Page 354 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Indian Economic Policy

Notes estimate further to 1968-69 on the basis of percentage increase in national income from 1961-62
to 1968-69. the income on which tax was evaded for 1968-69 can be estimated at a figure of
` 1800 crores.”
(iii) Rangnekar’s Estimate : Dr. D.K. Rangnekar as member of the Wanchoo Committee, in his
minute of dissent considers the estimates made by the Wanchoo Committee as under-estimates.
According to him, tax evaded income for 1961-62 was the order of ` 1,150 crores, as compared
to the DTEC estimate of ` 850 crores. For 1965-66, it was ` 2,350 crores, as against ` 1,216 crores
estimated by DTEC. The projections of black income for 1968-69 and 1969-70 were ` 2,833 crores
and ` 3,080 crores respectively. Rangnekar concluded : “The compound rate of growth of “black
income” was of the order of 13 per cent per annum at current prices whereas the compound
rate of growth of national income for the same period was 11 per cent per annum.” Rangnekar
further clarifies that if one took into account the leakage of foreign currency incomes and
surreptitious foreign income transfers, the estimates of black income may have to be marked up
by ` 200 crores.
(iv) Chopra’s Estimate : Mr. O.P. Chopra prepared a series of unaccounted income (black income)
for a period of 17 years, i.e., 1960-61 to 1976-77. Chopra uses a slightly modified methodology
recommended by the Direct Taxes Enquiry Committee. Since it is difficult to obtain information
on non-salary income actually assessed, the DTEC assumed the ratio of evaded income to non-
salary assessable income to remain constant to the one observed in 1960-61. Chopra gives up
this assumption in favour of a less demanding assumption. Chopra’s methodology marks a
significant departure from the DTEC approach and as a consequence, he finds a larger divergence
in the two series from 1973 onwards when the income above the exemption limit registered a
significant increase. The underlying assumptions of the methodology are :
(i) Only non-salary income is evaded. While this may be true for government employees,
this does not capture additional benefits given by the private sector to its salary earners,
more especially, business executives.
(ii) Taxes other than income tax are evaded and the study is restricted to only that part of
income which is subject to income tax. Thus tax evasion which may be due to
(a) non-payment or under-payment of excise duty, (b) sales-tax, (c) customs duties, or
(d) substituting non-agricultural income for agricultural income is not captured.
(iii) The efficiency of the tax administration remains unchanged.
(iv) The ratio of non-salary income above the exemption limit to total non-salary income has
remained the same.
(v) The ratio of non-salary income to total income accruing from various sectors of the economy
remains the same.
(vi) Unaccounted income generation in the agricultural sector has not been taken into account.
The study shows that a buoyant economy offers more opportunities for unaccounted income.
During periods of recession, it may be difficult for producers to extract unaccounted money.
The crucial finding of Chopra’s study is that after 1973-74. the ratio of unaccounted income to
assessable non-salary income has gone up, whereas the Wanchoo Committee assumed this
ratio to have remained constant. As a consequence, after 1973-74, there is wide divergence
between the estimates of Wanchoo Committee and those of Chopra. Chopra also corroborates
the hypothesis that tax evasion is more likely the higher the rate of tax.
(v) Gupta’s Study of Black Income using Feige’s method of transaction-income ratio
Poonam Gupta and Sanjeev Gupta have raised some fundamental objections regarding Kaldor’s
methodology used in estimating black income in India. Since the income generated in the illegal
economy is not reported for the calculation of official GNP, the estimates of GNP which are
used as the basis for estimation of black economy are serious under-estimates. Consequently,
the exclusion of black market activity biases all the important indicators of economic activity in
any society. Official statistics on income, therefore, grossly under-estimate the true size of the
economy. That being so, the size of the black economy is also seriously under-estimated.

348 LOVELY PROFESSIONAL UNIVERSITY