Black economy

Black economy and its effect with an insight of how tax havens work.

1. Black Economy

2. Table of Contents

3. Introduction A black economy is that portion of a country's economy that is undocumented. Individuals prefer to operate within the black economy so that they can avoid making tax payments to the government, or to avoid price controls or rationing. The black economy operates by using cash payments or barter to settle transactions. The transactions occurring within the black economy are not included in a country's gross domestic product (GDP) calculation, since there is no way to measure it. The black economy constitutes a large part of the total economy of a country in the developing world, because these nations have a large proportion of low-income citizens who cannot afford to pay taxes. Consequently, the GDP figures for many developing nations are probably severely under-reported.

4. There also tends to be a thriving black economy when a government imposes excessively high taxes, or when the government restricts certain types of activities, such as the sale of drugs or weapons. A black economy is also present when the government imposes an excessive amount of regulation. Examples of black economy transactions are: The sale of illegal drugs The provision of unauthorized transportation services  Smuggling heavily-taxed goods over the border for sale within the country   Paying cash to a housekeeper Unauthorized currency conversions

5. What is Black Economy? In  India ,  black money  is funds earned on the  black market , on which income and other taxes have not been paid. Also, the unaccounted money that is concealed from the tax administrator is called black money.  The black money is accumulated by the criminals, smugglers, hoarders, tax-evaders and other anti-social elements of society. People generally tend to keep black money in the form of gold, immovable property and other secret manners. Such money does not become part of the main economy and, therefore, remains generally out of circulation. The black money keeps circulating among the wealthy and creates more opportunities for them. Around 22,000 crores of rupees are supposed to have been accumulated by the criminals for vested interests, though writ petitions in the supreme court estimate this to be even larger, at ₹300 lakh crores. The infusion of unaccounted black money in the economy leads to higher inflation, which obviously hits the poor the most. It also increases the disparity between the rich and the poor.

6. What is the difference? Black Economy Black economy can be defined as the part of a country's economic activity which is unrecorded and untaxed by its government. The black economy is made up of the collection of various black markets in an economy. The black economy is all economic activity in a given economy that occurs outside or in violation of the prevailing laws and regulations of society. Activity in the black economy is often illegal, usually untaxed, and rarely recorded by official economic statistics. In fact, the activity may not consist of formal market transactions at all, making it very difficult to estimate. Black Market A black market is an economic activity that takes place outside government-sanctioned channels. Black markets trade in illegal goods and services, legal goods and services to avoid taxes, or both. Black markets do provide some benefits, such as creating jobs for those who may not be able to find employment in traditional markets and allowing access to medicine and healthcare to those individuals that might not have had access otherwise.

7. Continuing… Black Economy Black economies typically arise when a government restricts economic activity for particular goods and services, either by making the transaction illegal or by taxing the item so much that it becomes cost-prohibitive. A black market may arise to make illegal goods and services available or to make expensive items available for less money (such as pirated music or software). The black economy also consists of fake goods industry where replicas of the goods belonging to another well-established brand are sold under the same name. The fake goods industry is outside the formal economy, causing piracy and loss of revenue to both the brand and the government. This is part of unreported or the unrecorded economy. For example, there is a restriction on production, cultivation, trading, and distribution of any narcotic drug or psychotropic substance under the Narcotic Drugs and Psychotropic Substances Act, 1985. This would be part of the illegal economy. Black Market Black markets can have a negative impact on the economy because the activity is not reported and taxes are not collected on the transactions. With the rise of the Internet, many black-market transactions are now done online, such as on the dark web, and often conducted with digital currencies. Example of this can be black marketing of oxygen concentrators by Navneet Kalra, this the most recent example we can see.

8. Major sources of Black economy

9. Size of black economy in India created by different industries It is estimated that India has a black economy of 62 percent of GDP - earning roughly Rs 93 lakh in income (or USD 14 trillion). This is greater than the combined revenue from agriculture and industry, which is around 39% of GDP. It is more than the government (centre plus states) expenditure, which is around 27% of GDP. The country's economy lost an average of 5% growth from the mid-1970s, when the Black economy was important in terms of its presence (in comparison to official numbers). In the last four decades or so, if we add 5% of growth rate, our economy would be Rs 1,050 lakh (or around US Dollars 15 trillion at current exchange rates) rather than Rs 150 lakh (or 2.2 trillion US Dollars) as is now the case. Behind the US and the middle-income countries, we would have become the second largest in the world. The country's revenue per capita was Rs 7.4 lakh (or $ 11,000) rather than about Rs 1 lakh (or $ 1,500). That is to say, each of us would have been on average seven times richer.

