Clarify your doubts before joining Prelims 2018 TS

Have specific query regarding Flagship Prelims? Email us at  | Ready to join in? Click 4 joining

What is black money?

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.”

How is black money generated?

Black money can be generated through

  1. Illegal activities like crime, drug trade and corruption, or
  2. Failing to pay dues to the public exchequer in one form or another.

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.

 The extent of black money generation in India:

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.

Effects of Black Money on economy:-

  1.  Government loses tax revenue as tax on this money is not paid.
  2. It is hard for RBI to frame effective monetary policy: Black money floating in economy is impossible to estimate and remains out of preview of government. RBI increases interest rates, CRR, SLR etc. to regulate money supply but more the black money, more the ineffectiveness of these measures.
  3. Corruption – Black money is both a cause and effect of corruption.
  4. National Security – Black money can be used to support a wide range of illegal activities.
  5. Overpriced real estate prices – as immovable property is perceived as safest avenue for black money, most of the black money moves in to this. This has resulted in unrealistic real estate prices.
  6. Capital Flight – In order to escape domestic rules and regulation scarce capital in India moves out to Tax havens and stalls the process of capital formation in the economy.

Institutions currently in place responsible for dealing with black money issues:

  • Central Board of Direct taxes (CBDT)
  • The enforcement Directorate (ED)
  • The Financial Intelligence Unit (FIU-IND)
  • The Central Board of Excise and Customs (CBEC)

The Central Economic Intelligence Bureau (CEIB), the National Investigating Agency (NIA), and the High Level Committee (HLC) act as coordinating agencies.

Government Strategy to tackle black money:

The government has employed a five pronged strategy which involves:

  • Joining the global crusade against black money
  • Creating an appropriate legislative framework
  • Setting up institutions for dealing with illicit money
  • Developing systems for implementation
  • Imparting skills to personnel for effective action

Recent steps taken by the government to curb black money generation in India:

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:

  • Cash economy: The opening of a large number of payment gateways, Internet banking, and payment banks will prompt the use of banking transactions and plastic money to rise significantly.
  • Real Estate Sector: Real Estate (Regulation and Development Act, 2016) aims to bring in much needed transparency in the sector. [Click here to read more about the act]

3. Creation of effective credible deterrence:

Recent initiatives by the government in this regard include:

  • The benami transactions bill has been recently passed by Lok Sabha. The bill provides for confiscation of benami properties, or assets held in the name of another person or under a fictitious name to avoid taxation.
  • Project Insight, the income-tax (I-T) department’s ambitious project to effectively utilize the vast amount of information at its disposal more effectively to track tax evaders, will roll out from May 2017. [For more information click here.]
  • The monitoring regime of the income tax department has been strengthened. The department can detect large cash withdrawals, or large cash transactions which enter the system.
  • Setting up institutions like Directorate of Income Tax and strengthening existing institutions like Central Board of Direct Taxes

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:

  • A 3-Lakh cap on cash transactions.
  • An upper limit of Rs. 15 Lakhs on cash holding.

Steps taken by the Government to tackle the menace of black money stashed abroad:

  • Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. It was enacted to penalize those with unaccounted wealth abroad and has strict penalty provisions.
  • India has joined the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Financial Account Information (AEOI). These standards will enable India to receive information from almost every country in the world including offshore financial centres. It will directly help the Government to curb tax evasion and deal with the menace of black money stashed abroad.
  •  Strengthening DTAAs (Double taxation avoidance agreements): India recently revised DTAA with Mauritius and Cyprus & is in the process of revising its treaty with Singapore. These are aimed at preventing “round tripping” of funds i.e. the return to India of wealth that has not been accounted for by routing it through countries that provide easy channelling of funds without too many questions.
  • Amendments made in Prevention of Money-laundering Act, 2002 to strengthen the legal framework for effective action against those holding unaccounted income.
  • Amendments to Foreign Exchange Management Act (FEMA): The amendments provide for seizure and confiscation of value equivalent, situated in India, in case any person is found to have acquired any foreign exchange, foreign security or immovable property, situated outside India, in contravention of Section 4 of FEMA.

The way ahead:

  • The tax department must spruce up its data-mining methods to expand the country’s shallow tax base.
  • The introduction of these stringent laws against defaulters will help the Government widen the tax base but implementation of these proposals is the key as they may be rendered ineffective if not supported by advanced information gathering systems.
  • The new laws should not offer unrestrained powers to the tax investigators as such a move may dampen the investment climate of the country.
  • Also, the Government should ensure that an honest taxpayer is not caught in the web of these stringent laws.
  • The government needs to attack the root cause of the problem of black money generation by making electoral funding transparent, curbing the misuse by the wealthy of tax-free income sops for farmers, and encouraging cashless transactions. [Related Reading: Cashless Society: Can India be one?]


Are there any provisions in UN which can help us chase black money?

 United Nations Convention Against Corruption

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.

  1. Tough negotiations on this subject in Vienna, Austria, in 2003 was a vital part of the United Nations Convention Against Corruption (UNCAC).
  2. The first breakthrough came when the group established asset recovery as a “fundamental principle” of the convention.
  3. Then it was only a matter of laying a framework, in both civil and criminal law, for tracing, freezing, forfeiting and returning funds obtained through corrupt activities.
  4. What did the convention accomplish? Legal obstacles should be tackled with international cooperation rather than by domestic laws.
  5. Some of the relevant provisions of the convention are crucial to the question of recovery of assets.
  6. It provides that each state party shall take such measures as may be necessary to permit its competent authorities to give effect to an order of confiscation issued by a court of another state party.They are also required to share information with the competent authorities of another state, when necessary, to investigate, claim and recover proceeds of offences.

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.

Refining India’s approach

  1. In the case of India, difficulties may have arisen not in establishing that the sums amassed abroad belong to India, but in proving that the assets were illegally obtained.
  2. There is a need of domestic management and disposal of seized and confiscated assets and the management of the return and disposal of assets recovered in the context of international corruption cases.

Any doubts?

  1. Profile photo of Arjoo pundir Arjoo pundir

    plz explain the 6th point of the article in a more easy way unable to understand it.

  2. Profile photo of Irum Raza Irum Raza

    Why did SIT ask DRI and not ED to verify claims of GFI regarding the black money outflow?

    1. Profile photo of somesh kumar somesh kumar

      I think your question pretty much serves the answer. DE is a law enforcement agency, and looks into the proper implementation of laws but DRI is related with the flow of money and revenue.

    2. Profile photo of Pranav Pranav

      May be because its relates to outflow of money outside of the domestic circuit > therefore Customs dept > DRI

  3. Profile photo of eswara babu eswara babu

    Sir, please make a short notes on GAAR, MRTP Act repealed by CCI Act 2002, Foreign accounts Ta Compliance Act (FATCA), Base Eroision and profit shifting, DTC because all these are measures to tackle ta evasion and black money

  4. Profile photo of eswara babu eswara babu

    There is enough content is being reported in EPW, The Hindu, IE on Panama papers. Please make holistic notes

  5. Profile photo of rajiv shaw rajiv shaw

    Dr V……cud we add a point?…. while writing mains answer…….regarding d tax regime prevalent in India which is based on d OECD model which highly favours d MNCs who r also responsible for illict capital outflows (accrdng. to GFI report)……rather we shud go for UN model taxation prescribing ‘tax deduction at source’….colours of it are felt in d recently announced equalisation levy by d centre.

