The White Paper on Black Money[Non Tax Paid] in India makes for very good background reading on various ways of generating black money: the paper focuses on black money generated via non-disclosure to public authorities rather than that generated from illegal activities.
How is Black Money Generated in India ?
Eighteen ways of manipulating accounts to generate black money are highlighted and ‘vulnerable’ sectors like real estate, bullion, financial markets, public procurement, non-profit sector, transfer pricing and tax havens are identified.
There is no estimate on the contribution of the above factors in black money generation but various reports are cited to estimate the black money generation annually at 20% of GDP. Assuming it to be a reasonable estimate, at 30% tax rates, this can yield 6% of GDP as tax revenue, wiping off the Government’s fiscal deficit.
Assuming we start with a ‘no black’ economy, if 20% of annual GDP is ‘black’ and the economy grows at say, 8% p.a. in real terms, then even as (1) the real GDP doubles in 10 years, (2) the cumulative stock of ‘black money’ is worth 1.5X the tenth year GDP. If we assume that the black money earns no returns, black money finds a Government “approved” store of value in land / real-estate.
The paper makes a case for increasing the cost of tax administration to reduce the cost of tax compliance (more spends on manpower and systems). Reduction in stamp duties in real estate, reporting or tax-deduction-at-source of bullion and jewelry transactions, payment of salaries directly in bank accounts, model e-procurements, incentives for use of credit and debit cards, creating an effective deterrence and curbing of structuring via tax havens are
proposed as some interesting initiatives to reduce generation of black money.