Factors responsible for creation of Black money

Black money has been a main problem for all sectors of economy. It has active operations in real estate, Gold, precious metals, money markets and a lot more. In other words, this parallel economy emerges through manipulation of economic forces of demand and supply both of currency and commodities. It also emerges when trade and industry create artificial scarcity of and earn high return on investment by making profits. As a result, black money generates unreported income. 

There are various factors responsible for emergence of black money which I would like to share as follows, which one needs to understand -

1. Concept of black money started from Second World War - During this time when supply of various industrial goods from traditional suppliers was cut off resulting into grave shortages of goods. British Govt. indulged into raising of taxes and diverted the funds in order to meet war expenses In these circumstancs, many indulged in making profits from the goods which were short in supply. Such circumstances snd the results therefrom made a solid ground of what followed thereafter. In USA, Govt. increased corporate and personal tax rates to fund the war expenses besides selling Liberty bonds to public to raise funds. This resulted into post war filing of less tax returns. 

2. Tax structure - High tax rates and defective tax structure invite its evasion. In the case of Govt. revenue,which comes from Central and Excise duties ( about 80% of the total revenue), a small portion of evaded tax returns runs into crores of rupees of black money. Increase in tax rates directly effects the profitability of the organisation and they look for the ways and means to avoid taxes by showing less income.   

3. Licensing and control systems - Price and distribution control systems leads to generation of black money on a large scale. Since significant discretionary powers are in the hands of  those who manages controls provides them a scope of corruption - by speed money for turning blind eye to the violation of controls. Any price control without a proper administration of supply and distribution becomes a potential source of black money generation such as in exercising rent controls, issuing the system of  licences. Where controls are not implementable, harassment and creation of black money run the show.

4. Donation to political parties- Businessmen have by now learnt that they should pay a certain amount to political party to get a protection from the Political leadership. In the wake of political instability in the country, Black money is used  which, in turn, encourages their businesses. 

5. Black money in Public Sector - Every plan - be it annual or five year - provides for a large size of investment in Public Sector. Such projects are to be monitored by the bureaucrats in the Govt. deptts. and PSUs. Tenders are invited for the works and allotted by the bureaucrats in consultations with the political bosses. Thus, a symbolic relationship is established between the contractors, bureaucrats and the leadership. Thus, by a number of measures, costs gets escalated thus black money is generated by underhand deals. 

6. Ceiling on business expenses, Depreciation - Govt. prescribes restriction on such expenses to protetc the interest of shareholders and consumers. Businessmen donot want to part with this and take advantage by through various clandestine sources. Charging of stamp duty in real estate sector is also useful source of generating black money.

7.    Hawala and Corruption - Hawala is a consequence of poor banking system, strong family ties, thus leading parallel economy in the country. 

8. Under-invoiced goods- It is done to keep the amount for sale in the black market which is never shown in the accounts books.

9. Over-invoicing of goods- Materials purchased are shown at higher value to convert the black money in white in the books of accounts.

The existence of Black money effects the eco nomy of the country in the forms of  - Mass poverty, Uncontrollable inflation,  Loss of revenue to state exchequer, Underestimation of GDP,, Inflated Real Estate.which needs to be looked into for bringing economy on track in a useful manner. 

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