    1. Profile photo of Dr V Dr V


      Ab OECD BEPS base erosion profit shifting guidelines tameez se time par implement kar do toh most of the loopholes will he plugged.
      Do read about BEPS project

  6. Profile photo of shubham tiwari shubham tiwari

    Sir plz expln this article in hindi…

  7. Profile photo of Javed Aftab Javed Aftab

    Somebody please shed some light on ED vis a vis Directorate of revenue intelligence

    1. Profile photo of Dr V Dr V

      For all practical purposes ED is to investigate money laundering and FEMA violation cases while DRI is to investigate customs and narcotics related offences and FICNs

  8. Profile photo of ashwith naik ashwith naik

    Please give a detailed report on LOK SABHA and Rajyasabha and forming of government both state And central

  9. Profile photo of Jordan Jordan

    After getting assent from the honourable President , this bill has to be notified in the gazette of India.Then it becomes a law.

    1. Profile photo of Shikhar Sachan Shikhar Sachan

      Can you think of a case where the President has given his assent but the bill was not notified in the gazette?
      I cant think of any.

    2. Profile photo of Focus Ias Focus Ias

      So it means even if the bill is approved by the president – until the govt notifies it in the gazette – it is not the law and things keep on happening the way they were?

      Is there any deadline on the notification?

    3. Profile photo of Focus Ias Focus Ias


  10. Profile photo of Focus Ias Focus Ias

    Notifications are down after the bill has been made an act. That’s always the case.

    1. Profile photo of Viswas Viswas


SEBI targets participatory note norms



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.


  1. The Securities and Exchange Board of India (SEBI) plans to further tighten norms for issuance of offshore derivative instruments (ODIs) and participatory notes (PNs) as part of its overall effort to reduce the exposure investors take via such instruments in the Indian equity market
  2. In a consultation paper released on Monday, the capital market regulator has proposed levying a regulatory fee of $1,000 on every foreign portfolio investor (FPI) that issues ODIs or PNs

How will this work?

  1. It is proposed that beginning April 1, 2017, for a period of every three years, regulatory fees of $1,000 be levied on each ODI issuing FPI for each and every ODI subscriber coming through such FPI

Other measures:

  1. A few ODI subscribers invest through multiple issuers. This move will discourage the ODI subscribers from taking ODI route and encourage them to directly take registration as an FPI
  2. The regulator has also proposed to prohibit ODIs from being issued against derivatives for speculative purposes. Currently, ODIs are issued against derivatives along with equity and debt
  3. SEBI has given time until December 31, 2020, to wind up ODIs issued against derivatives, which are not for hedging purpose

Continued tightening of norms:

  1. In June last year, SEBI issued instructions on Know Your Customer (KYC) norms for ODI subscribers, transferability of ODIs, reporting of suspicious transactions and periodic review of systems


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


Demonetisation effect: 9.1 million new taxpayers



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


  1. The government added 9.1 million new taxpayers in 2016-17, an 80% increase over the typical yearly rise, highlighting the impact of India’s November demonetisation of high-value currencies

What will it do?

  1. This is expected to significantly boost the government’s tax revenue
  2. The increase in taxpayers may be used by the government to justify demonetisation, which critics have claimed did not help in its original objective of curbing black money, terror financing or counterfeit notes

‘India is largely a tax non-compliant society’:

  1. A low taxpayer base has for long been a key drag on the government’s finances
  2. India’s tax revenue, including indirect taxes, as a percentage of its gross domestic product (GDP) was 16.7% in 2016, compared with 25.4% in the US and 30.3% in Japan (Data not important, but note what it takes to be a developed economy)
  3. The predominance of cash in the economy makes it possible for the people to evade their taxes

Economic survey views:

  1. This year’s Economic Survey said that perhaps the most important marker of the success of demonetisation would be tax collections

IMF view:

  1. The International Monetary Fund, in its latest Asia Pacific Economic Outlook, said that after demonetisation, bank deposits of large amounts were expected to attract high scrutiny by tax authorities and the information obtained as a result of income verification could lead to a durable impact on the tax revenue base
  2. “With only about 1% of the Indian population paying personal income taxes, the scope for broadening the tax base is clearly large,” (Can be quoted in Mains answers on black money, non compliance and in Ethics as well as Essay papers)

$ 770 bn black money entered India in 2005-2014: Report

  1. An estimated $ 770 billion in black money entered India during 2005-2014, US-based think tank Global Financial Integrity (GFI) has said in its latest report
  2. Nearly $ 165 billion in illicit money exited the country during the same period, the global financial watchdog said
  3. Titled Illicit Financial Flows to and from Developing Countries: 2005-2014, the report is the first global study to place equal emphasis on illicit outflows and inflows
  4. The report said total illicit financial outflow was three per cent (about USD 165 billion) of India’s total trade of $ 5500.744 billion between 2005-2014
  5. Report suggested that Governments should establish public registries of verified beneficial ownership information on all legal entities to check black money
  6. All banks should know the true beneficial owner(s) of any account in their financial institution


Money laundering may be made criminal offence

  1. What: The Central government is considering a proposal to make money laundering a separate criminal offence to be investigated by the Enforcement Directorate, irrespective of a probe by other agencies
  2. Effect: This will facilitate quick action against those indulging in money laundering
  3. The Special Investigation Team (SIT) on black money has also been of the view that money laundering investigations by the ED should be allowed without any dependence on registration of cases by other police agencies under the legal provisions listed in the schedule of the Prevention of Money Laundering Act (PMLA)
  4. Current arrangement: The fate of money laundering cases depends on that of the probe and prosecutions in predicate offences pursued by primary agencies
  5. Many in government agencies are of the view that certain restrictions on money laundering investigations on several occasions cause impediments in taking the cases to their logical conclusion
  6. Elsewhere: Money laundering in itself has been defined as a criminal offence in several countries
  7. Besides, there are separate legislations for dealing with funds generated through activities like drug trafficking or terror financing
  8. The United States has very stringent laws to check money laundering
  9. UK: In the United Kingdom, police have to prove predicate offence through circumstantial evidence, linking it to the funds generated and laundered
  10. Wherever money laundering is treated as a stand-alone crime, U.K. agencies are not required to wait for the outcome of investigations into the predicate offence
  11. Also, they are not supposed to prove that the funds are proceeds of a particular offence
  12. Based on enough circumstantial evidence, they have to just establish that the proceeds had a criminal origin
  13. According to experts, the Indian government will have to bring about several amendments to the PMLA
  14. Including the current definition of the “proceeds of crime” that is right now dependent upon the predicate offences as listed in the Act’s schedule

SEBI lines up reforms to check flow of black money

  1. Securities and Exchange Board of India (SEBI), will soon put in place stricter norms to check any flow of black money into stock market though controversy-ridden P-Notes and also initiate steps for allowing mutual fund investments through e-wallets
  2. Besides, SEBI will consider new norms for allowing options trading in commodity derivative market
  3. Rules would be relaxed for registration of foreign investors and for common license to brokers to deal in equities and commodities
  4. It will also consider making it easier for banks and financial institutions to get shares of the companies they have exposure to by way of conversion of loan into equity — a move seen as a major boost to the steps for handling the bad loan menace
  5. It will also take stock of long-pending investigations and cases, involving some big corporates, and will consider putting in place an internal guidance note for dealing with quasi-judicial matters
  6. Besides, it would also discuss the implementation of graded surveillance measures by the stock exchanges to check any manipulation of share price
  7. It will also consider new guidelines for dealing with offshore derivative instruments, commonly known as participatory notes (P-Notes), which have been long seen as being possibly misused for routing of black money from abroad


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.

