Demonetisation: Black money may be 21 per cent of GDP, find economists
THIRUVANANTHAPURAM: A fresh look at tax evasion conducted post-demonetisation has found that the size of the shadow economy in the country is not as gargantuan as it has been made out to be.
The study, ‘Cash Holding, Tax Leakage and Estimate of Parallel Economy in India’, has revealed that the proportion of tax-evaded income or ‘black money’ is 21 per cent of the gross value added (GVA) and not 60 per cent or above as rumoured.
In absolute size, the tax evaded income (potential tax base minus gross total income) has been estimated at Rs 17 lakh crore, Rs 19 lakh crore, and Rs 22 lakh crore for the fiscals 2011-12, 2012-13 and 2013-14 respectively. This is far below the global average of 38 percent.
The study — done by R. Mohan, a former IRS officer, Dr N. Ramalingam of GIFT, and Dr D. Shyjan of John Mathai Centre, Thrissur — attempted to get a sense of the parallel economy by estimating the potential tax base of the country. They tried to detect leakages in the two main direct taxes, personal I-T and corporate tax. For this, they used the data on factor incomes in Gross value Added, published by the Central Statistical Organisation.
Factor income shares are incomes paid to labour and capital, which are Compensation to Employees (CE) and Operating Surplus (OS). OS comprises profits, rents, interest and all other income other than wages.
The researchers have been generous with income earners below the exemption limit so as to avoid over-estimation. For instance, official figures show that only 15.83 per cent of those who have given their income returns for the assessment year 2014-15 are below the exemption limit of Rs 2.5 lakh.
The study, nonetheless, has assumed that 45 per cent of those receiving CE and 25 per cent of beneficiaries under OS fall below the exemption limit. Calculated together, it means 33 per cent of total income is below taxable limit. Income from agriculture sector, too, has been left out.
Again they have erred on the side of caution by avoiding nominal tax rate and adopting effective tax rate. Official figures state that the effective corporate tax rate was 22 per cent against the nominal rate and surcharge of 33 per cent. The effective tax rate under salaries, which is reflected in CE, is 25 per cent.
After fanatically hedging against overestimation, it was found that there was a leakage (potential base minus actual collection) of Rs 3.22 lakh crore, Rs 3.62 lakh crore, and Rs 4.34 lakh crore for the fiscals 2011-12, 2012-13 and 2013-14 respectively.
A less fanatical assessment made by Mukherjee and Rao in 2015 show that the leakage is more; Rs 4.98 lakh crore, Rs 5.61 lakh crore, and '6.59 lakh crore for the corresponding fiscals. If the proportion of shadow economy according to the Mohan-Ramalingam-Shyjan study is 21 per cent, the earlier 2015 study says it is 30 per cent.
