MCom I Semester Business Environment Parallel Economy Study Material Notes

MCom I Semester Business Environment Parallel Economy Study Material Notes: Meaning of Parallel economy Black Money and parallel Economy Sources of black Money Causes of Black Money Methods of Estimation for black Money Suggestions for Solution fo problems Efforts to Solve the Problem Impact of Black Money or Parallel Economy Long Answer Questions Short Answer Questions Objectives Questions

CTET Paper Level 2 Set X Model Paper Multiple Questions Answer in English

Parallel Economy

A parallel economy poses a serious threat to the stability and growth of the official economy. It seems from the fact that the magnitude of black money is large and rigged deals are growing in volume and complexity at an alarming rate. Apart from the wide ramifications of the parallel economy, one might also be alive to the fact that ‘black incomes’ are accentuating the inequalities in income and wealth and breeding a new class of ‘black’ rich in a society which is already harshly stratified.

MEANING OF PARALLEL ECONOMY

A parallel economy connotes the functioning of an unsanctioned sector in the economy whose objectives run parallel and rather in contradiction with the avowed social objectives. This is variously referred to as ‘black economy, ‘unaccounted economy’, illegal economy; subterranean economy or ‘unsanctioned economy.’

The creation of a parallel economy as a consequence of the growing proliferation of black money in every sector of the economy has very serious and in a number of ways pernicious influences on the working of the Indian economy. The direct effect of black income is the loss of revenue to the state exchequer as the consequence of tax evasion, both from direct and indirect taxes. The availability of black incomes with businessmen and capitalists and the consequent inequalities of income place a large amount of funds at their disposal.

Black income from evasion of customs (Import) duty has been taken as heavy loss to the economy. The major direct source of black income from smuggling is the evasion of custom duties and sales tax and black gains through associated hawala transactions.

Meaning of Black Money: Black money is basically income either earned by engaging in unlawful activities or by misappropriating funds which legally belong to the exchequer. Black money is the sum total of transactions deliberately kept out of the books of the accounts by the businessmen. According to Dr. Raja Chelliah, “aggregate of incomes which are taxable but are not reported to tax authorities, is the black money while preparing the estimates of black income.” He excludes incomes generated through illegal activities like smuggling, black market transactions, acceptance of bribes, kick backs etc.

Parallel Economy Study Material

BLACK MONEY AND PARALLEL ECONOMY

Parallel economy refers to existence of an unsanctioned or illegal sector in the economy whose objects run parallel, rather in contradiction with the social objectives. Since parallel economy is run with the help of black money, this type of economy is also known as ‘black economy.’ The term ‘Parallel economy, emphasises a confrontation between the objectives of the legitimate and illegitimate sectors. The economy confined to the generation of black money is alternatively termed as the ‘parallel economy’ or unsactioned economy.’ The creation of a parallel economy as a consequence of the growing proliferation of black money in every sector of the economy has very serious and in a number of ways pernicious influence on the working of the Indian economy.

The emergence of the black sector or black economy started during the second world war when due to shortages experienced in certain essential goods, controls and rationing had to be introduced but this was a phenomenon which was expected to end after the second world war. However, with the attainment of independence and advent of the planning, more avenues of investment in a large number of industries were opened. With the expansion of economic activity in the post-independence period, the magnitude of the black money sector had grown and proliferated to such an extent that it had begun to play a dominant role in moulding state policies, in promoting a class which derived its maximum source of power from black money. Obviously, the magnitude of operations of the black money operators has resulted in the establishment of a parallel economy.

METHODS OF ESTIMATION OF BLACK MONEY

There are various view points regarding the estimation of black money. They are :

(i) Fiscal view point (ii) Monetary view point (iii) Labour market view point (iv) National and accounting view point.

National Institute of Public Finance and Policy adopted fiscal view point. Formula of financial method is :

BI = TTI-TAT

whereas,

BI = Black Income (Income earned from tax evasion)

TTI = Total taxable income.

TAT = Total actual taxed income

SOURCES OF BLACK MONEY

The important legal and illegal sources where black money is deemed to be usually generated may be identified as follows:

(i) Real estate transactions; (ii) Constructions; (iii) Retail trade; (iv) Smuggling (v) Hotels and restaurants; (vi) Selling of licenses and permits; (vii) Commission on contracts; (viii) Wholesale trade; (ix) Film industry;(x) Elections and donations to the politicals parties; (xi) Imports and Exports; (xii) Trusts and religious institutions; (xiii) The government and its corrupt public administration; (xiv) Reconstruction at large scale; (xv) Business.

CAUSES OF BLACK MONEY

Some causes of black money can be discussed as follows:

1 Inflation: The genesis of black money can be found in persistent inflation in the country which has enhanced incentives and opportunities to earn such incomes. As Dr. Brahmanand mentions, “inflation inevitably leads to growth of parallel markets and strengthen propensities to hide income and to evade taxes.”