In Operation Clean Money, I-T dept. to probe 60,000 people now

  1. The second phase of the ‘Operation Clean Money’ was launched recently
  2. Aim: To detect black money generation post demonetisation
  3. Under it, the Income Tax department will investigate over 60,000 individuals
  4. CBDT data: Detected undisclosed income over ₹9,334 crore between the period of November 9, 2016 till February 28 this year
  5. Background: As part of the first phase of the ‘Operation Clean Money’, launched on January 31 this year, the department had sent online queries and investigated 17.92 lakh persons out of which 9.46 lakh persons have responded to the department


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.

₹1.37 lakh crore tax evasion, says CBDT

  1. Source: The Central Board of Direct Taxes (CBDT)
  2. Law enforcement agencies have detected ₹1.37 lakh crore worth of tax evasion, launched criminal prosecution in 2,814 cases, and have arrested 3,893 people in the last three years
  3. Concerted and coordinated actions of law enforcement agencies under the Department of Revenue have achieved phenomenal success in fighting the menace of black money during the last three years


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.

[op-ed snap] Painting it all black


  1. Finance Minister Arun Jaitley, in his reply to the discussion on the Finance Bill, has pointed again to the small direct tax base
  2. Detailed tax data for 2012-13 showed that the picture has changed little from the 1990s, when only 1% of Indians were in the direct tax net

Money post demonetisation:

  1. Jaitley has presented data on the large sums of money deposited into some bank accounts post the demonetisation of November 8, 2016
  2. The implication is that these may be black funds and they are being tracked and the people behind them will be caught

Income tax problems:

  1. The secretary of the Income Tax Gazetted Officers Association has written to the Central Board of Direct Taxes Chairperson that the top leadership has issued directions, at times hourly, leading to confusion and indecision and to spoiling the image of the tax department
  2. Officers have exerted pressure on taxpayers via email, SMS and summons
  3. In spite of all this, apparently little black income has been declared

Decoding account deposits:

  1. In the Budget speech, the Finance Minister stated, “Deposits of more than ₹80 lakh were made in 1.48 lakh accounts with average deposit size of ₹3.31 crore… deposits between ₹2 lakh and ₹80 lakh were made in about 1.09 crore accounts with an average deposit size of ₹5.03 lakh”
  2. These two add up to about ₹10 lakh crore
  3. Thus, two-third of the total of ₹15 lakh crore of old notes returned to the banks were accounted for by 1.1 crore accounts
  4. Even if one or two lakh crores of this sum proves to be black (after years of litigation, etc.), this would hardly dent the black economy generating ₹93 lakh crore in 2016
  5. Many businesses such as petrol stations and hospitals generate a lot of daily cash. They were allowed to use old currency notes; every day, they would have deposited lakhs of rupees, and over a month, crores
  6. Businesses hold working capital and cash in hand which, depending on the size of the business, could be substantial
  7. Jaitley has stated that there are “5.6 crore informal sector individual enterprises and firms doing small business”
  8. Such small businesses work mostly in cash and, therefore, may hold fairly large sums of it
  9. He has also said that there are 13.94 lakh registered companies as of March 31, 2014
  10. Of these, 5.97 lakh filed tax returns but 2.76 lakh of them showed a loss or zero income
  11. Companies not filing returns or running at a loss or at zero profit also hold cash — to hire labour, buy inputs, spend on overheads
  12. The number of businesses mentioned by the Finance Minister and the crores of farmers together could legitimately hold about ₹9 lakh crore of cash in hand
  13. The remaining ₹8.5 lakh crore of currency in circulation in October 2016 would have been with households

All cash isn’t black:

  1. The government has said it would use ‘data mining’ to figure out whether the large deposits in accounts are consistent with their declared incomes
  2. Cash as working capital has to be distinguished from cash as saving from income
  3. Every household keeps some money for day-to-day requirements and for emergencies
  4. The 26 crore Indian households could hold about ₹5.5 lakh crore for these purposes
  5. The balance of the currency in circulation, another ₹3 lakh crore, could be held as black savings
  6. Since about four crore people generate substantial black incomes, the average cash holding of this group would be ₹75,000. Not a huge sum of money
  7. This is not to say that some individuals may not hold large sums of cash which may be black
  8. It is generally believed that lakhs of people have sacks full of currency at home or on their business premises
  9. Suppose one lakh entities hold ₹20 crore as black cash; that would amount to ₹20 lakh crore which is more than the currency in circulation (₹17.5 lakh crore) in October 2016
  10. It is very likely that not even 10,000 entities would have an average of ₹20 crore in cash

Narrow tax base:

  1. The Finance Minister pointed to the narrow direct tax base by saying that the number of people declaring income of above ₹50 lakh is only 1.72 lakh
  2. He contrasted this with the 1.25 crore cars bought in the last five years
  3. He said, “The predominance of cash in the economy makes it possible for the people to evade their taxes”
  4. Again, black has been equated with cash
  5. The lacuna is that the above tax data do not give the actual income but the income declared for tax purposes
  6. Given the large number of concessions and deductions available, actual incomes are much greater than the taxable income
  7. So, many more can legitimately afford to buy cars
  8. Further, clarity is needed as to how many cars bought were commercial or by the wealthy
  9. More importantly, if the department could not catch them during normal times then in these days of heavy pressure of work, is it possible?
  10. The Income Tax Department is barely able to audit 1% of those in the tax net

Bank deposits:

  1. The money deposited in the banks cannot be assumed to be black — the Income Tax Department has to prove that
  2. The explanation given by the suspects would have to be scrutinized
  3. Most of those who deposited more than ₹2.5 lakh would have known that they could be asked questions since the government had already announced that
  4. So, care would have been exercised in depositing the sums, such as showing it on the books as cash in hand and working capital or using shell companies
  5. In brief, the data given by the Finance Minister in the Budget speech does not imply that demonetisation will help unearth substantial black incomes, because cash deposited does not automatically make it black and black cash is a tiny part of the black economy


An important op-ed for understanding the black money and demonetisation issue.

