Tackling India's black
economy By Priyanka Bhardwaj
NEW DELHI - Revenue department officials
over the past few weeks have been impounding
luxury vehicles brought into the country without
paying the requisite duties.
government has taken more than 50 such vehicles,
including top-end Toyota Prados, Landcruisers,
BMWs, Jaguars and even a Porshe. Some of these
cars cost more than US$300,000, given that the tax
on such imported cars can be more than 100%.
Importers of these cars have been using
loopholes in existing laws to sell them to rich
customers. Recently, officials seized a Hummer
allegedly belonging to film star Sunil Shetty.
It is not known whether the buyers of
these cars knowingly evade the taxes, but the
entire episode has highlighted another aspect of
the way business/trade happens in India - the slew
of controls, norms and prohibitive duties that has
engendered the growth of
black economy. Black money has long been a subject
of debate in India. The purchase of luxury cars is
just the tip of the iceberg. It is estimated the
government loses some $50 billion annually due to
Huge cash flows estimated at
more than $100 billion form the basis of financing
property purchases, money laundering, funding of
political parties, corruption, opening foreign
accounts and even drug and arms deals. There is a
flourishing illegal economy in India that remains
out of the tax dragnet with only 20 million out of
a population of more than a billion paying taxes.
Other estimates put the level of economic activity
determined by black money to the tune of 30-50%.
Self-employed lawyers, businessmen,
doctors, designers, property agents and traders
get away with paying a pittance as compared to the
perpetually harassed salaried employees who have
no choice but to pay up. Agricultural income,
often higher than salaries, remains untaxed, given
the politics of keeping farm incomes untouched.
The black economy is an important reason
for declining revenues as a proportion of gross
domestic product (an abysmal 14%) mobilized by
government (center and state) in recent years.
This in turn leads to higher fiscal deficit and
inflationary pressures on the economy. Recently, a
report by Transparency International pegged India
at a lowly 88th among the 156 nations rated on
levels of corruption.
Minister Manmohan Singh, a trained economist who,
as finance minister, oversaw India's economic
reforms in the early and mid-1990s, recently said
there was no single mechanism or approach that
would be able to effectively tackle corruption and
"I think there are still far
too many custom and excise rates, besides too many
exemptions, which give scope to unscrupulous
bureaucrats to indulge in graft. We have to tackle
the problem of tax reform, not only to raise the
tax-gross domestic product ratio but also to
reduce the scope for arbitrary actions on the part
of bureaucrats that give rise to various sources
Earlier this year, a
rather curious declaration in the budget speech of
Indian Finance Minister P Chidambaram set off the
chatter on black money once more. The budget for
the financial year 2005-06 contained a proposal of
a 0.1% tax to be imposed on the withdrawal of cash
of Rs10,000 (about $250) or more from banks or
ATMs on a single day.
"I will come down
heavily [on tax evaders] ... We have taken a small
step," Chidambaram said in an interview, referring
to the tax on cash withdrawal. "We have
documentary evidence that huge cash transactions
take place and they leave no trail at all. This is
how black money is generated and circulated from
hand to hand. We have taken a small step."
However, it soon became apparent that
Chidambaram had got it wrong on the withdrawal tax
and Indian corporates reacted. "This is
counter-productive: if the aim is to track black
money, there are other ways of achieving that
purpose," said Madhur Bajaj of Bajaj Auto. Though
the measure was withdrawn due to a public outcry,
the intentions of Chidambaram were not in doubt.
This, however, is not to take away some
other steps by the finance minister to ramp up
government revenues and widen the tax base through
a mix of more government control, relief to the
salaried and at the same time making it more
difficult to evade as opposed to paying taxes.
Chidambaram has laid out the central system of
Value Added Tax (VAT) to ensure more
administrative compliance, while the 2005 budget
raised exemption levels, lowered tax rates and
ended a complex labyrinth of special allowances
that are expected to raise $1.2 billion.
The tax net on the services sector, which
now accounts for 52% of India's GDP and had
largely escaped taxation, has been widened. There
have been attempts to rationalize customs duty by
lowering the basic rate.
In the past
couple of months the income tax department has
raided the premises of bureaucrats known to be
corrupt and recovered illegal cash from the home
of several personalities related to the film
industry in south India. It is paradoxical that
some of the biggest catches happen to income tax
officials themselves, bribed by the rich seeking
Indeed, India has come a long way
in its attempts to streamline the red tape that
acts as an incentive for even an honest person to
beat the system rather than be part of it and face
harassment of officials. A large component of the
problem has been due to over-regulation of the
economy as well as industrial and import
licensing, which were the major causes of
corruption in public life. Since India embarked on
the path of liberalization and economic reforms in
1992, many of the teething problems of what was
termed as the License Permit Raj (rule) have been
done away with.
The black economy is one
arena that has to be treated carefully in order to
ensure the government does not turn into a "Big
Brother" that can stifle growth and
entrepreneurship. At the same time a paradigm
should be facilitated wherein it becomes easier
for a citizen to abide rather than evade.
When the government hauls up people for
evading taxes on purchasing cars, the question to
be asked is whether the system and the laws
balance the aspirations of the abiding taxpayers
and the need for social equity. It has not been
easy so far.