10. Impacts of black economy Loss of revenue to the government and running of parallel economy in the country- The black money is in such amount that it is said that a separate economy including only black money is running parallel to the current Indian economy. Vicious circle as a result of black money and corruption- The bribes are given by the people to the bureaucrats, government officials, etc. for getting their work done go to the unaccounted books and is never shown as income which adds more black money to the society. Effects on national income and real capita income- Black money is a result of revealing low income to the government while paying tax by the people which also results in low national income of the country. Decrease in the quality of public goods & services- The people who give bribe to the producers and marketing staff or the services provider will naturally get good quality products and services in comparison to the general public who will not be provided with the same products and quality of services has to suffer. 

11. Higher taxation and inflation-   The Reserve Bank of India itself has admitted that the amount of money in circulation in the Indian economy is quite more than the money inflow on papers.  Difficulty in the formation of monetary and fiscal policy-   This is an obvious impact as the government while making these policies is not able to count the exact national income because of the hidden black money which makes such policies unrealistic. Increased criminal activities in the society- Various terrorist activities have backup power of hoarders of black money which is even harmful to the whole country. The illegal weapons with various groups of unsocial elements are usually bought up by the use of black money. Drugs are the biggest enemy for the youth of the country.  It is estimated that India has a black economy of 62 percent of GDP - earning roughly Rs 93 lakh in income (or USD 14 trillion). This is greater than the combined revenue from agriculture and industry, which is around 39% of GDP. It is more than the government (centre plus states) expenditure, which is around 27% of GDP. The country's economy lost an average of 5% growth from the mid-1970s, when the Black economy was important in terms of its presence (in comparison to official numbers).

12. IMPACTS of BLACK ECONOMY on macro level

13. India's black economy is estimated to be 62% of GDP- generating about Rs. 93 lakh crore of revenue Because of its existence, the country's economy has been losing on an average 5% growth since the mid-1970s when the black economy became significant. If we add 5% to the rate of growth over the past four decades or so, the size of our economy would be Rs 1,050 lakh crore instead of Rs 150 lakh crore as it is now. We would have become the world's second largest income nation and every one of us would have been seven times richer on average. These figures are enough to show the degree and nature of the impacts of Black economy on any nation.

14. PROS of Black Economy Despite the natural negative effect of Black economy, there are few pros of Black economy too: The shadow economy provides jobs and income to people who might not have good options in the legitimate economy. For example, a street market allows dozens of entrepreneurs selling similar products to compete. It allows people to afford medicine, health services, and other essential products they could never obtain otherwise. For example, a doctor in a country illegally can provide low-cost health care on a cash basis because he doesn't pay taxes. It also helps countries survive economic downturns. When people lose jobs, they turn to the shadow economy to survive until the recession is over.

15. CONS of Black Economy It uses money laundering to convert payments to a legitimate form: The goal of money laundering is to move the money from the illicit business through many transactions to obscure the money trail. It prevents bank compliance officers and federal officials from recognizing the signs of an underground business. It may provide goods or services that are prohibited by law. Also, it could provide legal goods or services that avoid taxes.

16. 3) Bank capital itself tends to respond to changes in bank lending and the macroeconomic environment: A large part of the variation in bank capital is likely to result from variations in macroeconomic variables (such as changes in economic activity and interest rate spreads), as well as from changes in economic policy per se. For example, changes in macroeconomic variables affect capital through operating income and asset valuation. Black economy equals less revenue to government: Though huge amount of money is involved in black market transactions throughout the world, the very aim of these off-the-record transactions is to avoid the various taxes, which otherwise need to be paid to the governments. Owing to this, every year, the various governments tend to lose revenue amounting to millions of dollars, which otherwise would have been used for the benefit of countries and their citizens. It causes underestimation of National Income: The black market is illegal in nature, and all the transactions that happen therein, are off the record. In the absence of any authentic record, it is very difficult for the government to correctly estimate the actual economic status of the country. Consequently, it becomes immensely difficult for the government to plan and implement policies for the country’s economic development.

