Black Money in India – Sources, Effects & Measures Taken

India has, for many years, faced the problem of black money. Despite the measures taken by the government to address this issue, results are few and far between. There still exist stacks of unaccounted money, creating a huge loss for the government. Thus, efficient, proactive government reform is a need of the hour to address this issue.

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What is black money?

  • There is no exact definition of black money.
  • It is generally referred to as any money that remains hidden from the tax authorities.
  • It is not the same as fake notes. Counterfeiting involves the printing of new money by unauthorised agents, while the black money is more related to tax evasion.

How is black money generated?

The black money can be generated through many methods. They are broadly classified under three scenarios:

  • Illegal activities: The money earned through illegitimate activities like robbery, trafficking, etc., is obviously not reported to the tax authorities, and so it is black.
  • Tax evasion: It is the illegal practice of not paying the taxes by not reporting the income, over-reporting expenses or by not paying the taxes by understating the tax amount owed.
  • Tax avoidance involves the legal exploitation of tax laws to one’s advantage. It includes every attempt made to prevent or reduce tax liability which would otherwise be incurred by taking advantage of some provisions or lack of provisions in the statutes of the country.

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How is black money legitimised?

  • Those who receive black money must hide it or spend it in the underground economy or make it look legitimate through money laundering to avoid legal repercussions.
  • Money laundering is the term that refers to the process of making illegally obtained money appear as though it is from a legal source.
  • In India, money laundering is popularly known as Hawala transactions.
  • “Hawala” is an Arabic term that means the transfer of money or information between 2 persons using a third person.
  • The steps involved in the process of money laundering are
  • Placement
  • Layering
  • Integration
  • Placement: The first step in this process is the physical disposal of cash. The launderer introduces black money into the financial system. The placement is achieved by depositing the cash in domestic banks or other formal or informal financial institutions.
  • Layering is the second stage of the money laundering process. It involves a series of conversations and movements of the black money to remove the traces of the source. This is done through the purchase and sale of the investment instruments like bonds, stocks, and traveller’s cheques or transferring funds through a series of accounts at various banks across the globe, particularly to those dominions that do not cooperate in anti-money laundering investigations.
  • Integration is the final stage that involves the process of the returning of black money to the legitimate economy for later extraction. Examples include investing, purchasing real estate, luxury goods, etc. In this stage, the launderer makes the black money look as though it was legally obtained to accomplish the integration of the “cleaned” money into the economy.

How does black money affect the economy?

The black money poses some serious negative effects on the economy. Some of them are as follows:

  • It affects the country’s financial systems. The Reserve Bank of India won’t be able to control the money supply in the economy. This as a consequence would lead to higher inflation, which in turn may reduce the value of money and affect the investments and savings.
  • The credibility of the country will come under question.
  • As previously mentioned, black money can also be generated through illegal means and cannot be traced by the government. They can easily be used to fund illegal activities like terrorism. Thus it is a threat to the national security of the country.
  • The parallel economy of the country will thrive, leading to an increase in criminal activities. For example, Mexico has a flourishing parallel economy due to the increasing drug trafficking activities.
  • The government’s developmental activities suffer because there is a huge loss of revenue.
  • The real estate prices increase leading to the over-inflation of assets. This is highly harmful to the economy.

How much black money does India have?

  • The very meaning of black money makes it extremely difficult to quantify.
  • How can the government measure the economic activity that is hidden from it?
  • The Standing Committee on Finance had come out with its report on the “Status of unaccounted income and wealth both inside and outside the country”.
  • In this report, it was concluded that there is no reliable way to quantify black money whether in India or abroad.
  • According to the Standing Committee’s report, the sectors that see the highest incidents of black money include the real estate, mining, pharmaceuticals, pan masala, the gutkha, and tobacco industry, bullion and commodity markets, the film industry, and educational institutes and professionals.
  • This report also points out that there are neither reliable estimates of black money generation or accumulation and nor is there an accurate well-accepted methodology to make such estimates.
  • The process of estimation of the black money is highly dependent on the underlying assumptions made by the designers of the measurement, and so far there is no uniformity in the assumptions made by the various agencies tasked with measuring the black money.
  • The estimates of the black money in the system provided by the Standing Committee vary from 7% of the GDP to 120% of the GDP, highlighting the wide variance in the methods of estimation.

