Black money
1.Black money is money that has been acquired through illegitimate means or
money which is unaccounted for, that is, for which tax is not paid to the
government.
2.Spurious notes or counterfeit money is generally not counted as black money.
Counterfeit notes are currency notes that are illegally printed by unauthorised
agents.
3.Black money is hidden from government authorities and is not reflected in
the GDP of India, national income, etc.
4.Cash transactions without proper accounting are known as black money.
How is black money generated?
Black money is generated by any of the following three ways:
Illegitimate activities
a. Crime
b. Corruption
c. Non-compliance with tax requirements
d. Complex procedural regulations
e. Money laundering
f. Smuggling
Tax evasion- This is where an entity wilfully does not pay taxes that are
due to the government.
Tax avoidance- This is where an entity takes advantage of the existing
loopholes in the system and avoids paying taxes. This is not illegal though
Sources of Black Money in India
Some of the chief sources of black money are described below.
Sellers or traders who do not give bills or receipt creates black money.
Many people invest in bullion or jewellery to hide their actual income from
the authorities.
In the real estate sector, many people undervalue their real assets to
refrain from paying the rightful tax. They cheat the government of the
correct amount of property tax.
Some Self-Help Groups (SHGs) and trusts do not provide proper sources for
their funds and donations received.
Tax havens: Tax havens are generally small countries where foreigners
don’t have to pay taxes. These countries generally have very liberal
regulatory frameworks, which big corporations take advantage of. They set
up shell companies there and redirect all their profits to this entity, by
which they can reduce their tax liabilities by a huge margin.
Hawala: Hawala is an informal method by which money can change hands
without the use of banks. This works through codes, contacts and trust with
no paperwork at all.
Investments through innovative derivative instruments like participatory
notes also is a means to hide black money.
Effects of Black Money in India
Black money has some serious consequences on the economy of a country.
Some of them are discussed below.
It affects the financial system of the country. The central bank is not able
to control money supply in the economy causing higher inflation. This will
lead to a fall in the value of the currency.
Black money affects the credibility of a country negatively.
Black money is most often used for illegal activities such as drugs and
narcotics dealing, terrorism, etc. which is detrimental to the heath of the
country.
The government suffers a big loss in the form of taxes because of black
money.
Black money creates a parallel economy in the country, which is
completely underground. For example, in Mexico, there is a thriving
parallel economy because of the illegal trafficking of drugs. This leads to
governance problems.
Black money can also cause real estate prices to go up, which may lead to
an asset bubble.
Measures were taken by the Government to Curb Black Money
1. Tax reforms have been initiated with a view to resisting black money. The
tax base has been increased and rates have been slashed. Reforms are
being made to incorporate tax deduction at the source itself.
2. Through the Black Money Bill, the government has allowed the reporting of
black money generated through tax evasion in a given time frame.
3. Demonetisation of Rs.500 and Rs.1000 was carried out in 2016 with the
primary view of making black money useless.
4. The government is encouraging cashless/digital transactions with a view to
making things more transparent.
5. Electoral reforms are also intended to curb black money as much of the
black money generated in India is used in elections.
Legislative Framework to deal with Black Money
Prevention of Corruption Act, 1988
Benami Transactions Prohibition Act, 1988
Prevention of Money Laundering Act, 2002
The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015
Lokpal and Lokayukta Act
Money Laundering
Money laundering is the process by which black money is converted into white
money.
People who possess black money cannot spend it publicly. They should
either hide it or spend it on the underground economy. Through money
laundering, they convert it into white money. It is a method by which
criminals mask their accumulated wealth.
Through money laundering, people separate the money earned (illegally)
from its source, mix it with white money, and then funnel it back into the
source.
Another commonly heard related term is round-tripping. Here, people send
money to a tax haven like Mauritius or Cayman Islands (to avoid paying
tax) and then invest that money into India, thus becoming a foreign
investment.
