In order to create and sustain a healthy economy, a country should have a good tax revenue collection. Black Money basically refers to the income on which the tax is evaded or paid partially. This is one of the biggest menaces of an economy. Obviously, the existence of black money cause mammoth losses to the exchequer of the country and devoid it of its revenues, thereby reducing the pace of social or economic progress. The assessment of the nation’s progress depends on the accurate calculation of the savings to income ratio. It cripples the free flow of resources in the desired direction, widening the income gap of the population. According to various reports some of the countries which top the list of black money include India, Russia and United Kingdom.
Impact of Black Money
Even though there are multiple effects of this economic menace, some of the most prominent once include:-
Tendency to spend money too fast, too soon
The demand in the economy is pushed by the black money as black money holders buy commodities at a higher price in order to dispose the money fast, this increases the prices. The white money earners suffer due to this as with increase in price of commodities, inflation also increases.
Current Account Deficit Goes up
In order to protect themselves from the evil causes of inflation, black money holders invest in jewelry, real estate and big purchases in which the payment is mostly through cash. In absence of official receipts, taxes are not paid and no one questions the source of income of the account holder. This lead to increase in the current account deficit which poses a big risk to the economy of the country,
Reduced Purchasing Power Parity
Higher inflation has adverse effect on the purchasing power parity as it drops rapidly as now a person can buy fewer items at the same price as compared to more items earlier. This also leads to decrease in the savings.
Government policies fail
All the policies of various government agencies usually pertain to white money. Thus, in short run these policies remain ineffective. Markets with more black money become unpredictable and vulnerable to various market shocks which can be so adverse that it can bring the economy of entire nation down.
How can we deter black money?
The first step in controlling this menace is to minimize cash transactions. It is a must for any government to encourage the use of bank cheques and credit cards for transactions, this acts a major deterrent against black money as cash is not involved. This is the reason why developed countries like US 99% of the sales and purchases take place through these banking instrument against developing countries where its vice versa. Charted accountants guides tax payers to save tax and avoid payment. Severe punishment should be levied to such CAs who converts black into white money. At the same time, tax exemption limit should be increased so that people also gets discouraged to use wrong means to save tax.
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