This Issue - Icwai

ECONOMIC ECONOMIC MATTERS
MATTERS
Black Money in parallel existence with
legitimate economy
V. Gopalan*
As stated in the editorial of a national
newspaper recently, since the time of
Dadabhai Naoroji (1880s), Indians have
always been captivated by the idea that our national
wealth is slowly being drained abroad. It is therefore
the Supreme Court’s decision to set up a Special
Investigation Team to ensure the return of money
stashed abroad is widely welcomed.
Black money is generated by the desire to evade
taxes and hide assets disproportionate to known
sources of income. Black money, after all, refers to
the sum total of unaccounted income, and not just
the funds spirited away to Switzerland, Lichtenstein,
or some other foreign safe haven.
As reported in media many times, the property
transactions to a major extent add to the national stock
of unaccounted money. It is by the buyers and sellers
colluding in under-reporting the true value of the
transaction. Major part of sale price is paid in cash,
depriving the state of capital gains tax and stamp duty.
The cash received is often recycled back into the
property market, where the returns are extremely
high.
Black money, also described as tainted money, has
presence everywhere and is posing a great threat to
the stability of real economy. Black economy, if not
tackled in time, will ruin the country’s economy. Black
money in economic terms means ‘unrecorded gains’.
In other words, it is income which has escaped
taxation. The black-money has now assumed vast
dimensions and menacing proportions.
The causes of Black-money are :
1. Unrealistically high rates of taxes;
2. Complicated tax-laws in a country that a
layman fails to understand it;
3. Numerous controls, licenses and other governmental
regulations in a country;
4. Political activities such as elections where huge
money to is be spent;
5. Illegal activities like smuggling, drug-peddling;
6. Deterioration in the moral and civic standards
of the people.
It is common that large amounts of black-money
are generated through the sale of fixed assets and
scrap; or firms sell licenses at cash premiums; or over
or under invoices of transactions; or large scale
smuggling of precious items etc.
Since money generated out of black money is
re-invested in such activities as hoarding and
smuggling, it fetches still higher returns. Once blackmoney
is converted into black wealth it is very difficult
to track it down.
The genesis of black money can be attributed to
several factors. However, the most widespread cause
of black money is associated with World War II (1939-
1945). The supply of industrial goods to the Allies was
cut during the War from their traditional suppliers,
leading to a severe shortage of vital necessities. This
prompted the British Government to indulge in
excessive inflationary finance tactics for its war efforts,
leading to a sharp rise in the prices of commodities.
Tax rates on higher incomes and excess profits were
also raised, prompting many to resort to black
marketing and tax evasive measures.
People made huge profits by dealing in items in
short supply giving rise to a psychology that more
money could be made from shortages than from
production and expansion of business. The government
has been unable to prevent the administrative
powers from amassing wealth in black money by
misusing the controls and regulations still in place
today. Price controls in the absence of an adequate
system of distribution and an effective arrangement
for increasing supplies can potentially generate huge
amounts of black money. The licensing system
* FCA, AICWA, ACS, Director, Janhar Management
Consultancy Pvt. Ltd., Chennai
786 The Management Accountant |September 2011