What are the recent measures taken by the government to curb black money?

  • Constitution of Special Investigation Team on Black Money: The SIT had detected black money worth more than Rs.70,000 crore, including 16,000 thousand rupees hidden by Indians in offshore accounts.
  • Declaration of Black Money: The government gave people the chance to come clean, telling them to pay taxes on hidden money with a penalty of just 25% and had also assured them that no legal action will be taken against them.
  • Demonetisation: On 8th November 2016, the government took the historic step of demonetisation. The black money stashed in vaults was brought into the mainstream and the parallel banking system run by the moneylenders was completely demolished.
  • Encouraging cashless transactions: The government has taken steps to promote cashless transactions by allowing tax benefits for those who are making online payments for an amount greater than Rs.20, 000. Also, the government transfers money to the beneficiaries through the Direct Benefit Transfer. The Jan Dhan Yojana also plays a significant role in promoting the cashless economy.
  • Bank accounts were linked with Aadhaar and PAN so that the IT department can address the problem of fake accounts. It was also easier to track suspicious transactions through bank accounts.
  • Benami Transactions (Prohibition) Amendment Act, 2016 was implemented and the government was able to trace numerous Benami Properties.
  • Double Tax Avoidance Agreement (DTAA) was signed between India and several other countries like Switzerland, Singapore, Mauritius, and Panama. These countries have agreed to share suspicious bank transactions of Indians on a real-time basis.
  • Anti-shell company measures were taken by the Indian government. The government has cancelled the registration of over 2 lakhs companies.
  • Earlier this year, the government had stated that the anti-black money measures taken by the government in the last four-and-half years in the form of black money law, Fugitive Criminal Offenders Act, and demonetisation, have brought the undisclosed income of about Rs.1,30,000 crore to tax and led to seizure and attachment of assets worth Rs.50,000 crore.
  • It was also stated that as many as 3,38,000 shell companies have been detected and de-registered, and their directors disqualified.

What can be the way forward?

Despite the measures taken by the government, the menace of black money persists in India. Some of the steps that can be taken to deal with it are as follows:

  • Rationalising tax rate: It is found that the increase in the tax rate can increase in black money and tax evasion. Incentives must be made to make people pay their taxes.
  • Another cause for the increasing black money is the high transaction costs while complying with the law. Complicated tax regulations also make people opt for the creation of black money.
  • Strengthening the government institutions dealing with black money: Central Board of Direct Taxes, Enforcement Directorate, Financial Intelligence Unit, Directorate of Revenue Intelligence, Central Economic Intelligence Bureau and other central agencies like National Intelligence Agency, Central Bureau of Investigation, etc., are involved in curbing black money. Strengthening such institutions can ensure better implementation of anti-black money laws.
  • Systems for better implementation: Integrated Taxpayer Data Management System (ITDMS), establishing Cyber Forensic Labs, etc., can allow for easier tracking of black money by the government.
  • Skill training programmes both at the domestic and international levels for the law enforcing agents. For example, the Financial Intelligence Unit in India undertake proactive steps to upgrade the skills of its personnel by providing them training on anti-money laundering, terrorist financing and relating economic issues.
  • Electoral Reforms: Election funding is one of the ways used to utilize black money. Reforms are necessary to make elections transparent without jeopardising sensitive information.
  • Other measures to address this issue include reforms to ensure transparency, elimination of bureaucratic hindrances and discretionary regulations.
  • Information and Communication Technology must be utilised efficiently to ensure transparency of all the transactions taking place within and outside India.

Conclusion

It is seen that despite the numerous measures taken by the government, their effect is not seen during the implementation. This is due to the many loopholes and corruptions that exist within the government. Political will and international cooperation are vital to address this issue

Test Yourself

What are the reasons behind the existence of black money? What can be done to address them?

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