₹10,000 cr. collected so far via IDS-II

  1. Context: With the deadline for Pradhan Mantri Garib Kalyan Yojana (PMGKY) expiring on 31 March
  2. Collections: A paltry sum of ₹10,000 crore was declared
  3. It is the second initiative of the Income Declaration Scheme
  4. While under the IDS-I scheme, ₹55,000 crore was collected, the government had not set any target for IDS-II but expected the figures to be better


The assessment of the scheme. Know about the scheme here.

Plastic Rs. 10 notes in five cities soon

  1. Five cities across the country with diverse geographical and climatic conditions will be the first to start using plastic bank notes of ₹10 denomination, with the Centre approving a field trial
  2. The Finance Ministry has asked the Reserve Bank of India to go ahead with the procurement of the requisite plastic substrate material and approved the printing of ₹10 notes
  3. Advantages: The notes are considered to be cleaner than paper currency, will last longer and are difficult to counterfeit
  4. Plastic bank notes are expected to last longer than cotton substrate-based ones
  5. Over the years, central banks across the world have been exploring different solutions for extending the life cycle of bank notes
  6. These include introduction of plastic ones and other developments in substrates for enhancing durability including use of natural fibre blends and varnish


Note the benefits of plastic notes. Keep track as the issue develops- important for pre and mains both.

Govt. sets up inter-departmental task force to crack down on benami firms

  1. A task force comprising members of various regulatory Ministries and enforcement agencies has been set up on Prime Minister Narendra Modi’s directions
  2. Purpose: For a major crackdown on shell companies, which are used for large-scale money laundering and tax evasion
  3. The task force has been constituted under the co-chairmanship of the Revenue Secretary and the Corporate Affairs Secretary to monitor the actions taken by various agencies
  4. About 560 beneficiaries, who laundered ₹3,900 crore, and 54 chartered accountants, who were involved in the racket, have already been identified
  5. Action agenda: The agencies will invoke the stringent Benami Transactions (Prohibition) Amendment Act against the shell companies, freeze their accounts and strike off the names of dormant companies
  6. Disciplinary action will be initiated against professionals abetting the companies and entry operators, who are used to launder unaccounted-for incomes into the banking system for projecting them as white money
  7. Fact check: There are about 15 lakh registered companies in India and only 6 lakh of them file their annual returns, raising suspicion that a large number of these companies are indulging in financial irregularities
  8. Background: The move comes days after the government, during a small sample analysis of shell companies, found that ₹1,238 crore in cash was deposited in these entities during the November-December period, after demonetisation
  9. The Serious Fraud Investigation Office filed criminal prosecutions for cheating the national exchequer after a probe against the entry operators running a group of 49 shell companies and other proprietorship concerns


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?

  1. It is a corporation without active business operations or significant assets
  2. These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public
  3. Legitimate reasons for a shell corporation include such things as a startup using the business entity as a vehicle to raise, funds, conduct a hostile takeover or to go public
  4. These are used by large well-known public companies, shady business dealers and private individuals alike
  5. For example, in addition to the legal reasons above, shell corporations act as tax avoidance vehicles for legitimate businesses
  6. They are also used to obtain different forms of financing.
  7. However, the tax avoidance is sometimes seen as a loophole to tax evasion, as these corporations have been known to be used in black or gray market activities

Reasons to Legitimately Set Up a Shell Corporation

  1. Important reason for a domestic company to set up a shell company is to realize a tax haven abroad
  2. This is the process of “offshoring” or “outsourcing” work that was once conducted domestically
  3. To remain within legal bounds internationally, American corporations will set up shell companies in the foreign countries in which they are offshoring work
  4. This is legally allowed by the United States, and some say that it’s the U.S. tax code itself that’s forcing domestic companies to create shell corporations abroad
  5. Another way that shell companies help with taxes surrounds the need for financial institutions to conduct financial activity in foreign markets
    This allows them to invest in capital markets outside of domestic borders and realize potential tax savings

Ways That People Abuse Shell Companies

  1. Even though there are legitimate reasons to set up a shell company, many wealthy individuals abuse shell companies for personal gain
  2. Progressive taxation within the United States, that is, tax brackets, slowly caused people to seek personal tax havens
  3. Significantly high earners set themselves up as shell companies in one or many locations, like the Cayman Islands
  4. This is a gray area of tax evasion where people funnel earnings through shell companies in such a way that it isn’t counted toward personal income

I-T dept. says co-op banks’ cash records seriously tampered with; writes to RBI

  1. What? The Income Tax Department has written to the RBI informing it about alleged illegal malpractices being deployed by a number of cooperative banks
  2. Why? IT-Dept probe found “serious” difference in accounts, to the tune of multi-crore rupees, in the aftermath of the notes ban
  3. In two specific instances in Mumbai and Pune, over Rs 113 crore “excess amount” of old demonetised notes was reported by the two banks to the banking regulator in order to generate black funds
  4. The Income Tax department has earlier raised serious concerns over the working of a number of cooperative banks across the country in an earlier report
  5. It had claimed that they used the “opportunity” of demonetisation to make a quick buck and indulge in money laundering worth several crores


Not very important news but you should be update with few such happenings.

PMGKY not to apply for non-cash income: Govt

  1. Govt clarified that its income declaration scheme, the Pradhan Mantri Garib Kalyan Yojana, will apply only to cash or deposits in bank accounts
  2. It will not be available for income in the form of jewellery, stock or immovable property
  3. It would also not apply to income stored in foreign accounts
  4. Those under search and seizure notices can also apply under the scheme


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):

  1. It was notified along with other provisions of Taxation Laws (Second Amendment) Act, 2016 & came into effect from 17 December 2016
  2. It will remain open until March 31, 2017
  3. It is Union Government’s second income disclosure scheme (IDS) to allow tax evaders to come clean with unaccounted wealth
  4. Features: It provides for 50 per cent tax and surcharge on declarations of unaccounted cash deposited in banks.
  5. Declaration under it can be made by any person in respect of undisclosed income in the form of cash or deposits in an account with bank or post office or specified entity
  6. Declarant of undisclosed income needs to pay 30% tax, 10% penalty and 33% Pradhan Mantri Garib Kalyan Cess on the tax, all of which add up to around 50%
  7. Besides, declarant must make mandatory deposit of 25% of undisclosed income in the zero-interest Pradhan Mantri Garib Kalyan Deposit Scheme, 2016 with lock-in period of 4 years
  8. The income declared under it will not be included in the total income of the declarant under the Income-tax (IT) Act for any assessment year
  9. Besides, declarations made under it will be kept confidential and shall not be admissible as evidence under any Act (ex. Wealth-tax Act, Central Excise Act, Companies Act etc.)
  10. However, declarant will have no immunity under Criminal Acts mentioned in section 199-O of the Scheme
  11. Non declaration of undisclosed cash or deposit in accounts under this Scheme will render tax, surcharge and cess totalling to 77.25% of such income, if declared in the return of income
  12. In case the same is not shovm in the return of income a further penalty @10% of tax shall also be levied followed by prosecution
  13. Use of money: The money or revenue generated from disclosure of unaccounted cash will be used for welfare schemes for the poor
  14. It will be mainly used for projects in irrigation, infrastructure, primary education, primary health, housing, toilets and livelihood so that there is justice and equality

[op-ed snap] No proof required: Towards an Income Tax Revolution


  1. There is a considerable amount of tax evasion — a rough estimate of the order of magnitude is around Rs 6 lakh crore to Rs 9 lakh crore
  2. This may be a strange coincidence but this number corresponds closely to our estimates of black cash in the Indian economy in 2016-17, or as of November 8, 2016

Fight against black money:

  1. As the history of the license permit quota raj shows, unless the economic incentive favour voluntary tax compliance and less political, bureaucratic and police corruption, any benefits are soon frittered away and negative effects multiply over time
  2. Consequently, institutional reforms for minimising corruption and policy reforms for encouraging voluntary compliance are very important
  3. In the US, the IRS has been conducting an annual exercise since 2006, which attempts to identify the tax losses which arise from income tax evasion


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.

