What is Black Money ?

What is Black Money ?

Black money is money, which is not declared to the government and tax authorities. Any income which involves tax evasion is black money. Any income on which tax is due and is not paid constitutes black money. So, it is not only the billions of dollars stashed in secret accounts in Switzerland or other tax havens, it is also huge amounts of what constitutes the parallel economy or cash economy within India where income is concealed and different kinds of taxes are evaded.
Any income that is not disclosed is black money. It is the individual who makes Money black or white.

How is black money generated? 

When individuals and businesses, big or small, evade taxes, it is black money. In real estate transactions where there is valuation in white and black money components to avoid paying tax, black money comes into play. There are only 3.5 crore tax payers in the country, of whom a large number belong to the salaried class. Tax collection is obviously poor, so there are a large number of vendors and businessmen who may not be paying full taxes. A lot of people do not show their full income, they pay tax on a small component and hide the rest.

How is black money retained and used?

When proper receipts are not issued by shopkeepers, vendors and businessmen, it is safe to presume that they also conceal the income earned from such transactions. The black money thus generated is used to buy benami shares or property or, in case of larger amounts, sent abroad. Most cash transactions, unless there are proper receipts or invoices, are concealed income while most bank transactions are naturally white. But there are also cases when the money is in the bank but tax may not be paid on it.

How much Black Money does India generate?

It is safe to say that nobody knows for certain. Various estimates are there. According to some estimates, $1.4 trillion US dollars from India are stashed abroad in foreign banks. Another estimate says the outflow from India every year is $ 16 billion every year. Some have suggested that India has the largest amount of money in secret Swiss accounts among all nations.
However, officials who have dealt with these matters say that a precise estimate is very difficult. Some 30 years ago, Wanchoo Committee had provided some estimates. After that, the economic scenario has changed altogether and wealth has multiplied several times. The only estimate is to peg it as a number in relation to the white economy in the country.

Why does India have so much black money?

The trend dates back to the high tax regimes in the 70s and 80s and has continued and tax evasion has flourished since then. Tax collections and enforcement has also been poor and inefficient, which is partly due to weak willed governments and partly because of a lax tax administration. Tax laws are not enforced fairly and equitably.

Is black money in the country growing or declining?

It is growing despite tax rates having come down sharply. One would have expected black money to decline but that does not seem to be the case. Conspicuous consumption and the growing trend of spending on partying, designer items, grand entertainments and lavish lifestyles seem to be largely funded by black money. And since nobody gives or receives bills or receipts, it is difficult to check.

How is the black money taken out of the country?

The most prevalent way is the hawala channels where a deposit is collected in India and the amount delivered abroad in a foreign currency. So, you pay in Indian Rupees and get it exchanged for dollars, pounds or any other currency. Then you can put it in a Swiss account or buy a property in south of France or whichever place you fancy .

How easy is it to stash Black Money in tax havens?

Apparently, quite easy. Because it does not involve a physical transfer and you don’t have to carry the money in a suitcase. There is a flourishing industry which takes care of it. In an hour’s notice, hundreds of thousands of dollars can be transferred out.

What is meant by Tax havens?

Tax havens are countries and jurisdictions where taxes don’t apply. With countries like Cyprus and Mauritius, India has a double taxation agreement where taxation is only 5-10 per cent. The term money laundering came from cleaning money so these havens make your money white. Thereafter, you can route it back to India as stock market investments or investments into projects.

Is black money an India-specific phenomenon?

No, but the quantum is higher in India. The more developed economies have less of black money. They have been able to establish credible and durable institutional governance and tax administration systems which work well. Enforcement is swift and people fear the law and it is difficult to evade laws and when you are caught punishment is exemplary. Emerging economies and less developed countries suffer more from this phenomenon. In India, one reason that is cited is that this culture grew with the socialist agenda and when wealth was treated as unhealthy. Another factor is the Indian psychology of preserving and growing wealth for future generations.

What are the steps to curb Black Money?

The government seems to be taking some steps to curb black money. It is looking at legislation to ensure return of black money, confiscating it and meting out exemplary punishment. In addition, a criminal investigation department has been set up under the Income Tax Department. The more banking culture grows, less will be the use of cash. The more sophisticated the tracking and surveillance systems become, evaders can be caught more easily through tracking the money trail.

Will increasing the rate of Income Tax and reducing other duties help?

Highly unlikely. When income tax rates go up, evasion increases. One idea is that since the state is not able to collect the income tax legitimately due to it, duties should be raised on consumption items which is easier to collect. But that will make everything far more expensive and common people may not be able to afford them and thus demand and consumption will be reduced.

Will banning of large denomination currency notes help?

It was tried in 1979 but nothing much happened. These days, things are so expensive that even 500 or 1000 Rupee notes are not that large. And given the nature of the Indian economy, which is so unorganized and cash driven and with huge agriculture, large labour force and small businesses as components, it may be difficult.

Can money abroad be brought back?

The big issue is the chance of big names getting exposed. This could implicate politicians, bureaucrats, industrialists, even political parties among others. One idea may be to have a VDIS kind of scheme which says that you get the money back and no penalty is imposed. But that would result in a public outcry that first there is incentive to create black money and then even more incentive to bring it back. And without incentives, people may not bring it back or they may even have routed it elsewhere. In fact, some of it may have returned with the economic boom in India into the stock market and industrial activities.

WHY INDIA HAS MORE BLACK MONEY Traders do not give receipts Property transactions made both in ‘white’ and ‘black’ Agriculture income remains unaccounted Cash transactions remain the norm Indians hoard gold and silver Tax evasion still rampant Less than three per cent of the population pay income tax Some of the laws and initiatives, cited by the government, are : Prevention of Money Laundering Act, 2002 : Individuals and legal entities like companies can be prosecuted for money laundering. The Act provides for a minimum of 3 years imprisonment, which can be extended up to 7 years, a fine up to Rs 5 lakh while the proceeds parked overseas can be recovered through Mutual Legal Assistance Treaties. India has such treaties with 26 countries. Foreign Exchange Management Act, 1999 ( FEMA) : Indian citizens found violating legal provisions in foreign exchange transactions can be given a maximum penalty of three times the amount involved, confiscation of the amounts lying abroad and directing their repatriation under this Act. Section 105 A of the Cr.P.C. : The section lays down procedures for attachment and forfeiture of properties generated from the commission of an offence. Where such properties are situated overseas and treaty arrangements exist between the Government of India and the other country, Letter Rogatories can be issued to a court of the other country for execution of such an order. Tax Information Exchange Agreements : Such agreements have been finalised with 44 countries to facilitate flow of information related to tax evasion, money laundering and other economic offences. The Direct Taxes Code Bill : The Bill has been introduced in Parliament and contains provisions for mandatory declaration of assets held abroad by taxpayers in India. It also contains provisions to combat illicit transfer of money and assets abroad through complex financial arrangements and instruments. Frequent visitors to tax havens : The Government of India claims to have initiated an exercise to build a data base of Indians going frequently to foreign countries, specially tax havens, and returning to India. The current Immigration/Emigration databases are being expanded for the purpose.