taxed sector size, with an implied revenue loss of corresponding amounts.<sup>36</sup> The next subsection explores the implications of the “black economy” in more detail.

# **D. The “Black Economy” Effect**

Having looked at the pathways by which underdeclaration of property values for the purpose of stamp duty evasion may affect individual taxes such as capital gains, in this subsection we discuss a broader impact of stamp tax evasion through its effect on the circulation of black money. It is widely believed that, given the high levels of stamp duty rates, many immovable property sales transactions are deferred, others are not recorded, and even those transactions that do pass through the formalities of the registration of the change of title are recorded at values less than the full consideration paid for the property. As this underdeclaration occurs, individuals involved in the transaction must pay a part of the consideration in “black money”; that is, they must pay in cash and in such a way that the consideration paid is not recorded as part of the transaction, be it for the buyer or for the seller.

The underdeclared value of the property must be paid in cash, and the seller is in possession of black money that is unlikely to be whitened as long as continued operations in the black economy are possible and desirable. Indeed, the most frequent recipient of these funds would be property developers who have strong incentives to continue to circulate this black money in the black economy. As this money continues to circulate, a whole host of other transactions take place in the black economy and continue to escape the tax net. Payments to materials suppliers could be made in cash, thus evading sales and excise taxes. Builders paid in black money would not declare the associated profits for income tax purposes. Moreover, these recipients of the black money would then have the wherewithal and the incentive to make their purchases of goods and services in the black economy, thereby continuing the circular flow of transactions that escape the tax net. As a result, not only are stamp duty revenues eroded by underdeclaration, all tax yields are eroded as the process feeds black money in circulation and provides outlets for black money, whatever its source, thereby increasing opportunities for tax evasion of all kinds. Central government as well as state government revenues suffer.

Table 16 shows the distribution of all tax revenues by level of government, and suggests the possible incidence of the secondary impacts of underdeclaration of real estate values as black money works its way through the economy. These indications are only a rough approximation because it is certain taxes may be more affected by evasion than others, but such an analysis is beyond the scope of this paper. Nonetheless, it is important to note that, insofar as high stamp duty rates encourage underdeclaration of property values, tax revenues from multiple sources suffer, from stamp duties to federal excises to local body property taxes and business income. These numbers indicate that the central government stands to lose about 62 percent of every one rupee of these additional tax leakages, of which about 17 percent would be shared with the States.

> 36  For examples of such calculations, see James Alm (1985), “The Welfare Cost of the Underground Economy”, _Economic Inquiry_ , 24 (2), 243-263; and James Alm and Robert Buckley (1998), “Are Government Revenues from Financial Repression Worth the Costs?” _Public Finance Review_ , (26 (3), 187-213.

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