[pib] Know what the government did on black money

Steps against Black Money:

  1. The government constituted SIT under the directions of the Supreme Court to fight against black money
  2. The Prime Minister had proposed to the G-20 at Brisbane that international cooperation in sharing information with regard to base erosion and profit shifting should be expedited
  3. The arrangement with the United States furthered this object
  4. The Black Money Law dealing with illegal assets outside India opened a window for disclosure with 60% tax and provides a ten year imprisonment
  5. The Income Declaration Scheme (IDS) 2016 was launched with a 45% tax
  6. The PAN card requirement for cash transaction beyond rupees two lakhs put hurdles on expenditure through black money
  7. The Benami law legislated in 1988 amended and has been put into action
  8. The GST, which is scheduled to be implemented this year, will provide for better indirect tax administration and being a more efficient law will check tax evasion
  9. The demonetisation of high denominational currency notes was the big step in the same direction

 Crime using paper currency:

  1. Paper currency is a zero interest anonymous bearer bond
  2. Having no name or history attached to it, crime can take place easily
  3. Crime can happen with or without cash but excessive cash as a medium of exchange is favoured by the underground economy
  4. It results in non-compliance in the matters of tax payments which creates an unjust enrichment in favour of the evader as against the poor and the deprived
  5. Mountains of cash money reach tax havens through the hawala route from the original paper currency
  6. Cash facilitates real time untraceable payments
  7. Cash is the medium which funds bribery, corruption, counterfeit currency and terrorism

Digital Economy:

  1. Ethical and developed societies aided by technology have consistently moved towards banking and digital transactions as against the excessive use of cash
  2. Reducing cash may not eliminate crime and terrorism but it can inflict serious blow on them


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?

  1. Benami is a Hindi word which means ‘without a name’
  2. Benami property or assets, therefore, is a reference to property/assets whose actual owner is not the person in whose name it is
  3. That is, property or shares, fixed deposits, debentures and bank accounts held by someone for someone else
  4. The person who lends his or her name does not get any beneficial interest in the property or asset and is called a benamidar

Benami Transactions (Prohibition) Act 1988:

  1. In May 1988, the government issued an ordinance, Benami Transactions (Prohibition of the Right to Recover Property) Ordinance, which was then enacted as the Benami Transactions (Prohibition) Act 1988
  2. The Act defined benami transactions, prohibited them and made them punishable with a jail term and fine
  3. It also prohibited the recovery of property from the benamdar by the real owner

Benami Transactions (Prohibition) Amendment Act, 2016:

  1. The term `property’ is not confined to a piece of real estate. The definition covers assets of any kind – moveable or immoveable, tangible or intangible, corporeal or incorporeal
  2. The Act does not allow the re-transfer of benami property to the actual owner; any such transfer will be termed null and void
  3. The Act clarifies that benami property that has been declared as part of the Income Disclosure Scheme of 2016 will not be acted against
  4. Any benami property will be confiscated by the central government

[op-ed snap] How to go about chasing black money

  1. Context: The flow of tax evasion every year is what should be the focus of any drive targeting black money, rather than the caches accumulated from past tax evasion
  2. Those stocks certainly existed, but the really large holders of these assets had long ago moved on from physical forms (like cash or gold or real estate) to financial assets
  3. Cash came in particularly handy to pay the wages of construction workers

Underdeveloped Bond Market in India:

  1. We did not develop bond markets in the country as we should have, to the point where large construction projects could easily access formal financing
  2. Infrastructure construction worldwide has been bond-financed, including the rail network in colonial India
  3. Because the bond market today remains so poorly developed that there was such buoyant demand for loans in cash, and therefore for accumulation of black wealth in liquid loanable form
  4. Lending rates on these channels are astronomically high
  5. The borrowers would have much preferred a regulated bond market where rates would have been far lower, but that market was quite simply missing

Need for re-monetisation with special focus on credible rating agencies:

  1. Bond markets today call for a whole ecosystem, with credible rating agencies to give lenders the confidence to move into that disintermediated financial space
  2. The thing to do is to remonetize the economy fully, and to reduce cash dependence in a planned sector-specific manner
  3. Unless remonetization is complete, growth cannot be restored, employment cannot be generated, and the political popularity of demonetization will get eroded
  4. Moving everyday transactions to a digital platform cannot be done overnight

The future of the cost of service in digital payment space:

  1. Mobile wallets are in business in pursuit of profit, so if they provide a service they have to be paid for it
  2. What the digital move has done, therefore, is to introduce friction into the payment system
  3. When you digitally pay just the value of your purchase to your vegetable seller, the cost of the service is being loaded on to the seller
  4. He accepts it willingly now, because he does not want his business to be restricted to those with cash
  5. Over time, the cost of the conversion will be loaded on to the final consumer (and it already is, by milk suppliers in Delhi, for instance)
  6. Even though the user base of mobile wallets is expanding by the hour, they are reporting losses
  7. While the volume of transactions has exploded, their total value is reported to have remained flat, because the average value of each transaction has come down
  8. The losses are worrying because mobile wallets are essentially deposit-taking non-bank financial institutions
  9. Another reason for retailers retreating from wallets is that their employees still demand payment in cash
  10. Retail employees just cannot afford to receive their salaries any other way since their biggest monthly payment, which is rent for the rooms where they live, can only be paid in cash
  11. House rentals will be among the last bastions to fall when it comes to moving away from cash payments
  12. Doctors, tutors for their children, all demand payment in cash
  13. These are the small channels for tax evasion which will prove stubbornly resistant to change

Black money and effective measures around the world:

  1. There are many millions who earn incomes well above the taxable threshold, who are below the tax radar and prefer to stay there
  2. Israel in its early years needed tax revenue, and it had to do it in a way which would not alienate taxpayers since the country needed to stand united in the face of external hostility
  3. For a big purchase like a yacht or a luxury car by a moneyed immigrant, there would be a presumptive taxable income estimated at some multiple of the value of the transaction
  4. Restaurant owners would be taxed on a presumption of taxability based on capacity
  5. Those that did not meet the presumptive income had to pay the tax anyway, and eventually closed down
  6. The presumptive tax worked as an efficiency incentive
  7. These methods are survey-based and formulaic, and thus prevent the caprice and intrusive character of tax terrorism


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.

