Page 359 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 28: Parallel Economy

undertakings. Tenders are invited for the various works and these tenders are awarded by the Notes
bureaucracy in consultation with the political bosses. Thus, a symbiotic relationship develops
between the contractors, bureaucracy and the politicians and by a large number of devices,
costs are artificially escalated and black money is generated by underhand deals. Instability of
the political system has given a further momentum to this process. The rapidity with which
ministers are changed or dropped or cabinets reshuffled, has added another dimension to the
problem. Since the ministers are not sure of their tenure and in a majority of cases, the tenure is
very short, the principle ‘Make hey while the sun shines’ is adopted by most of them. The large
number of scandals that are unearthed by the Opposition only support the contention that
huge investment in the public sector is a big potential source for black money generation.
28.1.5 A Survey of Measures Undertaken to Unearth Black Money

It would be desirable at this stage to make a survey of the measures undertaken to unearth black
incomes since independence and to assess their success so that further course of action can be decided.
The principal measures undertaken were :
(i) Measures to check tax evasion : One of the basic causes of black income generation and then its
conversion into either white money by various measures or into black wealth is tax evasion.
Therefore, plugging loopholes in tax evasion by a large number of legal and administrative
measures was undertaken. Most of these measures were based on the recommendations of
various committees and commissions, viz., the Taxation Enquiry Commission (1953), Nicholas
Kaldor’s proposals for Indian Tax Reform (1956), the Direct Taxes Administrative Enquiry
Committee (1958). Recommendations by the Administrative Reforms Commission (1969), the
Direct Tax Enquiry Committee (1971). Most of these recommendations pertained to improvement
in tax laws. But more important than that, the various committees felt that tax administration
was too weak and ineffective. The penalties imposed under the tax laws were not deterrent
enough and the tax administration machinery was not able to bring to book the tax evaders.
During 1965-69, all the measures taken against tax evasion yielded only ` 105 crores by way of
taxes and penalties.
While it is customary to make the income tax officials as scapegoats in the matter, the fact of the
matter is that the political support needed by the Tax Administration did not come forth and
thus even the income tax officials who pursued their task honestly and vigorously were
demoralised. This is evidenced by the fact that when state support was given in 1975, then in
one year income tax revenues jumped from ` 874 crores in 1974-75 to ` 1,214 crores in 1975-76,
an increase by 39 per cent, but as state support declined, tax revenues also started declining.
The rot at the political level only demoralises the tax administration and makes it dysfunctional.
(ii) Demonetization : In 1946, demonetization was resorted to but the Direct Taxes Enquiry
Committee in its interim report admitted : “Demonetization was not successful then, because
only a very small proportion of total notes in circulation was demonetized. Notes demonetized
in 1946 were of the value of ` 143.97 crores as against the total notes issued of the value of `
1,235.93 crores.’’
Another demonetization was attempted with effect from January 16, 1978 of high denomination
notes, i.e., ` 1.000, ` 5,000 and ` 10,000. The high denomination notes as on that date aggregated
to ` 146 crores. Notes tendered to the Reserve Bank of India amounted to ` 125 crores as per data
available till August 1981. Obviously, demonetization failed to make a serious dent on unearthing
black money.
Demonetization assumes that all black incomes are held in the form of cash balances, but the
fact of the matter is that it is only a small part of the total black incomes which is held in liquid
form. The rest are in circulation. Secondly, businessmen invent a number of clandestine ways
to circumvent demonetization. So the net effect of this limited and partial measure to destroy
black incomes is too insignificant.
(iii) Voluntary Disclosure Schemes : From time to time, various voluntary disclosure schemes were
floated by the Government. These schemes were nothing but a camouflaged version of reduction

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