Previous Year Question
Which one of the following effects of the creation of black money in India has been the main cause of worry to the Government of India?
Diversion of resources to the purchase of real estate and investment in luxury housing
Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
Large donations to political parties and growth of regionalism
Loss of revenue to the State Exchequer due to tax evasion
Correct Answer: D
Detailed Solution
Black money generally refers to income or assets concealed from the governmental accounting and taxation system to evade tax or other legal obligations. It may include:
income generated through illegal activities; and
income generated through lawful activities but not disclosed to the tax authorities.
Option (d) is correct.
According to the Ministry of Finance’s White Paper on Black Money, a major fiscal consequence of black money is the erosion of the tax base and the resulting loss of government revenue. When income is concealed, the applicable income tax, goods and services tax, customs duty or other taxes are not fully paid.
Loss of tax revenue leaves the Government with comparatively fewer resources for education, healthcare, infrastructure, social security and other public services. It may also increase the burden on compliant taxpayers and place additional pressure on the fiscal deficit.
Black money also undermines equity and fair competition. A person or business evading taxes may face a lower effective cost than a compliant taxpayer, thereby weakening the general culture of tax compliance.
Options (a) and (b) describe possible uses of black money and the resulting distortion in resource allocation. These are serious effects, but the question identifies revenue loss caused by tax evasion as the principal and direct concern of the Government.
Option (c) combines opaque political donations with the growth of regionalism. Although unaccounted money may be used in political financing, growth of regionalism is not a necessary or principal direct consequence of black money.