Govt. may notify scheme for taxing black money holders this week

  1. What: The govt is likely to notify, this week, the scheme giving tax dodgers another chance to come clean.
  2. They will have to pay 50% of tax on junked currency deposited in banks post demonetisation
  3. The Pradhan Mantri Garib Kalyan Yojana (PMGKY) provides for 50% taxes and surcharge on declarations of unaccounted cash deposited in banks
  4. Declarants also have to park a quarter of the total sum in a non-interest bearing deposit for four years
  5. But there is no immunity from FEMA, PMLA, Narcotics and foreign Black Money Act


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.

[op-ed snap] Making of a mammoth tragedy

  1. Black money: a genuine concern, wealth that has been accumulated over years by those with unaccounted sources of income
  2. The notion that ‘all cash is black money and all black money is in cash’ is far from reality
  3. More than 90% of India’s workforce still earn their wages in cash
  4. Cashless poor: Number of bank branches in rural areas have doubled since 2001, there are still more than 600 million Indians who live in a town or village with no bank
  5. Cash- bedrock of the lives of these people, means of daily subsistence
  6. They save their money in cash which, as it grows, is stored in denominations of Rs.500 and Rs.1,000 notes
  7. To tarnish these as ‘black money’ and throw the lives of these hundreds of millions of poor people in disarray is a mammoth tragedy
  8. The vast majority of Indians earn in cash, transact in cash and save in cash, all legitimately
  9. It is the fundamental duty of a democratically elected government to protect rights and livelihood of its citizens, this decision is a travesty of this fundamental duty
  10. Unlike poor, holders of black money have access to various forms of wealth such as land, gold, foreign exchange, etc.
  11. Only a tiny fraction of black money is in cash
  12. Government has actually made it easier to generate such unaccounted wealth in the future by the introduction of a Rs.2,000 note
  13. Implementation: Replacing billions of old currency notes with new ones is a monumental one
  14. It is a huge challenge that is why most nations that have undertaken such currency swap operations have not done it as a sudden overnight operation
  15. Macroeconomic impact: At a time when India’s trade numbers are at multi-year lows, industrial production is shrinking and job creation is anaemic, this policy can act as a negative shock to the economy
  16. India’s cash to GDP ratio is very high vis-à-vis other nations- an indicator of the Indian economy’s dependence on cash


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:

  1. Nigeria- the debt-ridden and inflation hit country did not take the change well and the economy collapsed
  2. Ghana- made the people of the country support the black market and they started investing in physical assets which made the economy weak
  3. Zimbabwe- used to have a trillion dollar note! After demonetisation, the value of trillion dollars dropped to $0.5 dollar and were also put up on eBay
  4. North Korea- Kim-Jong ll introduced a reform that knocked off two zeros from the face value of the old currency in order to banish black market. It left people with no food and shelter
  5. Soviet Union- Mikhail Gorbachev ordered to withdrew large-ruble bills from circulation to take over the black market, resulted in a coup and led to Soviet breakup
  6. Australia- first country to release polymer (plastic) notes to stop widespread counterfeiting. Only replacement of paper with plastic therefore no side-effects on the economy
  7. Myanmar- military invalidated around 80% value of money to curb black market in 1987, mass protests that killed many people

Govt may still gain handsomely from demonetisation drive

  1. Issue: The govt was expecting deposits worth Rs 10-11 lakh crore, out of approx Rs 15 lakh crore, would come back to the banking system while the rest would not be declared
  2. The undeclared part of the currency liability could, then, be transferred by RBI to the government as dividend
  3. This amount could, in turn, be used to recapitalise banks or be spent in other social sectors
  4. However, many sources are of the view that the entire amount could come back to the banking system, and the RBI would not be able to transfer anything to the govt
  5. This would reduce the utility of the demonetisation exercise for the govt
  6. However, SBI’s research estimates that around Rs 2.5 lakh crore “on a conservative basis” will not be coming back into the system
  7. Other benefits of demonetisation: The government gets extra tax revenue
  8. The money so far kept out of banking system can also come back and get circulated in the economy, which will boost economic activity


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.

Tax defaulters get another chance

  1. What: The Centre introduced a Bill in the Lok Sabha that gives tax defaulters an opportunity to come clean by paying tax and penalties
  2. Key feature of the proposed amendment to the Income-Tax Act is a proposal to impose 50% tax on undeclared income that is voluntarily disclosed till Dec 30
  3. After that 82.5% (75% tax and 10% of such tax as penalty) could be levied on undeclared income detected by authorities
  4. The tax changes are intended to supplement the demonetisation move targeted at curbing black money
  5. The proceeds will be made a part of the Pradhan Mantri Garib Kalyan Yojana
  6. They will be used to fund schemes for providing irrigation, housing, toilets, infrastructure, primary education, primary health and livelihood


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.

[op-ed snap] Challenges in the face of corruption

  1. Three components of black economy: Corruption
  2. Example, the high stamp duties on real estate transactions that lead to payments in cash
  3. Second- methods adopted for storing unaccounted wealth. Example, holding assets in gold
  4. Third, methods through which transactions are effected
  5. Bundles of rupees can be replaced by bundles of US dollars. By year end, Indian small businessmen will be as fluent with bitcoin as they are comfortable with US dollar bills
  6. Six battlegrounds in this war: gold, hawala, real estate, taxation, politics and elections, and administration
  7. In 2013, when the customs duty on gold was reintroduced, it dealt a body blow to the world of gold and jewellery conducted through white money
  8. Eliminate customs duty and solve this at the root cause. Customs duties are “bad taxes” and should go
  9. Hawala business that emerged in 1960s and 1970s in response to capital controls that were a part of Indian socialism, need to be tackled
  10. Buying agricultural land, obtaining urban infrastructure like electricity and water, and getting a building plan approved: all are mired in problems
  11. Cash payments are favoured so as to avoid stamp duty
  12. Real-estate sector should be merged into GST
  13. Taxes other than income tax and GST, at the central level, should be removed. This will take us to a high-compliance and low-corruption environment
  14. Running a political party and fighting elections requires large-scale resourcing forcing the use of black money

Demonetisation: Distress messages go out from cooperative banks in rural India

  1. What: Operations at 370 district central cooperative banks (DCCBs) and over 93,000 primary agricultural credit societies (PACS) have been severely hit
  2. Why: The RBI slapping restrictions following the demonetisation of Rs 500 and Rs 1,000 notes
  3. Urban cooperative banks (UCBs) too have complained to the RBI that commercial banks are refusing to provide them currency support, affecting their operations
  4. DCCBs and PACS are considered the lifeline of the rural economy
  5. Especially for farmers in states like Maharashtra, Kerala, Uttar Pradesh, Gujarat, Tamil Nadu and Karnataka
  6. Reason: The curbs on them could be related to lax KYC (know your customer) norms and money laundering in some cooperative banks

