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There is no uniform definition of black money in the literature or economic theory. According to the White Paper on Black money by the Finance Ministry, it is defined as:
“assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.”
Black money can be generated through
In the second case, activities might be legal but the perpetrator may simply have failed to report the income generated to avoid paying tax.
It should be noted that not all the unaccounted money is black. It is only that money which was legally required to be disclosed, but was not disclosed. Income tax provisions permit income below a certain threshold without disclosure.
Certain sectors are more vulnerable to black money issues. These include real estate, bullion and jewellery, financial markets, public procurement, the non-profit sector, informal sector and cash economy.
India has been ranked the fourth-biggest source of black money in the world, with $510 billion worth of illicit financial flows during 2004-2013, or $51 billion annually, on average. This was stated in a report which was released recently by Global Financial Integrity (GFI), a research and advisory group based in Washington.
China tops the list for 2004-2013, with $139 billion average illicit financial flow per annum, followed by Russia and Mexico.
The Central Economic Intelligence Bureau (CEIB), the National Investigating Agency (NIA), and the High Level Committee (HLC) act as coordinating agencies.
The government has employed a five pronged strategy which involves:
1. Reducing disincentives against voluntary compliance: The planned roll-out of Goods and Services Tax (GST) in April 2017 will help in reducing disincentives against voluntary compliance by measures like rationalization of tax rates and reduction of transaction costs etc. [Click here to read more about GST]
2. Reforms in sectors vulnerable to generate black money:
3. Creation of effective credible deterrence:
Recent initiatives by the government in this regard include:
4. Income Disclosure Scheme, 2016 provided a one-time opportunity to all persons who have not declared income correctly in earlier years to come forward and declare their undisclosed Incomes. These declarations would be taxed@45% and would enjoy immunity from prosecution under the IT Act and Wealth Tax Act and also the Benami Transactions (Prohibition) Act, 1988. Record collections have been made under the scheme. [For more information about the income declaration scheme, click here.]
5. A Special Investigation Team was constituted in 2014 which is chaired by ex-Supreme Court Judge Justice M.B. Shah. Many recommendations of SIT have been implemented. The recent proposals of SIT presently being considered by the government are:
Yes, there are a few. And they might help us get black money back in India. Let’s look at the history of such negotiations to learn more about them and hone your understanding for Probable questions for IAS Mains.
The UN, through its Office on Drugs and Crime, which leads the fight against illicit drugs and international crime, has been given the responsibility to implement the convention, particularly its assets recovery provisions.
Mains Paper 2: Polity | Statutory, regulatory and various quasi-judicial bodies.
Government is concerned that P-notes are being used for money laundering. Special Investigation Team (SIT) wants stricter compliance measures put in place for trading P-notes. However, when the government proposed putting trading restrictions on P-notes in the past, the Indian market became extremely volatile. Read article for new measures proposed and what are the previous measures in place.
From UPSC perspective, following things are important:
Prelims level: P-notes, issuing authority, usage and other related measures (covered in B2B)
Mains level: How P-notes are being used for round tripping black money, what mesaures have been/can be taken to tackle this issue and other related topics.
How will this work?
Continued tightening of norms:
P-Notes: Participatory notes, also referred to as “P-notes,” are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India (SEBI) to invest in Indian securities
Components: P-notes are offshore derivative instruments with Indian shares as underlying assets
Issuing Authority: Brokers and FIIs registered with SEBI issue the instruments and make investments on the FII’s behalf. Brokers must report their P-note issuance status to SEBI each quarter
Used for/by: The notes allow foreign investors with high net worth, as well as hedge funds and other investors, to invest in Indian markets without registering with SEBI. Investors save time, money and scrutiny associated with direct registration.
Negatives:Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities. It is alleged that a lot of unaccounted money made its way to the country through the participatory note route
Mains Paper 3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment, Government Budgeting
Demonetisation was a blast whose echo is going to stay for a long time in Indian economy. From increasing digital payments to rise in tax base or be it reduction in interest rates for loans, there are multiple things happening which have been attributed being due to demonetisation.
From UPSC’s perspective, the following things are important:
Prelims Level: Not much relevant to prelims.
Mains level: Fodder from this news could quoted while writing your answer on Questions related to Demonetization specially if you are taking a pro-demonetization stance
What will it do?
‘India is largely a tax non-compliant society’:
Economic survey views:
Not directly important but these show the areas of economy that need mending to meet the rising challenges and may be used in a mains answer.
For prelims- know about the operation clean money. For mains- steps taken to curb menace of black money.