2. Moral Crisis : Crisis of moral and social values is also the reason of black money. The black money has corrupted our political system in a most vicious manner. At various levels political leaders openly and shamelessly go on collecting funds.

3. Corrupt commercial methods : It may originate from illegitimate source of income arising out of illegal gratification such as payment of ‘Salami’ or Pagri’ or income from smuggling, bribery, commission etc.

4. Deficient economy: The system of controls, permits quotas and licences which are associated with mal-distribution of the commodities in short supply results in the generation of black money.

5. Political finance : Big business houses are donating huge amounts of black money for a number of reasons like for establishing political links to exploit in case of need and to interfere and manipulate policy decisions so there is strong tie between black money and political forces which should be broken to curb black money in the country.

6. High level of taxation : The high rates of taxes induce businessmen to avoid recording of exact transactions. This evasion largely goes unchecked and thus sets in a chain reaction for the generation of black money at various business levels.

7. Other causes : Sanctions and implementation of public sector projects which involve huge costs are managed by bureaucrats, ministers and political leaders. The figure of costs are then escalated to allow money to flow into pockets of politicians and bureaucrates.

IMPACT OF BLACK MONEY OR PARALLEL ECONOMY

Black money is a socio-economic evil. Following are the impact of black money on the economy :

1 Wrong information related to economy : A large underground economy and growth of black money leads to under-estimation of true size and incorrect picture of the economy by the officially compiled nation income data.

2. Effect on distribution of income : The availability of black incomes with businessmen and capitalists and the consequent inequalities of income place a large amount of their disposals.

3. Effect on fiscal policy : The direct effect of black money is the loss of revenue as a consequence of tax evasion, both from direct and indirect taxes. When the black money is rising faster than the growth of GNP, then the rate of monetary expansion or contraction, estimates of impact of fiscal measures etc. based on official records will not produce the correct result.

4. Bad effects on allocation of resources : Black income reduces the financial capacity of the government to undertake sovereign and welfare functions.

5. Difficulties in implemention of monetary policy: A part of the black money is kept in cash and as a consequence, there is an abundance of liquidity. During inflationary rise in prices, the government uses its quantitative and qualitative method of credit control, they remain ineffective. It further leads to inflationary rise in prices.

Parallel Economy Study Material

EFFORTS TO SOLVE THE PROBLEM

Black money is resulting inequalities of income and wealth in society. The whole economy is shaken in today’s date and it has become very important to check the growth of black economy.

Government has taken various measures from time to time to control the parallel economy in the country which are as under:

1 Raids search etc : Income tax authorities have been given the wide powers to conduct on persons suspected to have black money. Raids are conducted from time to time by enforcement machinery on the premises of the people who are suspected of possessing black money.

2. Special Bearer Bond: The scheme was introduced in 1981 aiming at canalising unaccounted money for productive purpose. The special bearer bonds having face value of 10,000 each were issued at par with a maturity period of 10 years. The holders were entitled to receive 12,000 on maturity.

3.Demonetisation : Demonetisation of high denomination currency notes was effected twice, once in 1946 and again in 1978. Under the scheme introduced in 1978, a person could exchange currency notes of high denomination ( 1,000+ 5,000 and 10,000) with low denomination after explaining the source of income. This scheme has not been very successful in checking black money.

4. Voluntary Disclosure Scheme : First time government of India introduced the scheme of voluntary disclosure in 1951. This scheme allows a person holding black money to declare his income by paying tax at highest slab rates without disclosing his source of income and without paying any penalty. Again this scheme was introduced in 1956, 1965, 1966, 1975 and 1997. VDS (1997) yielded tax revenue of 10,500 crore. A record 4.66 lakh persons or corporations made disclosure of income amounting to 33,000 crore.

5. Make unrestrained tax structure: The underlying approach is that a reduction in tax rates will dampen the urge for concealing income to evade taxes. Till 1992, the tax on income was as high as 50%. These high tax rates were gradually brought down to 40% in 1996. Mr. P. Chidambram further reduced in 1997-98 to 30 percent for individuals and 35% for corporate sector.

6. Stop on smuggling and Hawala transactions: Hawala and smuggling have led to the development of a parallel economy in India. The corrupt politicians, beureaucrates and businessmen use it to evade taxes and route the unaccounted money to offshore banking accounts and re-route it to India via stock market. Government has taken hard steps to check hawala and smuggling.

7. Othe measures: Government has introduced other measures to control the black money such as issue of Indira Vikas Patra, tax deduction at source etc.

SUGGESTIONS FOR SOLUTION OF PROBLEMS

The government’s measures when pieced together,do make a good reading. But as yet the problem remains far from being solved. Some other steps need to be taken to eliminate the parallel economy. In this regard following suggestions are made.

