its
corrupt officers and politicians irrespective of their post they have. India is having all its
economical problems mainly because of two aspects. One is corruption and the other is
existence of ³Black Money´. If Corruption and Black Money is removed most of the
economical problems would be removed and moreover some of the political problems can be
solved.

Corruption is found not only in India. It is found throughout the world. All the countries are
fighting to stop corruption. But they are not able to find a solution to stop it.

Because of corruption ³Black Money´ exists. ³Black Money´ it doesn¶t means that it¶s black in
color. Money which is unaccounted or not the proper tax is paid where the tax has to be paid.

But arguing whether black money or corruption came first it¶s like whether egg or chicken came first,
is not necessary over here. We are in a situation to get out of both.

CORRUTION
³Corruption is the abuse of entrusted power for private gain. It hurts everyone whose life,
livelihood or happiness depends on the integrity of people in a position of authority´.

- Transparency International
Corruption is a source of income for the people of the government department made them
susceptible, bringing with it more inefficiencies and the easy way of making money with less or no
accountability. The crime of corruption is easily forgotten, the law offers easy way back into the
mainstream and acceptance by the society. In addition to that it is the lure of luxury, personal status
enhancement and the false sense of elitism that makes the corrupt vulnerable to illegal and unethical
means of acquiring wealth.

Indian society still has a cultural setup of having the "man of the house" to work for a living, while the
wife usually deals with the household work, and this puts a pressure on the man to make the living
more luxurious. The routine jobs are usually for life-long, with the support of a union there is a lesser
fear of losing the job and there is the pressure of dealing with rising prices of commodities and
sponsoring future education of children. The society, the social upbringing, the culture and a general
greed also plays a critical role in influencing a timid mind. The lack of instincts and to avoid the time
consuming bureaucratically setup of the organization, the corruption may be a easy way out for
people who bribe to make things happen.

ëEVEë OF CORRUTION IN INDIA

In India corruption is found from the bottom level of the organization from Gate keeper, pun to the
high profile of the organization, among commissioners, police inspectors, traffic police, stock
exchange brokers, recruiters, sportsmen, judiciary and the government employees in municipal
offices, military establishments and also in government contracts corruption is seen and felt in every
transaction from bottom of the chain till the top.

In India we can¶t find any government department without corruption. In recent time we are finding
corruption in the private sector also.

If anyone wants to get a certificate right from birth to death he has to pay corruption along with the
government fees which will not be mentioned in the application. A person is paying corruption fees
because he wants those certificates which are necessary for him. So the government officers are
taking an advantage over him. Even though if he is not in urgent also he has to pay the corruption
fees else we won¶t those certificates throughout his life time.

Note: All in the sense, who are all involved in corruption. Not all the government employees.

½ CORRUTION««««..?

FROM T½E OINT OF CORRUT EMëO EES

Indian government does not pay much for their low carder employees, whereas their needs and wants
are much, which they can¶t satisfy or get with that low income. So automatically they are looking for
another alternative source of income. That is Corruption, by which they are getting their things.

Moreover, if they want earn more, and then they have to be in a high post. If they want to get those
posts also they have to pay the corruption fees to their selector. They are thinking that it¶s an
investment. So later on they are getting their returns. If that person is already a government employee
then he has to pay less where as if that person is new then he has to pay more when comparing to
the old government employee who is ready to pay for that post. This is one case.

But most of them are waiting to get the high posts, where they are ready to pay whatever the
corruption money may be. Because they know what kind of return they are going to get back by way
of corruption. It does not apply for getting new post. It also applies for getting the transfer also.

So whoever is going for the government job they have to pay the corruption fees. Also they want to
get that back, they are charging other. So it became a chain. Now we are seeing its effect in all the
government departments which have hampered the countries growth in a very large extent.

FROM T½E OINT OF OëITICIANS

If a person wants to become rich very quickly then the right job is becoming a politician. For that he
has to spend large amount money and time for branding himself. Moreover if a person wants to stand
for post right from a ward councilor to M.P he has to spend huge amount of money from his pocket for
camping, posters, public meetings, etc.,

After wining in the election he is doing all kind of corruption activities first to get back those expenses
which were his investments. Later he does because he wants return on his investment. On this due
course all the government employees and people under him are getting the benefits.

FROM T½E OINT OF GENERAë UBëIC

If a person wants to get any job done from the government office, which would take much time, where
he is not ready to wait for such a long time or he may not be having the necessary papers that are
needed. Then he voluntarily pays some money to get his job done.

