Black Money

For Prelims: Meaning of terms: Tax Havens, Round tripping, Fugitive Economic Offender, Transfer Pricing,
whistleblower, Effects of black money on economy, Sources of black money, Financial Intelligence Unit,
Financial Action Task Force

For Mains: Tackling black money in India, Relevance of Panama and Paradise Paper Leaks.

Why in News

Recently, the government has said in the Parliament that Rs 2,476 crore has been collected as tax
and penalty under the one-time three months compliance window during 2015.

It has also been said that there is no official estimation how much worth of black money is
lying in foreign accounts over the last five years.
Total undisclosed credits amounting to Rs 20,353 crore have been detected with respect to 930
India linked entities in the Panama and Paradise Paper Leaks.

Key Points

Black Money:
There is no official definition of black money in economic theory, with several
different terms such as parallel economy, black money, black incomes, unaccounted
economy, illegal economy and irregular economy all being used more or less
synonymously.
The simplest definition of black money could possibly be money that is hidden from tax
authorities.
According to a secret study commissioned by the Finance Ministry concluded in 2014
that about 90% of unaccounted wealth, or black money, was lying within India and
not outside.
Source of Black Money:
It can come from two broad categories:
Illegal Activity:
Money that is earned through illegal activity is obviously not reported to
the tax authorities, and so is black.
Legal but Unreported Activity:
The second category comprises income from legal activity that is not
reported to the tax authorities.

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Examples for Sources of Black Money

Multi-Level Marketing Scheme:

 International debit or credit cards issued by offshore banks are used to create black money.
Disguised Ownership:
Increasingly, criminals want to own legitimate businesses. It could be to earn a return or
to convert black money into white.
Mixed Sales:
Mixing illicit money sources with legit ones is a popular method because it's hard to
detect, especially if there is a large cash component in the legal business.
Smurfing:
This type of transaction is usually done to evade notice by authorities monitoring
transactions above a certain threshold.
Trade Mispricing:
Traditionally, goods exported and imported were either priced lower or higher to
enable money laundering.
With current technology, the Organization for Economic Cooperation and
Development (OECD) says it's easy to modify invoices or produce fictitious invoices.
Money Transfers To Benami Entities:
In a Benami transaction, a property is transferred or held by one person and the
consideration for such property is paid by another person for whose benefit such property
is held.

Impacts:
Loss of Revenue:
Black money eats up a part of the tax and, thus, the government’s deficit
increases.
The government has to balance this deficit by increasing taxes, decreasing
subsidies and increasing borrowings.
Borrowing leads to a further increase in the government’s debt due to interest
burden. If the government is unable to balance the deficit, it has to decrease
spending, which affects development.
Money Circulation:
People generally tend to keep black money in the form of gold, immovable
property and other secret manners.
Such money does not become part of the main economy and, therefore,
remains generally out of circulation.
The black money keeps circulating among the wealthy and creates more
opportunities for them.
Higher Inflation:
The infusion of unaccounted black money in the economy leads to higher
inflation, which obviously hits the poor the most.
It also increases the disparity between the rich and the poor.
Government’s Initiatives:
Legislative Action:
The Fugitive Economic Offenders Act, 2018
The Central Goods and Services Tax Act, 2017
The Benami Transactions (Prohibition) Amendment Act, 2016
The Black Money (Undisclosed Foreign Income and Assets) and Imposition
of Tax Act, 2015
Prevention of Money Laundering Act, 2002
Gold Amnesty scheme: This is similar to the Voluntary Income Disclosure
scheme to tap black money in income taxes.
International Cooperation:
Double Taxation Avoidance Agreements (DTAAs):
India is proactively engaging with foreign governments with a view to
facilitate and enhance the exchange of information under Double Taxation
Avoidance Agreements (DTAAs)/Tax Information Exchange Agreements
(TIEAs)/Multilateral Conventions.
Automatic Exchange of Information:
India has been a leading force in the efforts to forge a multilateral
 regime for proactive sharing of financial information known as Automatic
Exchange of Information which will greatly assist the global efforts to
combat tax evasion.
The Automatic Exchange of Information based on Common Reporting
Standard has commenced from 2017 enabling India to receive financial
account information of Indian residents in other countries.
Foreign Account Tax Compliance Act of USA:
India has entered into an information sharing agreement with the USA
under the act.
Financial Action Task Force (FATF):
India is a member of the FATF.

Way Forward

Appropriate legislative framework related to Public Procurement, Prevention of Bribery of

foreign officials, citizens grievance redressal, whistleblower protection, UID Aadhar is needed.
Setting up and strengthening institutions dealing with illicit money: Directorate of
Criminal Investigation Cell for Exchange of Information, Income Tax Overseas Units- ITOUs at
Mauritius and Singapore have been very useful, Strengthening the Foreign TAX, Tax Research and
Investigation Division of the CBDT.
Electoral Reforms: Appropriate reforms are needed to reduce money power in elections,
since elections are one of the biggest channels to utilize the black money.
Training Personnel: Both domestic and international training to personnel for effective
action pertaining to the concerned area can also help.
For instance, the Financial Intelligence Unit-India makes proactive efforts to regularly
upgrade the skills of its employees by providing them opportunities for training on anti-
money laundering, terrorist financing, and related economic issues.
Incentivising Bank Transactions: To curb the menace of black money, industry
body Federation of Indian Chambers of Commerce and Industry has suggested
incentivisation of transactions through banking channels and a suitable framework for
taxation of agricultural income.
Besides, it suggested reforms in the real estate sector and creation of IT
infrastructure to track tax evasion.

Source: IE

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