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the parallel economy in india

The Parallel Economy in India

Economy consists of economic system of a region in amalgamation with the social factors, the labor, capital and land resources; and the production, exchange, distribution, and consumption of goods and services of that area. Consumption, saving and investment are core components in the economy and determine market equilibrium.Parallel economy - The functioning of any unaccounted and unsanctioned economic sector whose basic operations run parallel, however against the sanctioned or legitimate sector of the economy. Parallel economy is also known as ‘unaccounted economy’, illegal economy’, ‘subterranean economy’, ‘underground wealth’, ‘black economy’, ‘parallel economy’, ‘shadow economy’, ‘underground’ or ‘unofficial’ economy, or ‘unsanctioned economy’. The parallel economy incorporates all the forms of activities through which black income is generated and those which are usually not accounted for. The money circulated in parallel economy is known as the ‘Black Money’.Parallel economy negatively impacts the economic system of a country. Due to this, the GDP is reduced to nearly half of what should have been in the absence of the unaccounted component of economy. In other words, the volumes of the accounted and unaccounted components of the Indian economy are almost equal. Also, the black money generated in parallel economy accentuates the inequalities in income and wealth and deepens divide between rich and poor. There are two possible sources of black money:Source of income is itself illegitimate, ie. Income from an illegal activity like smuggling, bribery, trafficking etc.Source of income is legitimate but it is concealed from taxation. Causes of Black Money Generation  There are many reasons for the creation of back money in India. Some of them are as follows:1. Controls and licensing system - Before the economic reforms, the private sectors were allowed to produce goods only with a certified license. This gave birth to the License Raj, wherein the license inspectors resorted to corrupt practices to provide licenses. This led to a huge proliferation in black money. Even today, regulatory authorities like the TRAI are known to resort to corrupt practices while dealing with private players.2. Higher Rates of Taxes - Higher tax rates result into a tendency of tax evasion among the tax payers. Tax evasion is common in income tax, corporate tax, corporation tax, union excise duties, custom duties, sales tax , etc. As per 2022 statistics, only 5% of the Indians are tax-payers.3. Ineffective enforcement of tax laws and corruption in Tax departments leading to tax evasion even by rich sections of India.   4. Funding of political parties through black money with the objective of influencing the government in power in order to receive undue advantages.5. Inflation: The addition in prices of commodities like petrol, etc. in international market, boost in prices of commodities due to increase in duties and taxes imposed by the government, the artificial demand created by people with unaccounted or black money- all cause inflation which in turn leads to the circulation and hence creation of black money.6. The reluctance of governments to bring large agricultural earnings in the ambit of income tax and to reduce the welfare dependent population base has also contributed to creation of black money.The black money accrued from other sources can be easily transformed into white by viewing it on the agricultural returns account.7. Privatization and Public Private Partnerships (PPP) have a huge scope for generation of black income by ministers and bureaucrats.8. Activities like smuggling, property deals, bribery,extortion, concealment of income by professionals, etc. also creates black money. As a result, the circulation of enormous amounts of black income incessantly results in a flourishing parallel economy. Impact of Black Income on the Indian EconomyGeneration of black income, and thereby establishment of parallel economy has been creating the following serious impacts on the social and economic system of the country.Black income causes underestimation of GDP. The volume of Black economy in India is assessed as being equal to normal economy.The direct effect of black income is the net loss of tax revenue to the state exchequer, thus resulting in poor levels of development, and lesser government expenditure.Actual assessment of economy is never achievedCreates an invisible demand in the market, thus causing inflation.    Black money has resulted in the diversion of resources for the purchase of real estate and luxury housing.   Transfer of funds from India to foreign countries.   The availability of black incomes makes people unduly rich.   Black money causes psychological stress to honest tax-payers and  devalues the virtues like hard-work and honesty. Leads to a decline in moral standards in the society.Thus, the existence of parallel economy distorts and disrupts the normal functioning of a country, the economic planning does not bear desired fruits and also the ideal pace of development and growth of the country is never achieved. Government InitiativesThe government has taken a number of steps to curb black money.Demonetization - A process of discontinuing currency notes in circulation.Demonetization was pursued in 1946, 1978 and in 2016, however, this process has not been successful. It was expected that only the white money will come back, while the black money will be rendered useless. On the contrary, In 1978, 99.3% of the total currency notes, while in 2016, 99.8% of the total currency notes came back to the RBI, even though huge sums of currency notes had been destroyed. This meant that even after destruction of huge sums of currency, almost all notes came back and the amount and holders of black money were not revealed or caught. Almost whole volume of black money was successfully converted into white. Moreover, rolling out of Rs 2000 notes in 2016 made it easier to hoard black money.        