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Harmful Effects of Black Money under Income Tax

One may wonder how black money could harm the system when it is already a part and parcel of it. First of all, it distorts the national statistics as transactions carried out with black money do not get recorded. Therefore, published figures of production, distribution, employment, etc. are not reliable for national planning. Fiscal policies do not achieve the desired results because of the existence of unreported black economy. The other serious consequences are:

1.       Evasion of taxes deprives the government of much needed revenue, and thus hampers growth and development.

2.       It contributes to inequity in the society as black money earned is
cheap money which is spent in a lavish way in disregard to cost of goods and services. This also leads to scarcities on the one hand and rise in prices on the other, which are a great strain to the weaker sections of the society.

3.       Ostentatious display of wealth by the holders of black money leads to
focus on disparities and to class division.

4.       The part of black money invested in unproductive channels like holding
of gold, contributes nothing or very little to productive activities.


5.       Presence of black money results in the flight of funds from India to foreign countries through clandestine channels. The flight of capital abroad lowers productivity and employment potential within the country.

6.       Black money fuels corruption in the administrative and political
system, and corrodes the moral fibre of the society in a vicious manner.

7.       Black money is used for crimes or anti-social activities. In heinous
crimes against the society, like terrorism, what is used is black money. This is the most serious consequence.

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