The Black economy

The money which is earned by evading taxes is termed as black money.

The people who resorted to black money have been penalised by 25-50% due to demonetisation. But, they will soon find ways to use the new currency illegally. Hence, now is the need for policy which sets higher vision to disrupt the black economy totally.

For this, the focus needs to be on the core of the corrupt activity. We must look into details of six such areas which needs to be targeted.

Gold

Before liberalisation, there was a booming industry of smuggling gold in India.

In 1991, this was put to an end by eliminating restrictions against gold imports.

For this, a great deal of work went into the establishment of a white-money gold and jewellery business. But this developmental work received a major setback in 2013, when the customs duty on gold was reintroduced.

As a result, the buyer started making cash payment in order to have discount. Hence, this was a blow to the world of gold and jewellery that was being conducted through white money.

So now, instead of targeting jewellers and their customers, the better idea would be to eliminate the customs duty.

Hawala

The Hawala is an alternative remittance channel that exists outside of traditional banking systems whereby the money is transferred without any actual movement of money.

The hawala business came up in the 1960s and 1970s due to capital controls that were a part of Indian socialism. Hawala transactions avoid tax, has low commission rates than banks and is fast and convenient to send illegal money.

Indian businessmen and citizens have a robust history of business activities in East Africa, West Asia and South-East Asia. But the cross-border activities are mired in complicated regulations. Recent spat between Tata and Docomo is an example of problems created due to India’s capital control.

Thus, instead of policing against people involved in hawala transaction, India should look forward to become a ‘most open economy in world’ as envisaged by PM and also improve its ranking in Chinn-Ito index (measures capital-account restrictions) where it is currently placed at the bottom of the table.

Real estate

Real estate sector is widely mired in black money transaction where the secondary market generally involves a cash component.

Cash payment is favoured so as to avoid stamp duty. Just like custom duty, stamp duty also attracts tax evasion and thus, more generation of black money. Instead real estate can have GST.

At present, buying land and settling disputes often involves criminality, as there are title disputes.

Hence, Building sound land-title systems will enable law-abiding citizens to buy and sell land without a brush with cash or criminality through equity market which has shown how to build infrastructure for tracking property rights and achieving frictionless transactions.

Taxation

The tax administration in India has limited capabilities and hence, tax policy must put a low “load” upon the tax administration by favouring simplicity and low rates.

Under, the present levels of state capacity, the high interest rates and complex code has led to corruption in economy.

A GST has a single rate will eliminate classifying a given product at a high rate or a low rate. And the low rates will push both the tax administrator and the citizen in favour of compliance.

For this, a new tax administration act is required which sets up the Central board of direct taxes and Central board of excise and customs with sound processes for their legislative, executive and quasi-judicial functions.

Administration

Arbitrary power is the root cause of corruption. The government has the discretion to change a rule, give a licence, conduct an investigation etc. and such actions should be covered by procedural law, which enshrines good governance.

When a coal mine has to be allocated, there has to be a structured process for it, before any punishment is pronounced, the accused must be given a statement of the accusation and the evidence in writing. These are basic rules to be followed, yet it is presently lacking in many parts of the Indian state.

The regulators need to be established with proper statutes as they have legislative power (the power to write law, i.e. regulations), executive power (the power to give licences, the power to conduct investigation) and quasi-judicial power (the power to award punishment).

Thus, such an administrative environment should be balanced in order to prevent hegemony of few.

Politics and elections

Running a political party and fighting elections requires large-scale resourcing.

The complex procedures force the political parties to engage in these activities using black money. During elections, the arbitral and unpractical spending and donation limits encourage political parties to find alternate ways of funding.

Thus, there is a need for fundamental reforms are required so that funding in white money is made possible.

This will also allow the Indian political system to go beyond family-dominated political parties.

To Sum Up:

Thus, to truly disrupt the shadow economy, fundamental reforms targeting these areas is a must.