Also if a person does not want to involve in any activities or in any case (crime activities) then he is
ready to pay the money to get out of that. Moreover if a person is going against the rules and
regulation or if he is not paying the taxes properly or if he is involving in any kind of illegal activities
and don¶t want to caught means, then the magic is very simple. If he is ready to pay a portion of the
benefits (in terms of money) to the government employees as corruption then they will be keeping
quite. Moreover they will give you more ideas how to do those activities more cleverly.

A SMAëë EFFECT OF CORRUTION

The World Bank has suspended $800 million worth of loans to India's health sector after detecting
corruption in procurement. Fair enough: corruption should be checked. Yet, if corruption is really a no-
no, the Bank should stop almost all lending to India, so widespread is corruption here. The Bank may
have just discovered corruption, but it is no news at all to the public....
Source: http://hubpages.com/hub/Stop_CorruptionSave_India

INDIA¶S RANK IN CORRUTION

Transparency International, the global voluntary organization is fighting against corruption. Its main
motive is to bring people together in a powerful worldwide coalition to end the devastating impact of
corruption. TI¶s mission is to bring the world without the corruption.

Transparency International challenges the inevitability of corruption, and offers hope to its victims.
Since its founding in 1993, TI has played a lead role in improving the lives of millions around the world
by building momentum for the anti-corruption movement. TI raises awareness and diminishes apathy
and tolerance of corruption, and devises and implements practical actions to address it.

They are the countries according to the level of corruption on a scale of 0 ± 10. If a country gets 10
then it shows the country is very clean. But if a country gets 0 then it shows that the country is highly
corrupt. Also they have given rank to each and every country according to that scale. If a country gets
st
the 1 rank then the country is very clean and last rank shows highly corrupt.

Right now they are having ³Corruption Perceptions Index 2010´. For this they have taken 178
countries. In this index countries like Denmark, New Zealand, and Singapore are in rank 1 with score
of 9.3. Whereas countries like India, Albania, Jamaica and Liberia are in the rank of 87 with the score
of 3.3.

This shows how India has been corrupted.

Source: http://www.transparency.org/c

This video will show you a sample of corruption.

http://www.youtube.com/watch?v=HHlsfL2X40Y&feature=player_embedded#!

TAX EVASION CREATES ³BëACK MONE ´

No one in the world is ready to pay taxes. Indians are not in the exemption list. When we ask anyone,
³Why you are not paying the taxes properly?´

Then the possible reply may be ³I not getting any benefit out of the tax that I am paying. Also it¶s an
expense for me and it would result in the reduction of my assets.´

Other possible reply me, ³How does it going to make any difference if I pay and others don¶t pay?´
In India if take 10,000 transactions, taxes paid properly not more than 1%.

Some examples of major tax evasion transactions

- Purchase of land.
- Purchase of any materials or goods from an unorganized sector where the role of government is
very little or no role.

Some examples where taxes are paid fully

- Sale of petrol, diesel, LPG, Turbine fuel, Kerosene.

- Goods produced and sold by government and government owned companies.
- Some companies ± where they can¶t maintain the accounts

Here the taxes are paid fully because, the company is owned by the government. So its
employees are not getting any benefits even if they involve in tax evasion.

FOR INDIRECT TAXES

Taxes (Indirect Taxes) are not paid for most the goods and services that are sold in India. So people
are getting the goods and services at a lesser price. Because of this if a particular person or a
shopper keeper puts all the taxes in his bill and sells the goods no one will buy his goods. Then he
has to close down his shop and go to home without and business. In order to sell his goods, he is
selling the goods without adding all the taxes. This is the mentality of the people. One can change
their mind set. Even if except a change, then we are fools. It¶s just like expecting a thief that he will not
steel from today. In realistic this is not possible. Likewise, expecting people to ask the shop keeper to
charge all the taxes is not possible. Nowadays, if go and ask a rate a particular product there are two
rates i.e. one with taxes and another without taxes.

Here all the government officials like sales tax people knows which shop keeper is selling and
services with tax and without. But the sales tax officers are keeping quite because they are getting
their corruption regularly. There will be a problem for the keeper for the sales tax people only when
did not may his corruption payment on time. Else also don¶t have any problem.

This is well known to all. I am not telling anything new. If this is shocking to you means then you are
not updated with current market conditions. This is even known to the President and Prime Minister of
the country. But what to do? We need some solution to get out this.

So all the profits that, both the buyer and the seller of the goods and services are turning to be ³Black
Money´. This is the major problem in all the economy.

FOR DIRECT TAXES

There are many possible ways of tax evasion in India. One simple way I can tell. If a person has a
land even a waste land i.e not suitable for agriculture, he can involve in tax evasion. The trick is very
simple. He can earn through other source but he for the income tax he can tell that he earned that
money through agricultural activity where the tax rate is 0%. It is not necessary to own a land. Even
he can tell that he got the land on lease. Preparing a false document is a not big task that too in India.

