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Indian Economic Policy

Notes revenue was nearly 78 per cent in 1971-72, it declined to 72 per cent in 1975-76 but started
rising there after and was of the order of 82 per cent in 1978-79. It follows that reduction
in tax rates could not control the propensity towards tax evasion
(b) There was a dramatic increase in actual tax collection from ` 874 crores in 1974-75 to
` 1,214 crores in 1975-76—an increase of almost 40 per cent. But this spurt in actual tax
revenue was the result of tightening up of tax administration during emergency, coupled
with a vigorous drive for unearthing black incomes. However, buoyancy in tax revenue
was short-lived and with the wearing down of the effects produced by measures taken
during emergency, actual tax collections registered a decline.
The upshot of Kabra’s analysis is that whereas it may be conceded that higher marginal rates of
taxation motivate tax evasion because of its expropriatory nature, a reduction in the marginal
rates of taxation, even though substantial, is no guarantee that tax evasion would not be resorted
to, if the costs and risks involved in tax evasion are considerably less than the amount of money
converted into black income. In other words, elasticity of increase in tax revenue as a consequence
of the reduction in the marginal rate of taxation is less than unity. Kabra writes : “In a regime
which induces reduction in tax evasion by a method “soft” on tax evaders (like cut in tax rates)
rather than by “harder” method which enhances the costs and risks of tax evasion, it would be
difficult to expect a better tax compliance through “soft-methods.”
(ii) Black money generation as a consequence of controls, licensing system : There is a school of
thought which firmly believes that the system of controls, permits, quotas and licences which
are associated with maldistribution of the commodities in short supply results in the generation
of black money. The Wanchoo Committee explaining this factor as a source of black money
observed, “In spite of the vigilance exercised by the Government, controls and regulations came
to be used by the unscrupulous for amassing money for themselves. Since considerable
discretionary powers lay in the hands of those who administered controls, this provided them
with a scope for corruption—’speed money’ for turning a blind eye to the violation of controls.
All this gave rise to trading in permits, quotas and licences, malpractices in distribution and in
the process, it generated sizeable sums of black money.”
Dagli Committee on Controls and Subsidies concurring with DTEC observed : “Price and
distribution controls have in the past led to the generation of black money on a significant scale.
Any price control without any adequate machinery of distribution and speedy arrangement for
increasing supplies is potentially a source of black money generation.”
Dagli Committee pointed out rent control leads to “pugree system” and is, therefore, another
source of black money. Similarly, the system of licences requires large number of inspectors for
completing various formalities and thus good amount of hush money has to be paid.
(iii) Donation to political parties : Ever since the Government decided to ban donations to political
parties in 1968, it prompted businessmen to fund political parties, especially the ruling party,
with the help of black money. Ostensibly, this decision was taken to reduce the influence of big
business on the electroral process, but in practice what happened was precisely the opposite.
Businessmen everywhere have by now learnt that they should pay a certain charge out of the
black money to the coffers of political parties and then be sure that the political leaders will
only bark but not bite. Big business, in the process, has been able to tame the political leadership
and thus, the latter has started speaking the language of big business etc.
(iv) Ineffective enforcement of tax laws : Whereas the Government has an armoury of tax laws
pertaining to income tax, sales tax, stamp duties, excise duty etc., their enforcement is very
weak due to widespread corruption in these departments. The high rates of these taxes induce
businessmen to avoid recording of these transactions. This evasion largely goes unchecked and
thus sets in a chain reaction for the generation of black money at the wholesale, retail as well as
production levels.
(v) Generation of black money in the public sector : Every successive five-year plan planned for
a larger size of investment in the public sector. The projects undertaken by the public sector
have to be monitored by the bureaucrats in Government departments and public sector

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