17. BLACK ECONOMY and SDG- 9

18. Sustainable Development Goal 9 The aim of SDG-9 is to build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation . This is because economic growth, social development and climate action are heavily dependent on investments in infrastructure, sustainable industrial development and technological global manufacturing – considered an engine of overall economic growth – has been steadily declining due to tariffs and trade tensions.

19. How Black economy acts as a hindrance in achieving SDG 9... In order to achieve SDG 9, countries have determined that investing in more resilient infrastructure, cooperating across borders, and encouraging small enterprises will all be critical to ensuring sustainable industrial development. They will also have to improve our existing industrial infrastructure, and here, technological innovation will be key. Governments and businesses will have to contribute to creating a hospitable policy environment for innovation, encourage scientific research, and improve access to information technology universally. For implementing these ideas, any nation will be required to fulfil three basic prerequisites: a huge budget for investment as advancing infrastructure requires a huge capital investment; an effective government occupied with an incorrupt bureaucracy as mere allocation of funds is not enough but the execution matters more; will of the public and businesses to contribute towards sustainable development.

20. Now as we are well aware of the impacts of Black economy, we know that: Black economy reduces a government's revenue significantly. As it facilitates tax evasion, a large amount of money which was supposed to be in government's treasury gets eat up in black market. Also most of the good sold in black market are those which are either banned or are highly taxed. So that extra tax, or the penalties on illegal sales of such goods, never come to government. Thus, it hampers the government's capacity to invest on better infrastructure. Black economy and corruption go hand in hand as one induces the other. The strong presence of black economy disrupts the smooth functioning of the government schemes as a majority part of the bureaucrat is corrupt. So even if a government somehow manages to put in a huge investment, the end product will be of much inferior quality as a huge portion of that investment got stuck away in the Black economy. For low-income countries, where the governance is weaker than in high-income countries, corruption and shadow economy may help firms to avoid government regulations, to solve many economic problems and thus, the negative effect of corruption and shadow economy is reduced for low-income countries as compared to high income countries

21. When companies can earn a much larger profit in black economy, they would never want to cut off their profits and work in a sustainable way. We have already been witnessing various incidents since a long time where capital giants skip the measures required for a sustainable growth and often big capitalists get their names involved in money laundering, black marketing and other financial scams. As long as black economy prevails in the current world, these things are not going to change at all. Additionally, the public already have less trust on the state forces owing to the prevalent corruption. As the figures of the national economy also get affected negatively from the black economy, public start to look down upon the government's economy policies. And as we saw that there are few advantages of the black economy too especially on a micro level, people tend to indulge in it due to these benefits and the lack of trust on state. So the contribution from businesses, especially small entrepreneurs and the people is likely to remain negligible towards achieving SDG-9.

22. Generation of Black Economy through Legal Activities An important example of the black economy is legal goods and services that are shielded from taxes. It includes any work done "under the table." It includes any income that isn't reported to tax authorities. For example, a construction worker engages in the black market economy if he takes a cash payment and doesn't report it on his taxes. The work is legal, but his tax avoidance isn't. Another source of black income generation is the variety of permits that are required from government agencies for construction or transfer of urban properties. Any new building requires sanction of a building plan, water connections, electricity connections, a completion certificate and so forth. For expeditious clearance each of these typically requires payment of bribes. Even the simple registration of sale deeds has often to be consummated through bribes. In the case of Delhi a large portion of urban land is controlled by the Delhi Development Authority (DDA) and the Land and Development Office (L&DO) of the Union Ministry of Works and Housing. Transfer of such lands or the associated construction requires prior sanction by the concerned authority. Further, 50 per cent of capital gains (the "unearned increment") is required to be shared with these governmental agencies. All this affords substantial opportunities for unscrupulous elements in the staff of these agencies to extort bribes from the concerned parties.

23. Typically, both buyer and seller of real estate have incentives to declare a lower price on the sale deed than the one at which the transaction actually occurs. For the seller, these inducements include: the evasion of capital gains taxation; the continued evasion of wealth tax in so far as the black portion of the sale proceeds can be held in undeclared forms of wealth; ready access to black funds for use in activities-including fresh purchases of real estate-where such resources are necessary. For the buyer, the incentives encompass: the evasion of wealth tax; the evasion of stamp duties and registration charges. on the transaction; the evasion of income tax (corresponding to income from house property); the evasion of house property tax; investment of black resources in a form in which its detection is far more problematic and in which it earns a higher return than is the case with some alter natives such as undisclosed cash or 'benami' financial assets.