As per the income tax act, government is expecting all the persons to file their income tax returns
voluntarily and to pay the taxes. Moreover the government doesn¶t have all the evidence what an
individual is earning. Expecting voluntarily to pay the taxes is foolish. Government should have all the
evidence that, what every individual is earning?
TAX A ERS IN INDIA

The sad part over here is, as of today the population of India may be more that 120 corers. But the no
of people who are paying the taxes are very little. Only 3.34 corers are paying the taxes which include
all the corporate and SMEs which is nearly 2.78% of the population is paying the taxes.

How can anyone expect the government to serve all the people with only 2.78% of the population¶s
taxes? This is unfair on our part. Then we will blame the government that they are looking only for the
industrialist and the lower level of the population.

Source: http://freepress.in/business/total-income-tax-payers-assesses-in-india/

BëACK MONE

³Black Money´ it doesn¶t means that it¶s black in color. Money which is unaccounted or not the
proper tax is paid where the tax has to be paid. During the Parliament election camping, some
political party raised the issue of Indian black stashed in Swiss Banks and numerous other tax
havens. They quoted the massive figure of $1.4 trillion (more than India¶s nominal GDP) as the
amount being illegally held abroad in numbered accounts.

Source: http://mananvyas.com/politics/black-money-in-swiss-banks-analysis/

The above mentioned figures were gone out of the country during the period of 2002- 2006. All are
just an estimate. Then think of amount of Indian money that would be lying there till now since from
our independence. Moreover these figures are not correct figures. I think there would some $ 10
trillion would lying in those tax heavens of Swis banks.

Dishonest industrialists, scandalous politicians and corrupt IAS, IRS, IPS officers have deposited in
foreign banks in their illegal personal accounts, which have been misappropriated by them. This
amount is amount is about 13 times larger than the country¶s foreign debt. With this amount 45 corer
poor people can get Rs. 1,00,000 each.

This huge amount has been appropriated from the people of India by exploiting and betraying them.
Once this huge amount of black money and property comes back to India, the entire foreign debt can
be repaid in 24 hours. After paying the entire foreign debt, we will have surplus amount, almost 12
times larger than the foreign debt. If this surplus amount is invested in earning interest, the amount of
interest will be more than the annual budget of the Central government. So even if all the taxes are
abolished, then also the Central government will be able to maintain the country very comfortably.

Source: http://wiki.answers.com/Q/Total_black_money_in_India

Then think of Black money within the country. If $ 1.5 trillion is going out of the country means then
that clearly shows they don¶t have that much space to store that. This money is only big shots money.
Then think of rest of Indian population who are having their black money in the form of gold, real
estate and in other forms.

From now onwards no one in the world have the right to say that India is a poor country.

Ok. How can solve these problems of Corruption and ³Black Money´?
I have a solution to solve this problem.

DEMATERIAëIZATION OF CURRENC

If we remove the physical existence of money transactions i.e. in the form of currency and coins and if
we make all the money transactions through online this will be stored in a database, under the
government¶s control. Then there is no possibility of corruption and having black money because all
have to give their reasons for each and every transaction to the government.

For this we need to do so basic stuffs to make this as a real happening.

COST OF INFRASTRUCTURE

Now the Indian Government is working on the ³Unique ID´ project. With this all the citizens of the
country will a no. Then the Unique ID can be used as the user ID or the A/c No for all the individuals.
So an individual should receive a plastic card like an ATM or Debit or Credit Card. By this only he will
make all the transactions.

- For this we need create a new core banking solution which will adaptable for this kind of
transactions in huge numbers. We should a storage capacity of at least 100 Petabytes. The cost
of 1 Petabytes will around $ 4 million. Then the total would be around $ 400 million (Rs.1, 800
corers)
- Then the cost of developing a new banking solution would cost around Rs. 1,000 Corers. The
software should be designed in such a way it should take the back up for every 30 seconds. So
that loss of data can be prevented.
- Then we issue the cards to all the individuals, corporate, kind of business houses and all kind of
shops. The cost issuing these cards would cost around Rs. 1, 500 Corers.

Then all the shop should be provided with a swiping machine. This machine should be different from
the existing. It should have option of scanning the thump impression or scanning the retina of the card
holder. Also the transaction can be possible only after the password. A transaction will be possible
after swiping the card and scanning the thump impression or retina of the card holder and entering the
password. Each every user will be provided with a internet usage and tele-banking password so he
view all his transactions and can listen his to his some of his transactions.