1Improvement in election process: It is suggested that the financing of all elections should be done by the State on the basis of agreed norms, maintenance of accounts and statutory audit as part of overall electoral reforms. even if funds are to be sought from business houses for defraying election expenses, the business houses should be permitted to make such donations out of after tax profits.

2.Minimisation of control and license : Unnecessary controls in the form of licenses, permits etc. have created an environment to generate black money in India. Introduction of economic liberalisation would remove the regime of controls and thereby the extent of black money would be reduced gradually

3. Elimination of Benami transactions: For checking black money and black income benami transactions should be eliminated.

4.Simplification of tax structure: If tax provisions are complex, then these can be interpreted by the tax evaders in their own interest. To avoid misinterpretation of tax provisions, the government should rationalize the tax structure.

5.Other suggestions: Following are some other suggestions :

(i) Informers of smugglers, black marketeers, tax evaders should be suitably rewarded.

(ii) Progressive taxes should be imposed on lavish spending.

(iii) Agricultural income should be included in minimum income.

(iv) Process of tax determination should be speedy.

Parallel Economy Study Material

RECOMMENDATION OF DIFFERENT COMMITTEES AND COMMISSIONS ON SOLUTION OF BLACK MONEY PROBLEM

In post-independence period, the government of India appointed various committees and commissions to make a survey of the measures to unearth black incomes. These Committees and Commissions are :

1 Direct Tax Enquiry Committee.

2. The Direct Taxes Administration Enquiry Committee.

3. Tax Enquiry Committee.

4. Nicholas Kolder’s proposals for Indian tax reforms.

These committees and commission gave their recommendations to solve the problem of black money, most of these recommendations pertained to improvement in tax laws.

National Institute of Public Finance and Policy conducted a study under the direction of Dr. S. Acharya, formarly of the World Bank. Dr. Raja Chelliah was the overall supervisor of the study.

The Institute made the following recommendations to control black money effective:

(i) Tax structure should be simplified and tax rates should be reduced.

(ii) Rent control regulations should be liberalised.

(iii) Unnecessary price control should be removed.

(iv) Central government should reduce marginal tax rates on company profits, personal income tax, wealth tax, stamp duties. In addition, to remove the effect of inlflation, exemption on taxable income should be determined frequently.

(vi) Stamp duties on the transfer of property should be reduced to 5% on the value of the property

(vii) If funds are to be sought from business houses for defraying election expenses, the business houses should be permitted to make such donations out of after-tax profits and parties should show these expenses in their books of accounts.

EXERCISE QUESTIONS

Long Answer Questions

1 What do you understand by Parallel Economy? What is the magnitude effect of black money on the Indian economy? . What is the meaning of black money? Write causes of its generation and its demerits?

2. What steps have been taken by the government to restrain it? What are your suggestions in this regard?

3. Explain the measures taken by the government to solve the problem of black Give suggestions to eliminate this problem.

4. What are the causes and sources of black money in India? Explain the causes and demerits of black money.

5. Explain the nature of black money. What steps have been taken by the government to restrain it ? Explain.

Short Answer Questions

1 What do you understand by parallel economy?

2. What are the main causes of black money in India?

3. Explain the nature of black money.

4. What is meant by black money?

5. Write the causes of parallel economy.

6. What is the effect of black money on the Indian economy? Objective Questions

Parallel Economy Study Material

(I) Select the Correct Alternatives :

1 The bad effect of black money on the Indian economy is :

(a) inflation

(b) political finance

(c) on distribution of resources

(d) none of these

2. Black money means :

(a) income earned by illegal activities

(b) more money

(c) less money

(d) all of above

3. Black marketing and profiteering are known as:

(a) sources of black money

(b) effect of black money

(c) quantity of black money

(d) none of these

4. Non-Payment of tax on earned income or not making entries in the books of account

is known as:

(a) quantity of black money

(b) nature of black money

(c) effect of black money

(d) all of above

5. The main feature of black money is :

(a) film industry

(b) export-import

(c) smuggling

(d) illegal business activities

(Ans. : 1. (c), 2. (a), 3.(a), 4. (b), 5. (d)]

(IT) Write True or False :

1 The existence of sizeable and rapidly growing parallel economy has grave and disastrous consequences in the economy.

2. In a deveolping economy, the problem of black money is also a main problem.

3. Likewise the black money smuggling is not the main problem.

4. Black money is not generated when aggregate incomes which are taxable there but are not reported to the tax authorities.

[Ans.: 1. True, 2. True, 3. False, 4. False)

(III) Fill in the Blanks :

1 The genesis of ……………. can also be found in persistent inflation in the economy.

2 Standards of moral values and social attitudes of people have ……… during recent years.

3.The high rates of ……….. induces businessmen to avoid the recording of exact transactions

4. Black money has become the part and parcel of Indian ..

(Ans. : 1. black money, 2. declined, 3. taxation, 4. politics.)

Parallel Economy Study Material