Directions (Q.1–8): Read the following passage carefully and answer the questions given below it.
Now that the debate on demonetisation is simmering down, it is a good time to go into its root causes. The problem is the generation of black money, which would be a non-issue if there were no taxes. That, however, is unthinkable since the state requires revenues for defence, welfare, infrastructure, the administrative machinery and so on. Once there are taxes, however, there is always the temptation to evade them, especially if they are too onerous.
Tax evasion goes back to the time when trade took place between nation states through land and sea routes. In India, tax evasion became rampant after the 1960s, when a nexus developed between business and politics. Politicians needed funds which were outside the ambit of audit and businesses generating black money by and large became a social reality. The term “crony capitalism” began to do the rounds and was spurred by the licence permit raj: Even those who abhorred it got drawn into the vortex of corruption. The reforms of 1991-92 did away with many of the licence-permit restrictions and the country enjoyed over two decades of high growth.
This brings us to the current story of demonetisation. The immediate impact of erasing the value of Rs 1,000 and Rs 500 notes was to make them worthless overnight, thus destroying nearly 80 per cent of the money in circulation. There are two aspects to this concept; the stock of money and the flow of money. ‘Stock’ would typically comprise hoarded cash, gold and jewellery.. There was a stock of money with citizens, a portion of which could be explained as savings from legitimate income as well as that which could not — the latter formed part of tax evasion and was a major component of black money.
Firms which likewise kept money off the books, stored it away from banks and the tax authorities. There were ingenious ways of holding black money, through benami land and a network of companies at home and abroad, which often proved a nightmare for the authorities. In the sudden sweep of demonetisation, there is no doubt that a good amount of black money was cancelled, thus appearing as revenue for the government. The problem is with the “flow” side: Undoubtedly, digitisation will help in plugging leakages but it will be a time-consuming project. On the other hand, Aadhaar and other identification methods, given vast computer memory banks, will make it easier to track the mismatch between legitimate income on the one hand and expenditure plus savings on the other.
From economic theory perspective GDP should have declined. The latest figures tell us that the GDP growth rate has remained steady at 7 per cent. There could be two reasons for this. First, agricultural growth has shown a spurt of 6 per cent and second, the non-capital expenditure of the government shot up during this period, thus adding to the white money stream in the country.
With demonetization, government attempted to root out black money. Since this results from tax evasion, let us see what economic theorists have to say about optimising taxes. Arthur Laffer believes that if we plot the tax rate on the horizontal axis and tax revenue on the vertical axis, revenue will be optimised at a sweet spot, where the tax rate is not too onerous and the revenue is maximum. This is shown on the bow-shaped Laffer curve where its maximum horizontal distance from the vertical axis shows the optimal point. If we travel above this point, the tax rate will be so high that revenue will be suboptimal. Below this point, the tax rate will be so low that the government will forego revenue. Keeping in mind that there is a sweet spot for both direct and indirect taxes, the government will have to design a system for all economic activity. These sweet spots will have to be derived through trial and error and, of course, good judgement.
So far, more or less all taxes on goods and services as well as on political parties are in the ambit of government planning — except land and real estate as so well argued by Arvind Subramanian. If land and real estate, as he says, can be brought under GST, this will plug a major leak in the fight against black money. The need for reducing cash transactions, meanwhile, has its limits. Developed countries use cash transactions to the extent of between 5 and 10 per cent of their GDP. In India, which has a long way to go towards digitisation, a figure of 10 per cent or Rs 15 lakh crore seems more realistic.
- In what scenario, would there not be any black money?
1.If we implement GST
2.If there were no taxes
3.If people were honest and sincere
4.If we had cashless economy
5.All of the above are trueAnswer – 2
The passage on a whole discusses the ways of curbing black money only, not making it zero. Para 1 provides the answer, when author says: “The problem is the generation of black money, which would be a non-issue if there were no taxes.”
- How can we determine ‘sweet spot’ for a country’s economy, as discussed in the passage?
1.By calculating the tax rate on different items
2.By calculating the tax revenue
3.Both 1 & 2
4.It can be determined by trial and error
5.It varies from country to countryAnswer – 4
Second last para, last line: “These sweet spots will have to be derived through trial and error and, of course, good judgement.” Hence the answer D. Tax rate and tax revenue are used to plot the graph but the option uses word ‘calculating’, which completely changes the meaning. They are already calculated by govt.
- Which of the following is true, as per the passage?
1.Increase in non-capital expenditure increased the amount of white money
2.Arvind Subramanian is the Finance Secretary
3.Demonetization has previously been done in other countries as well
4.Digitisation is a better method than Aadhaar to curb black money
5.After doing away with licence raj, govt enjoyed a decade of high growthAnswer – 1
Third last para justifies the option 1. 2 and 3 have not been stated in the passage. Option 4 is wrong, 4th para states that Aadhaar is a better method than digitization to curb black money.
- What factor/factors contributed to the increase in tax evasion?
1.Govt’s lackadaisical attitude towards the citizens
2.Implementation of Licence raj
3.Developing of nexus between businessmen and politicians
4.Both 1 & 2
5.All 1, 2 and 3Answer – 3
1 has not been stated in the passage. 2 is wrong as it has been given that Licence Raj increased corruption, not black money. 3 is the correct option, para 2: “In India, tax evasion became rampant after the 1960s, when a nexus developed between business and politics.”
- Which of the following is true about tax evasion?
I.People evade tax when they are too burdensome
II.Tax evasion can be curbed by digitization
III.Arthur Laffer curve helps in tackling tax evasion
IV.Main agenda of demonetizing the currency was to reduce tax evasion
1.I, II, III & IV
3.Only I, III & IV
4.Only II & III
5.Only I & IIAnswer – 2
I is correct, para 1, last line. II is wrong, digitization will help in curbing black money, it may or may not help in reducing tax evasion. III is wrong, the curve helps in optimizing taxes or tax rate. IV is wrong too, main agenda of demonetization was to attack the black money, not tax evasion.
- How do corporate entities hold black money?
1.Through benami land
2.Through network of companies at home and abroad
3.By putting money in tax havens
4.Both A & B
5.By funding the political parties as and when requiredAnswer – 4
Para4, second line provides the answer. Both options 1 and 2 have been stated in the passage, hence the answer 4.
- Find synonyms of the following: Onerous
5.ExcessiveAnswer – 5
- Find antonyms of the following: Optimise
5.IncorrectAnswer – 1
Optimize – make the best or most effective use of (a situation or resource). Antonym will be 1