- This kind of swiping machines would cost around Rs. 6, 000 Corers. i.e. one shop of every 1000
persons then we have to purchase 12 lakhs swiping machines. Each will cash Rs. 50, 000
because of this advanced technology
- Then, these swiping machines should be connected with internet. Since 3G service is going to be
in usage by the year, we can get the connections easily through wireless. For providing internet
connection we need to spend around Rs. 100 Corers yearly.
- In some areas internet connections may not be available. For setting up of the boosters¶
government needs spend around Rs. 1, 500 Corers.
Then we need some machines or we have to set up an office for making the fund transfer from one
people to another. For that government can undertake the existing ATMs since physical money is
removed from the system then there is no need for that. Nowadays ATMs do other services also. So
the government can make a tie up with banks for using these machines and also their part their office
space. This will a minimum cost.

- Then we have to educate people how to use these card systems. That would be costing around
Rs. 1, 200 Corers.

ARTICUëARS COST In INR

Storage Device 1,800
New Software 1,000
Cards 1,500
Swiping Machine 6,000
Boosters 1,500
Internet
Connection 100
Education 1,200

Total 13,100

For this government has to spend nearly Rs. 13, 100 Corers.

Architecture
This is how all the transactions will be made. If there is any problem in the transaction then the person
has to go to nearest bank or any centre for clarification.

Source: Google Images ± Core Banking Architecture.

ROBëEMS

Anyone can ask me ³For using the swiping machine we need electricity. But the penetration of
electricity in rural and in villages is not 100%. Then how is it feasible?´

Now the government of India has launched a program ³RAJIV GAND½I GRAMIN VID ATIKARAN
OJANA´ to electrify all the villages in India. So we the problem will solved easily. This map shows
the Electrified Village Map
EëECTRIFIED VIëëAGE MA

Source: http://mapxl.com/indiamaps/electrified-villages.html

³Is it necessary to adapt this mode? Instead of this why don¶t we change the system?´

If we change the taxation system also then people will find many loop holes in its and again the same
thing will happen.

How to educate the people for using this system?

In India we can find mobile with more 60% of the people. So this system is also like using the mobile.
So we don¶t want to worry of this 60%. The remaining 40% will the problem.

³Is this hack proof?´

Any kind of system design can hacked. But in this system if your account is hacked means then your
fund should to transfer to others account. So easily we can trace the money.

³½ow this system will put a stop to corruption, tax evasion and black money?´

If a person is receiving money from others he has to tell the reasons to the government. If a
government employee is receiving money from sources then he has to disclose all the details. So it
cannot be possible.

If I am going to shop and buying a goods then I have to pay the money which through online. So
abusively the shop keeper has to prepare the bill.

If a politician is involvining in any kind of corruption activity then he has to take the money. If he takes
the money we can find that in his records. Even if he tries to do by this binami then that person has to
tell his source of income.

½ow can we get the ³Black Money outside India´?

If a person has earned the money he needs his money at any cost. So he has to bring it back. Else he
has to forget that money. Moreover now Indian government is trying to bring that back.

CONCëUSION

In India, this system has be implemented by the politicians and the government employees. But they
are the one how is going to get affected badly. These implementations are in their hands. If law
makers are the law breakers then the possibility of implementation is very very little.

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Statistics:
It is said that black money in India accounts for 20 % of GDP. If this is true, then black money generated
every year must be around Rs 400,000 crore or $ 80 billion. This is a huge amount, more than the entire
budget of the government at the Centre. We have a government that spends about Rs 350,000 crore a year,
most of it on itself, and asks for accounts of every paisa. On the other side, we have bla ck money worth Rs
400,000 crore every year, which is just guesswork, and there are no accounts. This money goes into property,
which is why real estate prices are so high, and of course five-star hotels. If the government could have all this
money, or even a small fraction, there would be no need for revenue or fiscal deficits, and no need for huge
borrowings to make two ends meet.
How big is $ 100 billion? It is bigger than you think. It is worth Rs 500,000 crore, wh ich makes it bigger than
the central budget. It is more than twice our annual exports. It is equivalent to 30 times what Enron is
supposed to have invested on its Dabhol project. It is more than what the US government is expected to pay
those who have suffered from the September 11th smash. And, if you must know, it is a fifth of our annual
GDP, which is itself a big figure.

