Proposals to prevent Indian black money

History

Even in colonial India, numerous committees and efforts were initiated to identify and stop underground economy and black money with the goal of increasing the tax collection by the British Crown government. For example, in 1936 Ayers Committee investigated black money from the Indian colony. It suggested major amendments to protect and encourage the honest taxpayer and effectively deal with fraudulent evasion.

Current Proposals

In its white paper on black money, India has made the following proposals to tackle its underground economy and black money.

Reducing disincentives against voluntary compliance

Excessive tax rates increase black money and tax evasion. When tax rates approach 100 per cent, tax revenues approach zero, because higher is the incentive for tax evasion and greater the propensity to generate black money. The report finds that punitive taxes create an economic environment where economic agents are not left with any incentive to produce.

Another cause of black money, the report finds is the high transaction costs associated with compliance with the law. Opaque and complicated regulations are other major disincentive that hinders compliance and pushes people towards underground economy and creation of black money. Compliance burden includes excessive need for compliance time, as well as excessive resources to comply.

Lower taxes and simpler compliance process reduces black money, suggests the white paper.

Economic liberalisation

The report suggests that non-tariff barriers to economic activity such as permits and licences, long delays in getting approvals from government agencies are an incentive to proceed with underground economy and hide black money. When one can not obtain a licence to undertake a legitimate activity, the transaction costs approach infinity, and create insurmountable incentives for unreported and unaccounted activities that will inevitably generate black money. The successive waves of economic liberalisation in India since the 1990s have encouraged compliance and taxes collected by the government of India have dramatically increased over this period. The process of economic liberalisation must be relentlessly continued to further remove underground economy and black money, suggests the report.

Reforms in vulnerable sectors of the economy

Certain vulnerable sectors of Indian economy are more prone to underground economy and black money than others. These sectors need systematic reforms. As example, the report offers gold trading, which was one of the major sources of black money generation and even crime prior to the reforms induced in that sector. While gold inflows into India have remained high after reforms, gold smuggling is no longer the menace as it used to be. Similar effective reforms of other vulnerable sectors likereal estate, the report suggests can yield a significant dividend in the form of reducing generation of black money in the long term.

The real estate sector in India constitutes about 11 per cent of its GDP. Investment in property is a common means of parking unaccounted money and a large number of transactions in real estate are not reported or are under-reported. This is mainly on account of very high levels of property transaction taxes, commonly in the form of stamp duty. High transaction taxes in property are one of the biggest impediments to the development of an efficient property market. Real estate transactions also involve complicated compliance and high transactions costs in terms of search, advertising, commissions, registration, and contingent costs related to title disputes and litigation. People of India find it easier to deal with real estate transactions and opaque paperwork by paying bribes and through cash payments and under-declaration of value. Unless the real estate transaction process and tax structure is simplified, the report suggests this source of black money will be difficult to prevent. Old and complicated laws such as the Urban Land Ceiling Regulation Act and Rent Control Act need to be repealed, property value limits and high tax rates eliminated, while Property Title Certification system dramatically simplified.

Other sectors of Indian economy needing reform, as identified by the report, include equity trading market, mining permits, bullion and non-profit organisations.

Creating effective credible deterrence

Effective and credible deterrence is necessary in combination with reforms, transparency, simple processes, elimination of bureaucracy and discretionary regulations. Credible deterrence needs to be cost effective, claims the report. Such deterrence to black money can be achieved by information technology (integration of databases), integration of systems and compliance departments of the Indian government, direct tax administration, adding data mining capabilities, and improving prosecution processes.

Supportive measures

Along with deterrence, the report suggests public awareness initiatives must be launched. Public support for reforms and compliance are necessary for long term solution to black money. In addition, financial auditors of companies have to be made more accountable for distortions and lapses. The report suggests Whistleblower laws must be strengthened to encourage reporting and tax recovery.

Amnesty

Amnesty programmes have been proposed to encourage voluntary disclosure by tax evaders. These voluntary schemes have been criticized on the grounds that they provide a premium on dishonesty and are unfair to honest taxpayers, as well as for their failure to achieve the objective of unearthing undisclosed money. The report suggests that such amnesty programmes can not be an effective and lasting solution, nor one that is routine.

International enforcement

India has Double Tax Avoidance Agreements with 82 nations, including all popular tax haven countries. Of these, India has expanded agreements with 30 countries which requires mutual effort to collect taxes on behalf of each other, if a citizen attempts to hide black money in the other country. The report suggests that the Agreements be expanded to other countries as well to help with enforcement.

Modified Currency Notes

Government printing of such legal currency notes of highest denomination i.e.; 1000 (US$17) and 500(US$8.40) which remain in the market for only 2 years. After a 2-year period is expired there should be a one year grace period during which these currency notes should be submitted and accepted only in bank accounts. Following this grace period the currency notes will cease to be accepted as legal tender or destroyed under the instructions of The Reserve Bank of India. As a consequence turning most of the unaccountable money into accountable and taxable money.