Question 13 from UPSC CSE 2021 - Economics

Question

Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?

Accepted Answer

Correct Option: D. Loss of revenue to the State Exchequer due to tax evasion

Strategy: Focus on the primary, direct impact of an issue. In this case, prioritize the fundamental fiscal loss to the state from tax evasion over secondary economic or social consequences.

Key Info: **Black money** in the Indian context refers to income that is not reported to tax authorities, thereby evading taxation.

It typically originates from two main sources:
- Illegal activities such as corruption, crime, and smuggling.
- Legal activities where income is not disclosed, such as tax underreporting in business, property transactions with an unaccounted cash component, and the use of shell companies for offshore routing.

The key issue with black money is the evasion of taxes, which reduces government revenues and constrains the State's capacity to fund public expenditure. This leads to a fiscal deficit, impacts social sector spending, and creates reliance on additional borrowing or deficit financing.

While black money may also result in several secondary effects, these are considered less central:
- Diversion of resources toward unproductive sectors like real estate, gold, or luxury goods.
- Encouragement of the shadow economy.
- Fostering of corruption in political and administrative systems.

Legislative and regulatory measures pursued by the Indian government to tackle black money include:
- The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
- The Benami Transactions (Prohibition) Amendment Act, 2016.
- Increased formalization measures, such as the mandatory PAN for high-value transactions and restriction of cash transactions above certain thresholds.

These actions aim primarily to safeguard tax revenues. Loss of revenue to the exchequer due to widespread tax evasion remains the principal government concern as it erodes the tax base, undermines resource mobilization, curtails public investment, and weakens state capacity.

Answer

Option A: Diversion of resources to the purchase of real estate and investment in luxury housing

Answer

Option B: Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.

Answer

Option C: Large donations to political parties and growth of regionalism