Black Money Blues: How Hidden Wealth Hurts India’s Tax Revenue

Introduction

For a long period, progress has been shadowed by tax evasion, which involves intentionally hiding income or presenting false financial statements to avoid paying taxes. It does not simply include avoiding the payment of financial penalties; it also includes activities such as diverting funds from economic and social welfare projects.

Such illegal activity includes hiding income, finding loopholes in legal procedures, and taking advantage of such loopholes. All this results in a reduction in public funds availability and impacts funds that are required for the development of infrastructure projects and other projects made for the development of the education and healthcare sectors.

Tax evasion results in the existence of a parallel economy driven by black money, which leads to mistrust of the government and deepens the wealth divide.

Tax evasion and lawfully avoiding tax are different from each other, and there is a significant difference between them. Tax evasion reduces tax liabilities by taking advantage of loopholes and deductions available in the tax code.

Handling tax liabilities by creating tax-shelter accounts or retirement plans is acceptable.

Important measures for tackling tax avoidance include encouraging moral behaviour among Chartered Accountants and Tax Attorneys, bolstering the legal framework, and promoting more openness in government expenditures.

Exposure to tax evasion activities requires more than just statistics; it includes advancement in social justice, development of a more prosperous and sustainable future, and promotion of trust building.

What Is Black Money

In India “Black Money” refers to funds that have been stored or gained through unlawful activities. There are two primary scenarios possible in such a case:

  • First, such money has been acquired through illegal means. This might include serious offences such as terrorism, drug trafficking, human trafficking, and organised
  • Hiding from taxes: This refers to legitimate income that is not declared to the government for taxation purposes.

The fundamental idea is still the same, despite the existence of phrases like “unaccounted economy” and “parallel economy”: black money is defined as revenue that is hidden from view by the government. Therefore, it may originate from both illicit and legitimate sources that are merely unreported.

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Taxes

There are two types of hidden wealth: unreported income and earnings obtained illegally. These are what the government refers to as “unreported assets,” which include both illicit gains and legitimate income that is kept out of the records. This hidden wealth can take many different forms, from substantial quantities hidden by wealthy people to lesser amounts hidden by regular people for a variety of reasons. Although large-scale concealed wealth is frequently the subject of media and political discourse, it’s important to acknowledge the larger problem of undeclared income at all income levels.

Impact Of Black Money On Indian Economy

The existence of a parallel economy driven by black money can act as a serious obstacle to India’s growth and development.

There are several negative effects of black money on an economy:

  • The expansion of a hidden economy that helps only a small number of individuals will increase inequality in the distribution of wealth and income in the country.As a result large number of people are being deprived of resources and opportunities which will ultimately increase widespread poverty in the country.
  • It is a challenging process for the government to collect a fair share of taxes because of the covert nature of black money. This will directly hamper the government’s capability to invest in important projects like infrastructure, education, and healthcare which eventually affects every individual in the country.
  • Black money can be one of the major reasons for unstable prices in an economy. As when black money enters the market the money supply chain is being artificially inflated. This will result in unchecked inflation as people with surplus money will drive up prices of commodities.
  • Black money creates an “underground economy” that works outside the official channels hence the effects of such an economy are unpredictable and impossible to control.

Impact Of Black Money On Tax Revenue

Government budgets face a shortfall because of tax evasion and avoidance because of which there are hidden rich people because of which it is now difficult to anticipate revenue and shows a shortfall in anticipated revenue. To overcome the shortfall of revenue, the government might impose more taxes on people, but there is a backdrop that people who are already paying fair taxes have to pay more taxes, which can discourage them. In addition, middle-class and lower-income people have to pay disproportionate amounts of taxes. This ultimately results in greater income disparity among the people of the country. To cope with this increasing disparity, the government might have to borrow money, which would worsen the already existing unstable financial conditions of the country.

The development and advancement of India’s economy are not only affected by tax evasion but also by fraud. Tax evaders take advantage of loopholes to reduce their tax liabilities , whereas frauds involve overt criminal evasion. All of this directly and negatively impacts governments’ social service programs and economic and infrastructure expansion projects. Tax revenue is essential because it is India’s primary source of income. Due to tax avoidance and fraud, the budget is also shrinking, the government is unable to provide proper services, and the economy falters.

Research by NIPFP states that unpaid taxes and tax fraud are obstacles to India’s economic development.  Research also states that this widespread problem of tax fraud and tax avoidance negatively impacts public spending, tax income, and the country’s budget deficit. Ultimately, because of all this, the government is facing a Rs. 9.6 trillion loss every year.

According to IMP, all of this is reducing public confidence in the government, diminishing public services, and discouraging investments.

Because of ineffective tax administration, tax evasion is simpler. However, this is not the only cause. Other causes are responsible for this problem, such as corruption and flaws in the framework of tax rules.

In brief, unpaid taxes pose a significant risk to the future of the Indian economy. To address this problem and reduce this risk, the government must focus on administrative reforms, making changes in legislation, and increasing public trust.

Conclusion

There are many loopholes in our system that people use for tax evasion

which can be considered a chronic illness as due to such evasion many people are able to avoid tax payments. All this will drain resources and hamper the growth of the country.

Hence government has to create a robust enforcement framework just by making legislation stricter is not the solution. Making citizens of the country aware of the consequences of tax evasion and the benefits of timely payment of taxes will also help as citizens have an important role in this.

Author: Rashi Sharma, in case of any queries please contact/write back to us via email chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

REFERENCES

  • https://dor.gov.in/sites/default/files/FinalBlackMoney.pdf
  • https://jlrjs.com/wp-content/uploads/2023/07/242.-Sahi-1.pdf
  • https://journalijcar.org/issues/impact-tax-evasion-indian-economy
  • https://vidhilegalpolicy.in/research/impact-and-incidence-of-tax-evasion/
  • https://loksabhadocs.nic.in/Refinput/New_Reference_Notes/English/BLACK_MONEY_19-11-2015.pdf

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