Introduction:
The CBDT is hopeful of collecting more than Rs 7,000 crore (Rs 70 billion) as income tax area, the target
indicated by Finance Minister P Chidambaram for the current financial year. The board has already collected Rs
3,400 crore (Rs 34 billion) during the first six months of the current fiscal year, compared to Rs 2,700 crore
(Rs 27 billion) in the same period a year earlier.
Finance Minister P Chidambaram\\\'s Budget speech for 2004-05 shows there were only 27 million taxpayers in
the country on the date of the presentation of the Budget. This indicates the tax evasion rampant in the
country.
The economy keeps growing and so does the deficit, while the revenues do not increase in the same proportion
as the economy grows. There could be a number of reasons for the shortfall, which may vary from year to year
like recession in the industrial sector or shortfall in agricultural production. But one factor that has been
constant for the last five decades is the tax evasion. There are so many loopholes in the tax system that allows
people and organizations to evade taxes with impunity. There are no reliable estimates of the extent of the tax
evasion in this country. But some studies show that the size of black money has grown significantly over the
past many years If this tax evasion were checked, the Finance Minister would never be faced with shortfall in
tax collection and would have a very low fiscal deficit. Therefore, the Finance Minister instead of resorting to
increase in tax rates or coming out with amnesty schemes should find other means to increase the revenue
collection. One such way is to plug the loopholes, which encourages tax evasion. Most of the tax evasion occurs
when transactions are done in cash and never recorded. This has been the experience of many countries and
they have come out with measures that discourage cash transactions and encourage recorded transactions.
One such mechanism has been the use of debit and credit cards combined with payment through banking
mechanism. The Finance Minister should come out with such a provision, which encourages cashless
transaction.
As a first measure it may be made mandatory that all salaries above Rs 10,000 per month, both in public and
in private sectors, be directly credited to individuals\\\' accounts in their respective banks. Secondly, payments
above a certain amount may also be made mandatory through debit / credit cards and through cheque or bank
drafts. With electronic banking gaining importance, transfers through banking mechanism will become as easy
as receiving or making payments by cash. In most of the countries the use of debit and credit cards for making
and receiving payments has reached a point that for buying even one small ball pen payment is made through
credit / debit card.
Similarly, payments for the sale and purchase of immovable property, various kinds
of consumer goods and services beyond a certain stipulated amount should also be made mandatory through
banking channels. While doing so, the Finance Minister will not only be plugging one of the biggest loopholes
leading to tax evasion but would also reduce the need for ready cash and hence the printing of currency notes
on a large scale.
The biggest chunk of black money is invested in real estate and gold. The circulation of black money in the
housing sector is beyond imagination. Since the house tax is based on the current purchase price only one
fourth of the money is paid by cheque and the rest in unaccounted cash. Even an honest buyer of flats /
houses is forced to pay in black money if he wants to acquire one.

History:
The period 1946-61 was one of the intense creativity. A black or parallel economy emerged both in the wake of
the Second World War and the expansion of the economic activity in the post-independence period. Incentives
were provided through the taxation laws to promote savings and investment; this made the tax laws more
complex. Then, there was the need for larger revenues to finance the plans of economic development.
Thorough investigations were, therefore, conducted into the structure of taxation not only with a view to widen
the base of income tax but also to look for new taxes and to prevent tax evasion and avoidance. The Income-
tax administration came under heavy strain due to the increase in the volume and complexity of its work.

Nature:
There are two powerful ethical props for a different view than the one the court has taken.
1. It is a plain fact that many high -earning persons evade income tax by ruthlessly exploiting the loopholes in
the laws. Black money is the outcome of this practice. And neither the income tax department has mounted an
effective campaign to hunt out these tax cheats, nor has the court, any court, felt provoked to order a
comprehensive crackdown.
2. The widespread ruse of doling out big money to top executives and others by describing it as
reimbursement.

Constituent activities of Black Economy:

1. Legal activities that are not reported to the tax authorities and the income which goes untaxed and
unreported. For instance: it is not illegal to clean someone\\\'s house, to feed people or to drive them. It is,
however, illegal to hide the income generated by these activities and not to pay tax on it. In most countries of
the world, this is a criminal offence, punishable by years in prison.
2. Illegal activities, which needless to say, are also not reported to the state (and, therefore, not taxed).
The money generated by these activities is largely held in foreign exchange outside the banking system or
smuggled abroad (even through the local banking system).

How is it formed?
A parallel or a black market is an illegal structure that is created in response to government intervention, which
produces excess supply or demand for a product. When the price of foreign currency is set below the market-
clearing rate, an excess demand is usually generated for acquiring foreign currency. The government has the
choice of either devaluating the currency, or maintaining strict controls over exchange, such as setting quotas
on the purchase of foreign exchange. Such currency controls are designed by governments in order to limit the
use of foreign exchange in transactions. This parallel economy, or black market, emerges through the
manipulation of the economic forces of supply and demand for both currency and commodities. A black market
also emerges when trade and industry create an artificial situation of scarcity or glut, and in the process amass
high returns on their investments by profiteering. As a result of profiteering activity, the black market
generates unreported income and wealth, which escape detection by official statistics. Much of the strength of
the black market can be attributed to the resale of officially allocated foreign exchange holdings and to the
incentive to under invoice and smuggle exports. He argues that an increase in the black market rate, given the
official exchange rate, creates an incentive for residents abroad to channel their remittances through the black
market. This raises their private receipts in terms of home currency and deprives the central bank of this
foreign exchange. Economists studying black market activity in developing countries advocate that it is best to
keep the black market premium rate as low as possible. By influencing the determinants of the black market
exchange rate, developing counties can keep the black market premium rate low and increase their official
foreign exchange currency holdings.