[op-ed snap] Artificially created recession II

  1. Impact: Supply chain of goods and services disrupted
  2. Traders and retailers deprived overnight of the funds to carry their business they can’t even pay for transport of goods to the market
  3. Retailers cannot sell goods since customers do not have money to buy them, they can provide goods on credit to customers only up to a point since they need to pay their suppliers
  4. In villages, kharif harvest is not yet fully marketed, but producers unable to sell their crops owing to shortage of the new money
  5. Many are being offered drastically lower prices for their produce
  6. Farmers who have already marketed their kharif crop cannot buy seed and fertilisers for sowing rabi
  7. Even in a relatively organised tea plantations sector, daily wages in new money have not been paid to workers, depriving them of their sustenance

[op-ed snap] Artificially created recession I

  1. Prior steps that should have been taken: Prior large increase of lower denomination notes should have been ensured through banks and ATMs
  2. This would not reduce overall money supply and a normal level of activity could be maintained
  3. Condemning the step: Purchasing power of the population suddenly taken away, reducing the level of economic activity and causing distress to people
  4. Denomination of notes has nothing to do with the existence of black money, which is not held in hoards of notes but is a circulation of unrecorded and undeclared incomes
  5. Monetary authorities or government itself doesn’t believe that black money is connected to ‘high denomination’ Rs.500 and Rs.1,000 notes
  6. If they did, they would not have chosen to issue a new note of Rs.2,000 which is of even higher denomination

Economists see ‘short-term pain, long-term gain’

  1. The govt’s demonetisation drive will likely negatively impact the economy in the short term
  2. But it could help over the longer term propel economic growth into double-digit levels
  3. Reason: As more of the informal economy becomes formal and the GST comes into effect
  4. Benefits: The NPAs of banks will go down as the cash coming in will lead to higher CASA (current account, savings account), in turn declogging the system
  5. Interest rates will come down because the money will go to the banks and to some extent some of it will go to the government as taxes
  6. The overall economic impact would include a likely appreciation of the rupee and a sharp slowing in inflation
  7. The banking system getting a boost and real estate prices falling about 20-25 per cent before stabilising

Demonetisation could cut inflation, says Panagariya

  1. Source: NITI Aayog vice chairman Arvind Panagariya
  2. Views: The Centre’s demonetisation drive will help lower inflation
  3. Also as the black money goes out of the system, the money supply will shrink to some degree
  4. This will reduce the inflation rate in the absence of any open market operations by the RBI
  5. Savings that were kept in different forms particularly in the form of currency notes, they will now move into bank deposits. So we will see some surge in bank deposits

[op-ed snap] Curbing the black currency menace

  1. Context: withdrawing highest-value currency notes of Rs.500 and Rs.1,000
  2. Justification: Stashing corrupt officials’ ill-gained cash under their mattresses, fuelling inflation as well as terrorism
  3. Introduction of new Rs.500 and Rs.2,000 notes: would check counterfeit currency and purge India’s economy of black wealth amassed in the form of high-value notes
  4. Problems: Step caused hardship as people struggle to get notes of smaller denomination for daily expenditure
  5. Administrative steps: ensure that no poor person is saddled with old, useless notes due to lack of official identity documents or a bank account
  6. Avoid putting to disadvantage older citizens unable to visit a bank repeatedly to exchange high-value notes
  7. Find ways to check black money parked in benami properties and gold
  8. There must be administrative and electoral reforms to advance digital payments

‘Demonetisation to hit terror financing hard’

  1. What: The govt has said one of the reasons to demonetise currency notes of Rs. 500 and Rs. 1,000 was to curb the circulation of fake currency notes
  2. Why: Officials in the security establishment were upbeat that crimes like terror financing would be severely hit by the move
  3. Officials said that in 90% cases, the fake currency had been pumped in through the land route from Bangladesh
  4. Certain security features of Rs. 500 and Rs. 1,000 notes had been compromised
  5. The supplier of raw currency notes, the ink and the silver thread is same for India and Pakistan

Move was in the pipeline for months

  1. The government’s move to scrap nearly 23.2 billion high-value currency notes of Rs. 500 and Rs. 1,000, was in the pipeline for several months but was kept tightly under wraps
  2. Statistics show that high denomination currency in circulation has risen sharply between 2011 and 2015
  3. While all currency notes grew 40%, Rs. 500 notes in circulation rose by 76% and Rs. 1000 notes went up by 109%
  4. But during this period, the economy expanded by 30% so the circulation of such notes had gone up disproportionately

Rs. 500, Rs. 1000 currency notes no longer legal tender

  1. What: 500 and 1,000 rupee notes ceased to be legal tender from midnight on Tuesday
  2. Who: PM Narendra Modi announced this in a surprise address to the nation on Tuesday night
  3. Why: He said the decision was taken to root out the menace of black money and corruption
  4. Existing Rs. 500 or Rs. 1,000 notes can be deposited in an individual’s bank or post office accounts between November 10 and December 30
  5. The PM made a pointed reference to cross-border terror which was being funded by forged currency notes
  6. A government official said that the move was necessary to stop terrorists and drug cartels

[op-ed snap] Making legal tender illegal-Good step but bad implementation

  1. Context: 500 and 1000 denomination notes no longer remain a legal tender
  2. Withdrawals from ATMs limited to Rs.2,000/day for next few days; returning bills to banks will require some form of government ID
  3. Step taken to deal with “the disease” of unaccounted income—or “black money”
  4. Across Asia, countries are moving away from high-denomination notes- Korea plans to go cashless by 2020- so as to curb the menace of black money
  5. Problems a common man would face: Tougher for small businesses and for poor
  6. ATM cards or mobile payments in India have not percolated far enough thus making transactions difficult for the poor
  7. Demonetization of this kind was necessary, but pushed too soon
  8. Hasty implementation: We first need private sector to create the cheap and easy mechanisms for cash transfers using smartphones before going cashless

New ‘Benami’ law to come into effect from November 1

  1. Act: The Benami Transactions (Prohibition) Amendment Act will come into force on November 1, 2016
  2. It will be renamed as the Prohibition of Benami Property Transactions Act (PBPT Act)
  3. It defines benami transactions, prohibits them and further provides for punishment
  4. A transaction is named ‘benami’ if property is held by one person, but has been provided or paid for by another person
  5. It provides for the creation of an appellate mechanism called the Adjudicating Authority and Appellate Tribunal

SIT moots independent ED probe into money laundering

  1. New recommendation: The Special Investigation Team (SIT) on black money has recommended that money laundering investigations by the Enforcement Directorate (ED) should be allowed without any dependence on registration of cases by other agencies.
  2. Background: The Prevention of Money Laundering Act (PMLA) at present provides that the ED can pursue only those cases which have been registered by agencies like the Central Bureau of Investigation (CBI), State police units and the Income-Tax Department.
  3. Previous recommendations: Based on the SIT’s recommendations, the Central government had earlier brought in some crucial amendments to the PMLA, apart from the Income-Tax Act and the Foreign Exchange Management Act.
  4. These were to strengthen the legal framework for effective action against those holding unaccounted income.
  5. A latest amendment to the PMLA empowers the ED to continue with the money laundering investigations even if the police case is closed in the court.
  6. The ED can still pursue the probe into a financial angle and file a separate charge sheet.