Voluntary Disclosure of Income Scheme - Introduced in 1997, the scheme allowed anyone to declare and regularise black money by paying taxes, and with a promise of no legal action against the entity in future.The non-tax compliants declared undisclosed incomes and assets, and ended up paying lesser than normal taxes, with all immunities. The income declared under VDIS had been Rs 33,000 crore, however, the actual value of the assets declared was double the value considered for taxation and also the taxes were paid at less than 50% of the normal rate, with zero interest and penalties. Thus, the scheme was nominally successful. Thus, in a way, the VDIS motivated people to evade taxes and wait for such schemes in future.Income Declaration Scheme, 2016 - It was proposed by the then Finance Minister Arun Jaitley  and launched by the Income Tax Department. The Scheme provides an opportunity to come forward and declare the undisclosed income and pay tax, surcharge and penalty  equal to 45% of the undisclosed income declared.  Declarations were to be made from 1st June, 2016 to 30th September, 2016. Though the scheme saw a collection of Rs 65,250 Crore, a record in the history of tax collection, only a small portion of big earners with black money came forward and declared a very small portion of their wealth.Special Bearer Bond Scheme - In 1981, the Government issued Special Bearer Bonds under a scheme which allowed people to invest their black money in these bonds and enjoy freedom from investigations and prosecutions for tax evasion in respect of their holdings of these bonds. The face value of the bond was Rs10,000 and maturity was for 10 years. Anyone could buy the bonds without inviting any scrutiny from the government. The income tax department was prohibited from harassing buyers and the bond could be even bought with anonymity. If one had purchased these bonds in 1981 for Rs10,000, he could redeem it in 1991 for Rs12,000.All of the aforesaid schemes have hardly fetched Rs. 5000 crore over a period of years. The main drawback in these schemes is that they give a mere cosmetic effect to the problem of black money already created but without addressing the root cause of generation of black money. Governments should understand the importance of reducing tax slabs, improving tax structure and widening the tax base. These are long term measures which will prevent tax evasion and reduce the number of dependents in the Indian population.India has tried to combat tax evasion by requiring an identification number for all major financial deals. The Permanent Account Number (PAN) card, issued by the Income tax Department is a compulsory 10‐character number issued to taxpayers by the tax department which is needed during any economic transactions such as buying a car or property, investing in the stock market or converting Indian rupees to foreign currency.  The card was issued in order to prevent tax evasion by individuals and entities as it links all financial transactions made by a particular individual or entity. In this way, the Income Tax Department has a detailed record of all major transactions for tax purposes. Indian citizens who are residents of the country as well as NRI (Non Resident Indians), OCI (Overseas Citizen of India) cardholders, PIO (Person of Indian Origin) as well as foreigners who come under the purview of the Income Tax Act of 1961 are eligible to apply for a PAN card. Firms and companies, governments and minors too can apply for a PAN card. But many transactions, especially those related to property, are conducted in cash and are unlikely to be reported.   Money LaunderingCriminal acts generate a huge profit in quick time for the individual or group that carries out the act. Money laundering is the processing of legitimizing these criminal proceeds so that their origin is disguised and they appear to be coming from a legitimate source. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardising their source. The dirty money from the criminal activity is “laundered” it to make it look clean.Illegal activities include arms sales, smuggling, activities of organised crime, including for example terrorism, drug trafficking and prostitution rings, cyber-crime, embezzlement, insider trading,  bribery etc.   Some money-laundering methods include:Smurfing or structuring- This is the process of breaking up large chunks of cash into multiple small deposits, and spreading them over many different accounts, to avoid detection. Investing in commodities such as gems and gold that can be moved easily to other jurisdictionsInvesting in valuable assets such as real estate, cars, etc.Gambling Counterfeiting goodsUsing cryptocurrenciesUsing shell companies (inactive companies or corporations that essentially exist on papers only)Through the use of currency exchanges, wire transfers, and “mules”—cash smugglers, who sneak large amounts of cash across borders and deposit them in foreign accounts, where money-laundering enforcement is less strict.In response to mounting concern over money laundering, the Financial Action Task Force on money laundering (FATF) was established by the G-7 Summit in Paris in 1989 to develop a co-ordinated international response. One of the first tasks of the FATF was to develop Recommendations, 40 in all, which set out the measures national governments should take to implement effective anti-money laundering programmes. Stages in Money Laundering1. Placement -  Introducing illegal profits into the financial system. This might be done through smurfing, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location.2. Layering - A series of conversions, transactions or movements of the funds to distance them from their source. The funds might be channelled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe. This use of widely scattered accounts for laundering is especially prevalent in those jurisdictions that do not co-operate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.3. Integration -The funds re-enter the legitimate economy.                                                                         