Effects of black money on Indian Economy:

• Affects public revenues,
• Degenerates the investable surplus,
• Delimits the national productivity,
• Drains the balance of payments,
• Distorts equity and equality concepts of economic distribution.

HAWALA SCAM --- Financing Illegal Trade:

What makes the illegal market prosper is the large amount of black money that is easily accessible to traders.
Thus money can be transferred to any country of the world through the illegal money market. The existence of
a massive black economy consisting of both domestic and foreign currency makes such trade possible. Illegal
trade is financed either by high value precious metals like gold and silver or by liquid money through a network
of unauthorised moneylenders. In the former case gold is smuggled physically and then converted into the
desired currency. However gold smuggling is risky and a preferred mode is through the illegal money market.
The uniqueness of this system is that there is no physical transfer of currency. This mechanism referred to as
the hawala in India, the hundi in Bangladesh and the chit fund in Sri Lanka operates on the same
principles.

Advantages:
The black economy has many more important functions:
• The black economy is a cash economy.
• It is liquid and fast.
• It increases the velocity of money.
• It injects much needed foreign exchange into the economy and inadvertently increases the effective money
supply and the resulting money aggregates. In this sense, it defies the dictates of \\\"we know better\\\"
institutions such as the IMF.
• It fosters economic activity and employs people.
• It encourages labour mobility and international trade. Black economy, in short, is very positive. With the
exception of illegal activities, it does everything that the official economy does and, usually, more efficiently.
• The black economy is especially important in times of economic hardships. Countries in transition are a
private case of emerging economies, which are a private case of developing countries that are called (in less
politically correct times) \\\"Third World Countries\\\". They suffer from all manner of acute economic illnesses.
They lose their export markets, they are technologically backward, their unemployment skyrockets, their plant
and machinery are dilapidated, their infrastructure decrepit and dysfunctional, they are lethally illiquid, they
become immoral societies (obligations not honoured, crime flourishes), their trade deficits and budget deficits
balloon and they are conditioned to be dependent on handouts and dictates from various international financial
institutions and donor countries.
• It enhances exports (and competitiveness through imports), it encourages technology transfers, it employs
people, it invests in legitimate businesses (or is pract iced by them), it adds to the wealth of the nation (black
marketers are big spenders, good consumers and build real estate), it injects liquidity to an otherwise
dehydrated market.

Disadvantages:
So, what is morally wrong with the black economy? The answer, in brief:
• It is exploitative. Other parts of the economy, which are not hidden (though would have liked to be), are
penalized for their visibility. They pay taxes. Workers in a factory owned by the state or in the government
service cannot avoid paying taxes.
• The money that the state collects from them is invested, for instance, in infrastructure (roads, phones,
electricity) or used to pay for public services (education, defense, policing). The operators of the black
economy enjoy these services without paying for them, without bearing the costs and worse: while others bear
the costs. This encourages them, in theory to use these resources less efficiently.
• And all this might be true in a highly efficient, almost ideal market economy. The emphasis is on the word
\\\"market\\\". Unfortunately, we all live in societies, which are regulated by bureaucracies that are controlled
(in theory, rarely in practice) by politicians. These elites have a tendency to misuse and to abuse resources and
to allocate them in an inefficient manner.

Measures taken by the Government:

In a unique drive launched a few days before the presentation of the Union Budget, the CBI has registered 36
cases against 112 government officials and others after search operations across the country in a bid to
unearth black money amassed by them. The drive conducted under a team of joint directors of the agency, has
reportedly been able to unearth black money amounting to lakhs of rupees, CBI sources said here today. He
said simultaneous searches were carried out on 109 official and residential premises of accused or suspected
persons. In these cases 21 accused / suspected persons belonged to the Union Bank of India, the Reserve
Bank of India, Sikkim Bank, the United Bank of India and private firms located at Mumbai. These cases
pertained to cheating, export fraud, abuse of powers and falsification of records resulting in wrongful loss to
the banks and public institutions. Cases taken up for investigation were of the Anti-corruption division, the
economic offences Wing and the special crimes division.
Although the stamp duty department maintains a list of rateable value properties in Mumbai, the main concern
is that in most of the cases the rates are much higher than the actual transacted rates for the actual property.
However, instead of addressing these irregularities, authorities have increased the stamp duty rates!