24. Steps To Reduce Black Economy Reform in Labor Laws- One institution that unambiguously increases the shadow economy is the strictness of employment protection legislation. Pro-worker laws were also associated with an increase in urban poverty. So in order to reduce black economy, one of the things that the government could do is reform the labor laws that currently make hiring labor through formal channels costly. In addition, we need a social safety net in place to support such reforms. Right to information- The black economy functions in secrecy. It is crucial to bring under RTI all political parties, the judiciary, the prime minister and the chief ministers’ offices. If it is extended to them, it would make the politician and the executive accountable and their functioning transparent so that, unlike at present, they cannot subvert the law deliberately.

25. Business Transactions India has consistently fared worse on the ‘ease of doing business‘ index. One of the main reasons for this is the lack of transparency in rules and regulations governing business transactions. Reforms in these laws would certainly reduce the growth of the informal or black economy. Changes in structure of taxes The tax structure needs simplification and modification. Corporation tax should be on gross profit and not net so that the costs incurred cannot be manipulated to show lower incomes. Property taxation, which is currently manipulated by fudging the value declared, should be based on site and services valuation. Indirect taxes too need to be simplified by levying them only on final and luxury goods. In the case of taxation of services, incomes are manipulated since norms are difficult to establish. Such manipulation of income by those in the services sector needs to be checked via what is called a presumptive tax. Other regulations that introduce opaqueness in implementation and compliance can also increase the size of black economy or the ability . of the informal economy to pay taxes. The policy of a goods and services tax is a right step in this regard . 

26. Infrastructure Related Policies and Regulations- One of the peculiarities of the Indian informal manufacturing sector growth after 1989 is that it is significantly present in urban India and is constituted mostly by one-person establishments focused on tradable sectors. There is some evidence of subcontracting from larger enterprises suggesting benefits in staying close to the outsourcing firm. These could come from infrastructure being more dependable in urban areas than in rural ones suggesting some role for infrastructure related policies and regulations. Also, subcontracting to the informal sector could be thought of as a way of avoiding hiring labor formally.  Political change needed A major reform required is that political parties function democratically. There is need for internal democracy. Many of today’s leaders come up without serving the people and take over parties. Parties and constituencies are often passed on by political leaders to relatives like property. Such leaders are often contemptuous of the people and represent mostly the interest of society’s upper crust. Citizens’ groups which can present an independent record of the performance of the candidates before elections will help make voters better informed. A politically alert public – which votes consciously in the national interest and not along caste and communal lines – is needed.

27. Women Participation  The growth of the informal sector suggests increasing economic participation of women and could be thought of as a healthy trend. To promote such participation in the interest of reducing gender disparities in economic outcomes would mean finding other ways of tracking such economic activity and bringing it under taxation without distorting the incentives. Fundamental changes in the structure and organization of economy and politics. We need to replace the extractive institutions with ones that broaden access to resources and opportunities, and help build the capabilities of the masses. This is easier said than done and may entail significant political costs in the short term, reducing its attractiveness as a political platform. The urban elites, where most of the votes, taxes and policy influences come from, have reaped the benefits of globalization. In order to make these benefits accessible to the masses would require significant shift in resource allocation and government spending towards better schools, electricity, roads and law and order.   The set of policies that could influence the size and growth of black economy as well as corruption have to do with transparency of policies governing different economic transactions in the economy and their sensitivity to socio-economic problems in India.

28. Some steps taken by Government but did not work Voluntary Disclosure Scheme s T he idea behind the government announcing the Voluntary Disclosure Schemes, which were introduced six times until 1997 was  that if the black savings accumulated over time could be channeled into the white economy then at least it could contribute to the development of the economy.  The government also came out with Bearer Bond scheme in 1979-80.  In 2016, it floated an Income Declaration Scheme to raise resources for development. All of these schemes proved to be counter-productive as it had made people habitual tax offenders. The ineffectiveness of these kinds of schemes shows a lack of imagination on the part of the government as well as an inability to come to grips with the problem for a variety of reasons.

29. Demonetization It wanted to eliminate counterfeit currency used by terrorists and smugglers and it wanted to destroy the black economy by forcing the ‘de-hoarding’ of cash held by those generating black income. But, since demonetization was announced, unemployment has risen, investment has fallen, banks are facing difficulties and the crisis in agriculture has been aggravated in spite of a good monsoon. All this leads to the emergence of recessionary conditions in the economy.

30. PRESENTED BY