Social Impacts of Money LaunderingThe possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious.Organised crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.The economic and political influence of criminal organisations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society.Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generated it. Laundering enables criminal activity to continue. Measures to Tackle Money LaunderingIn the wake of such dramatic transformation of the factors that lead to the generation of black money and the globalized development that facilitates them, the Government of India has resorted to a five-pronged strategy, which consists of the following:Joining the global crusade against black moneyCreating appropriate legislative frameworkSetting up institutions for dealing with illicit moneyDeveloping systems for implementationImparting skills to personnel for effective action. Prevention of Money Laundering ActThe Prevention of Money Laundering Act (PMLA), 2002 was enacted in January, 2003. The Act came into force with effect from 1st July, 2005.The act defines offence of money laundering as whosoever directly or indirectly attempts to indulge or knowingly assists or is actually involved in any process or activity connected with the proceeds of crime shall be guilty of offence of money-laundering. It prescribes obligation of banking companies, financial institutions and intermediaries for verification and maintenance of records of the identity of all its clients and also of all transactions and for furnishing information of such transactions in prescribed form to the Financial Intelligence Unit-India (FIU-IND). It empowers the Director of FIU-IND to impose fine on banking company, financial institution or intermediary if they or any of its officers fails to comply with the provisions of the Act as indicated above. FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.PMLA empowers certain officers of the Directorate of Enforcement (ED) to carry out investigations in cases involving offence of money laundering and also to attach the property involved in money laundering. The PML Act seeks to combat money laundering in India and has three main objectives:To prevent and control money launderingTo confiscate and seize the property obtained from the laundered money; andTo deal with any other issue connected with money laundering in India.The Act also proposes punishment under sec.4. Enforcement Directorate (ED)The Directorate of Enforcement was established in the year 1956 with its Headquarters at New Delhi. It is the principal agency responsible for investigation and prosecution of cases under the PML, and enforcement of the Foreign Exchange Management Act, 1999 (FEMA).  The Directorate is under the administrative control of Department of Revenue for operational purposes and for policy issues pertaining to PML Act. While the policy aspects of the FEMA, its legislation and its amendments are within the purview of the Department of Economic Affairs.The Directorate has 10 Zonal offices each of which is headed by a Deputy Director and 11 sub Zonal Offices each of which is headed by an Assistant Director.Zonal offices- Mumbai, Delhi, Chennai, Kolkata, Chandigarh, Lucknow, Cochin, Ahmedabad, Bangalore & HyderabadSub Zonal offices - Jaipur, Jalandhar, Srinagar, Varanasi, Guwahati, Calicut, Indore, Nagpur, Patna, Bhubaneshwar & Madurai. Egmont GroupFinancial Intelligence Unit-India (FIU-IND) is a member of the Egmont Group, an international organization for stimulating co-operation among FIUs. The Egmont Group serves as an international network fostering improved communication and interaction among FIUs. The goal of the Egmont Group is to provide a forum for FIUs around the world to improve support to their respective governments in the fight against money laundering, terrorist financing and other financial crimes.India became member of the Egmont Group in May, 2007.FIU-IND is the national agency responsible for receiving, processing, analysing, and disseminating information relating to suspect financial transactions. It is an independent body reporting to the Economic Intelligence Council headed by the Finance Minister. For administrative purposes, the FIU-IND is under the control of the Department of Revenue, Ministry of Finance.Under the Rules issued under the PMLA, the following types of reports have been prescribed for the reporting entities:Cash Transaction Reports (CTRs)Suspicious Transaction Reports (STRs)Counterfeit Currency Reports (CCRs)Non-Profit Organizations Transaction Reports (NTRs) The Asia/Pacific Group on Money Laundering (APG)The Asia/Pacific Group on Money Laundering (APG) was officially established as an autonomous regional anti-money laundering body in February 1997 at the Fourth (and last) Asia/Pacific Money Laundering Symposium in Bangkok , Thailand . The APG was formed with the objective to facilitate the adoption, implementation and enforcement of internationally accepted anti-money laundering and anti-terrorist financing standards set out in the recommendations of the Financial Action Task Force (FATF).The APG's role includes assisting jurisdictions in the region to enact laws dealing with the proceeds of crime, mutual legal assistance, confiscation, forfeiture and extradition. It also includes the provision of guidance in setting up systems for reporting and investigating suspicious transactions and helping in the establishment of financial intelligence units.India became a member of the APG in March, 1998. Financial Action Task Force (FATF)The Financial Action Task Force (FATF) is an inter-governmental body which sets standards, and develops and promotes policies to combat money laundering and terrorist financing.The Forty Recommendations and Nine Special Recommendations of FATF provide a complete set of counter-measures against money laundering covering the criminal justice system and law enforcement, the financial system and its regulation, and international co-operation. These Recommendations have been recognized, endorsed, or adopted by many international bodies as the international standards for combating money laundering.India became a member of the FATF in 2010.