It is a well known fact that because of high stamp duty, buyers have been quoting their property much below
the actual transacted value. This is mainly because it enables the buyers to save substantial amount on the
stamp duty outgo, since stamp duty is charged on the value of the property. This practice of undervaluing
property is not ethical and moreover it leads to accumulation of black money in the economy, which is not
good. For instance, there are cases where builders / sellers ask up to 40 % of the transacted value of the
property as black money. This gives a distorted picture of the real estate price, as there is a huge difference in
the transacted price and the rate list maintained by the stamp duty authorities.

Why the Policies implemented so far are Ineffective?

Now the Supreme Court has ordered that dearness, house rent and city compensatory allowances are income
and attract tax. Theoretically, the ruling covers only the employees of the government and those of public
sector undertakings and the two nationalised insurance companies since the original dispute arose from their
petition. But the judgement is so general in nature that every salaried individual receiving any allowance o f this
nature has to pay tax on it if he or she is not already doing so. It is an old demand of those with a regular
income that those payments which are compensatory in nature should be tax-free if the underlying idea is not
to be perverted.

Government intends to undertake:

The government is likely to announce a scheme to channel black money into a dedicated fund, which could be
used for funding the government\\\'s social sector programme. The fund, which may be announced in the
Budget for 2005-06, could be modeled on the lines of the Prime Minister\\\'s Relief Fund. Government sources
said the revenue department was contemplating various other strategies. One option would be to issue bonds
to raise funds for infrastructure and social sectors, which would not yield any returns in the initial few years. An
official said a scheme on the lines of the Voluntary Disclosure of Income Scheme 1997, launched during P
Chidambaram s previous stint as finance minister, was ruled out.

Suggestions:
All citizens should be obliged to file annual, personal tax returns (universal tax returns, like in the USA). This
way, discrepancies between personal tax returns and other information can lead to investigations and
discoveries of tax evasion and criminal activities.
All citizens should be obliged to file bi-annual declarations of personal wealth and assets (including real estate,
vehicles, movables, inventory of business owned or controlled by the individual, financial assets, income from
all sources, shares in companies, etc.).
All retail outlets and places of business should be required to install over a period of 3 years cash
registers with \\\"fiscal brains\\\". These are cash registers with an embedded chip. The chips are built to save
a trail (detailed list) of all th e transactions in the place of business. Tax inspectors can pick the chip at random,
download its contents to the tax computers and use it to issue tax assessments. The information thus gathered
can also be crossed with and compared to information from other sources. This can be done only after the full
implementation of the recommendations in the section titled \\\"Databases and Information Gathering\\\".
(While it increases business costs it is not likely to prevent cash or otherwise unreported transactions).
All registrars should be computerized: land, real estate, motor vehicles, share ownership, companies
registration, tax filings, import and export related documentation (customs), VAT, permits and licenses,
records of flights abroad, ownership of mobile phones and so on. The tax authorities and the Public Revenue
Office (PRO) should have unrestricted access to ALL the registers of all the registrars. Thus, they should be
able to find tax evasion easily (ask for sources of wealth - how did you build this house and buy a new car if
you are earning 500 DM monthly according to your tax return?) The computer system should constantly
compare VAT records and records & statements related to other taxes in order to find discrepancies between
them. Gradually, submissions of financial statements, tax returns and wealth declarations should be
computerized and done even on a monthly basis (for instance, VAT statements).
Tax inspectors and customs officials should receive police powers and much higher salaries (including a
percentage of tax revenues). The salaries of all tax inspectors regardless of their original place of
employment should be equalized (of course, taking into consideration tenure, education, rank, etc.) Judges
should be trained and educated in matters pertaining to the informal economy. Special courts for taxes, for
instance, are a good idea. Judges have to be trained in tax laws and the state tax authorities should provide
BINDING opinions to entrepreneurs, businessmen and investors regarding the tax implications of their
decisions and actions
All contracts between firms should be registered in the courts and stamped to become valid. Contracts thus
evidenced should be accompanied by the registration documents (registrar extract) of the contracting parties.
Many \\\"firms\\\" doing business in Macedonia are not even legally registered.
A special inter-ministerial committee with MINISTER -MEMBERS and headed by the PM should be established.
Its roles: to reduce bureaucracy, to suggest appropriate new legislation and to investigate corruption.
Bureaucracy should be pared down drastically. The more permits, licenses, tolls, fees and documents needed
the more corruption. Less power to state officials means less corruption. The One Stop Shop concept should
be implemented everywhere.
To impose a VAT system. VAT is one the best instruments against the informal economy because it tracks the
production process throughout a chain of value added suppliers and manufacturers. The Tax code needs to be
simplified. Emphasis should be placed on VAT, consumption taxes, customs and excise taxes, fees and duties.
To ensure progress, the government should directly compensate the poor for the excess relative burden.
Special tax courts should be established within the existing courts. They should be staffed by specifically
trained judges. Their decisions should be appealed to the Supreme Court. They should render their decisions
within 180 days. All other juridical and appeal instances should be cancelled except for an appeal instance
within the PRO. Thus, the process of tax collection should be greatly simplified. A tax assessment should be
issued by the tax authorities, appealed internally (within the PRO), taken to a tax court session (by a plaintiff)
and, finally, appealed to the Supreme Court (in very rare cases).
White Sugar is often imported as brown sugar. One way to prevent this is to place sugar on the list of LB
(import license required) list, to limit the effective period of each license issued, to connect each tr ansaction of
imported brown sugar to a transaction of export, to apply the world price of sugar to customs duties, to
demand payment of customs duties in the first customs terminal, to demand a forwarder\\\'s as well as an
importer\\\'s guarantee and to require a certificate of origin. The same goes for Cooking Oil (which when it
is imported in a package is often declared as some other good).
Simplicity in tax laws is certainly a desirable objective. US tax laws are 5 times the size of Indian tax laws, in
terms of the number of clauses! Yet, the US tax laws are considered simpler than Indian tax laws. There is only
one reason - constant change, and lack of continuity, in Indian tax laws, creating uncertainty on the
applicability of different tax provisio ns. Add to that, the multiplicity of inspectors, the voluminous records to be
maintained, the limited role of computerisation, the vagueness in wordings of rules and regulations, leading to
subjective interpretation, and, thereby, the uncertainties with respect to compliance - and you have a level of
complexity beyond what rocket scientists ever encounter!

