Thursday, May 17, 2012

India's not the worst when it comes to black money

A lot has been said about the black money menace prevailing in India. It is believed that the tax evasion resulting from black money transfers has virtually choked the economy. However, it is worthwhile to note that when compared to most of its BRICs peers India has fared relatively better in curbing the black money menace. A recent study by researchers from Bogazici University indicates that the size of the shadow economy in India is declining. A shadow economy is that part of the economy where transactions happen in cash. And such transactions circumvent tax.

The research shows that the size of the Indian shadow economy has fallen in the last 40-50 years. In fact, it has contracted from about 40% of the GDP in 1950 to about 23% in 2008. Most BRIC peers have also seen their shadow economy contracting. But the absolute size of their shadow economy is much higher than India. China is the only country that has fared better than India. However, we believe that a lot needs to be done from here on to curb black money trafficking. Aggressive tax planning devices can help. Measures like General Anti Avoidance Rules (GAAR) are also suitable.    

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