Income Tax Department (ITD) initiated Operation Clean Money on 31st Jan 2017. Initial phase of the operation involves e-verification of large cash deposits made during 9th November to 30th December 2016. Data analytics has been used for comparing the demonetisation data with information in ITD databases. In the first batch, around 18 lakh persons have been identified in whose case, cash transactions do not appear to be in line with the tax payer’s profile.
Mains trivia. Step taken towards curbing black money.
The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963. The Central Board of Revenue as the apex body of the Department, charged with the administration of taxes, came into existence as a result of the Central Board of Revenue Act, 1924. Initially the Board was in charge of both direct and indirect taxes. However, when the administration of taxes became too unwieldy for one Board to handle, the Board was split up into two, namely the Central Board of Direct Taxes and Central Board of Excise and Customs with effect from 1.1.1964. This bifurcation was brought about by constitution of two Boards u/s 3 of the Central Board of Revenue Act, 1963.
Money post demonetisation:
Income tax problems:
Decoding account deposits:
All cash isn’t black:
Narrow tax base:
An important op-ed for understanding the black money and demonetisation issue.
The assessment of the scheme. Know about the scheme here.
Note the benefits of plastic notes. Keep track as the issue develops- important for pre and mains both.
One more step in fight against black money. Note it for mains as well as prelims. See what are shell companies in b2b.
What is a Shell Corporation?
Reasons to Legitimately Set Up a Shell Corporation
Ways That People Abuse Shell Companies
Not very important news but you should be update with few such happenings.
This is one more step towards bringing unaccounted money into legitimate circulation and penalising those possessing it. It can be important for prelims.
The Pradhan Mantri Garib Kalyan Yojana (PMGKY):
Fight against black money:
The budget 2017 provides an opportunity for the Modi government to unleash a big bang reform in personal income taxation. The economy provides scope and demonetisation, the rationale for a flat income tax rate and a negative income tax for the poor and the needy.
Taxes in India are levied by the Central Government and the state governments. Some minor taxes are also levied by the local authorities such as the Municipality. The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Central and the State. An important restriction on this power is Article 265 of the Constitution which states that “No tax shall be levied or collected except by the authority of law”.
India follows Progressive Tax System. Progressive tax is the taxing mechanism in which the taxing authority charges more taxes as the income of the taxpayer increases. A higher tax is collected from the taxpayers who earn more and lower taxes from taxpayers earning less. The government uses a progressive tax mechanism.
Steps against Black Money:
Crime using paper currency:
The PIB release is a good insight into what measures the government has taken regarding black money. Indians need to be seriously educated regarding corruption so as to fight this menace. Note down the points for your Mains answer.
What is benami property?
Benami Transactions (Prohibition) Act 1988:
Benami Transactions (Prohibition) Amendment Act, 2016:
Underdeveloped Bond Market in India:
Need for re-monetisation with special focus on credible rating agencies:
The future of the cost of service in digital payment space:
Black money and effective measures around the world:
The op-ed is a complete analysis on demonetization, black money and mobile wallets. Make notes for your Mains. We have divided it into smaller segments so that you can focus at ease.
All govt schemes and decisions are important for UPSC.
Pradhan Mantri Garib Kalyan Yojana – The declarant under this regime shall be required to pay tax @ 30% of the undisclosed income, and penalty @10% of the undisclosed income. Further, a surcharge to be called ‘Pradhan Mantri Garib Kalyan Cess’ @33% of tax is also proposed to be levied. In addition to tax, surcharge and penalty (totaling to approximately 50%), the declarant shall have to deposit 25% of undisclosed income in a Deposit Scheme to be notified by the RBI under the ‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’. This amount is proposed to be utilised for the schemes of irrigation, housing, toilets, infrastructure, primary education, primary health, livelihood, etc., so that there is justice and equality.
This editorial is a holistic account of cons of demonetization. It covers all aspects. Make your notes. Read the B2B for interesting trivia!
Other countries that have taken the road to demonetization:
As of now, the jury is still out on how useful the demonetisation exercise will prove to be. Exactly how much money comes back will be an important factor. The picture should get clearer in the coming weeks.
This development indicates a sustained effort on the part of the govt against black money. Make notes of such developments, it helps to enrich mains answers. Also note the Pradhan Mantri Garib Kalyan Yojana.
Undisclosed income detected during each survey has shot up drastically in two years
The Union govt. has received 644 declarations for black money worth Rs. 4,164 crore.
India has been ranked the fourth-biggest source of black money, with $510 billion worth of illicit financial flows during 2004-2013, or $51 billion annually, on average.
Indian govt will start receiving information of overseas assets from other nations and failure to disclose them will become a very risky affair from 2017.