• Simplicity
• Stability and Continuity
• Certainty
• Reasonable tax rates
• Ease of Compliance

Unfortunately, in the past, for checking evasion, stress had mostly been on legislative measures, forgetting
that equal importance is to be given to administrative aspects. In the discussion to follow, some suggestions
for checking evasion, through legislation, and for improving compliance to tax laws are being mentioned. As
indicated earlier, the problems need to be tackled in two ways -- by legislation and taking effective
administrative measures. Other measures for checking tax evasion through legislation could be:

• Taxing big and prosperous agriculturists\\\' incomes and wealth.

• Introducing donee-based gift tax.
• Permitting tax officials to have power of door-to-door survey.
• Claims for losses / expenses relating to undisclosed or illegal incomes should not be recognised for tax
assessments while taxing incomes from such sources.
In countries like Belgium, Greece and France, there is provision for confiscation of personal rig hts like arms or
driving license of persons found guilty of dealing with black money or resorting to tax evasion. Similar law
should be made in India too. Such persons should also be debarred from holding any elective offices, including
directorships in companies.

More emphasis must be laid on these aspects instead of floating amnesty schemes and issuing bearer bonds. It
needs to be borne in mind that such schemes merely tackle that too to a very limited extent, the problem
relating to \\\'stock\\\' concept in black money and do not provide solutions for checking the onslaught of black
money generation -- the flop concept.

Among administrative aspects, strict measures can only create impact. Some suggestions in this context are:

• Tax laws should permit wide publicity through media regarding persons found guilty of tax evasion.
• Social conscience needs to be aroused amongst people against tax evasion, for attaching social stigma for
tax evaders and to work as sentinels for identifying black marketers an d tax dodgers.
• The most important measure for checking evasion is to establish credibility of the government regarding its
own integrity before exhorting persons to pay their taxes correctly.

Some other measures, of an administrative nature, could be:

• Disentitling tax evaders / defaulters to avail of the facility of payment of taxes in the installments and getting
credit facilities from banks.
• Streamlining procedure for speedy determination of tax disputes. Special courts for this need to be set up.
• Paying special attention towards training for detection of tax frauds, evasion and black money generation,
including deputation of IT officers to other countries for training to tackle cross border tax evasion.
• Providing adequate security to tax officials, conducting search and surveys.
• Improving morale of the tax department officials by providing them adequate infrastructure and other
facilities, by recognition of their merit and giving them the place that they deserve in the overall government
set up.

Conclusion:
There had been umpteen talks and voluntary disclosure schemes in the past for checking evasion and black
money, but no perceivable results have come. Rather, the quantum of black money in circulation has increased
substantially in volume. There is one sure medicine: eliminate the population and both unemployment and
inflation will be eliminated. So long as cash transactions continue to be made, tax evasion will be there and
black money will continue to be generated. c