Rs. 8,000 cr. under tax net, says Centre

  1. News: Govt told the Supreme Court that Rs. 8,186 crore kept in unreported foreign bank accounts has been brought under the tax net
  2. The feat was achieved despite restrictions like non-sharing of information by the Swiss authorities
  3. Context: Govt reply comes in towards a PIL petition seeking investigation against Indians holding offshore bank accounts and whose names feature in the Panama papers
  4. Govt has asked the apex court to dismiss the petition
  5. Why? It has already set up a multi-agency group probe involving the CBDT, RBI, Financial Intelligence Unit and ED to ensure speedy and coordinated investigation

Let’s know more about Income Disclosure Scheme, 2016- II

  1. Assets specified in the declaration will be exempted from Wealth tax
  2. These declarations will also enjoy immunity from prosecution under the IT Act and Wealth Tax Act and also the Benami Transactions (Prohibition) Act, 1988
  3. Non-payment of total taxes, penalty and surcharge in time or declaration by misrepresentation or suppression of facts shall render the declaration void
  4. Other penal consequences will also follow accordingly
  5. The declarents have been assured of absolute confidentiality
  6. The income tax and penalties collected under the scheme will be used for public welfare

Let’s know more about Income Disclosure Scheme, 2016- I

  1. The scheme is part of Finance Act, 2016
  2. Had given four month window from 1st June 2016 to 30 Sept 2016
  3. Provides one-time opportunity to all persons who have not declared Income correctly in earlier years to come forward and declare their undisclosed Incomes
  4. However, foreign assets or income to which the alack Money Act 2015 applies are not eligible for declaration under this scheme
  5. The declared income would be taxed at the rate of 30% + Krishi Kalyan cess of 25% on taxes payable + a penalty at the rate of 25% of the taxes payable
  6. Thus the total tax to be paid will be 45% of the income declared under the scheme
  7. No target for disclosures or collections from the scheme had been set for the CBDT

Rs. 65,250 cr. mopped up via new black money window

  1. What? Union Finance Ministery announced that the Central Board of Direct Taxes (CBDT) had received total disclosures of Rs. 65,250 crore under the Income Disclosure Scheme, 2016 in the form of cash and other assets
  2. The four-month window under the scheme for declaring undisclosed income or black money that had escaped assessment closed on 30th Sept midnight
  3. Earlier: The Voluntary Disclosure Scheme of 1997 had mopped up Rs. 9,760 crore in taxes at an average of about Rs. 7 lakh per declarant
  4. The VDS, unlike IDS, had not penalised the declarents and allowed them to value the assets declared at the market prices of 1987 rather than current rates

Cabinet clears revised India-Cyprus DTAA

  1. DTAA: Double Taxation Avoidance Agreement
  2. Impact: Will give India the right to tax capital gains on investments routed through Cyprus prospectively from April 1, 2017
  3. Cyprus: Considered a haven for money laundering, round-tripping, and profit-shifting
  4. Context: Strengthening DTAAs- India recently revised DTAA with Mauritius & is in the process of revising its treaty with Singapore

Govt examining proposal to ban cash transactions over Rs3 lakh

  1. It was recommended by the Supreme Court-appointed special investigation team (SIT) on black money, headed by M. B. Shah
  2. Impact: If implemented, it will help in curbing the generation of black money
  3. Provide push to India’s movement towards a cashless economy

Lok Sabha passes benami transactions bill

  1. The bill provides for confiscation of benami properties, or assets held in the name of another person or under a fictitious name to avoid taxation
  2. This is the second initiative of the government to curb generation of black money
  3. First initiative: Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
  4. It was enacted to penalize those with unaccounted wealth abroad

SIT wants to ban cash transactions above Rs 3 lakhs

  1. News: The Special Investigative Team (SIT) on undisclosed money wants a ban on any cash transaction over Rs 3 lakh and a limit of Rs 15 lakh on cash holdings
  2. In the wake of the ‘Panama Papers’ leak, it also recommended amending the law to provide for confiscation by the state of such money abroad
  3. The SIT, in its fifth report to the Supreme Court, said that a large amount of unaccounted wealth is stored and used in the form of cash

Income Declaration Scheme extended

  1. News: The Centre announced an extension of a deadline under the Income Declaration Scheme to September 30, 2017 from November 30, 2016
  2. The Scheme is aimed at bringing undeclared income and assets into the tax net
  3. Staggered due dates for the payments – minimum 25% tax, surcharge and penalty is to be paid by November 30, 2016, another 25% by March 31, 2017, and the remaining amount by September 30, 2017
  4. The previous deadline for the entire payment of the tax, interest, and penalty was November 30, 2016

Government tries to calm fears of black money holders

  1. Govt has sought to assure that it would not harass those who came forward with their undeclared income
  2. The compliance window is open for people with undisclosed income to legitimise it by paying 45% tax, between June 1 and September 30
  3. Any declaration made under the Income Declaration Scheme 2016 would be protected, and that information would not be shared

Only ill-gotten assets a crime, observes SC judge

  1. Context: SC hearing the wealth case involving Tamil Nadu Chief Minister Jayalalithaa
  2. SC: Acquisition of assets per se is not a crime unless proved that the source of funds is illegal
  3. The court asked how Karnataka could prove that the money circulated among the co-accused was that of Ms. Jayalalithaa
  4. Ms. Jayalalithaa had argued that the prosecution cannot presume that she was the source of the money flow merely because the co-accused lived in the same house as her

‘No immunity for those who earned money through graft’

  1. Context: Finance Ministry’s FAQ on Income Declaration Scheme
  2. No immunity: Persons who have earned money through corrupt practices cannot take advantage of the domestic black money disclosure scheme
  3. Scheme: The four-month window which opens on June 1 provides an opportunity to people having undisclosed income to come clean by paying tax, penalty and surcharge totalling 45% of fair market value
  4. Confidential: The declarations made will remain confidential as in the case of return of income filed by an assessee

Centre orders probe against Indians linked to tax havens

  1. Context: The expose by a German newspaper and a global team of investigative journalists about investments going into tax havens
  2. News: Union govt ordered the formation of a special agency to investigate Indians who figure in the ‘Panama papers’
  3. Panama Papers: A set of over 11 million leaked documents that reveal how the rich and the connected around the world used tax havens for salting away their wealth

Those under watch ineligible for IDS

  1. Context: The govt’s decision to open a one-time compliance window for domestic black money-holders
  2. News: It would exclude potential disclosures from people who received notices seeking a regular explanation on the returns they had filed
  3. The scheme allows undisclosed income of any financial year up to 2015-16 through this window
  4. Impact: This could limit the success of the scheme

A chance for tax evaders to come clean

  1. Context: The govt’s commitment to remove black money from the economy
  2. News: The govt has decided to open a one-time, 4-month compliance window for domestic black money-holders
  3. It is intended to help them come clean by paying tax and penalty of 45%
  4. Benefits: There will be no scrutiny of money declared, either under the Income-Tax Act or the Wealth Tax Act
  5. The declarants will have immunity from prosecution
  6. The IT dept. has improved its capability to detect evasion with increased access to information and the availability of technology-driven analytical tools to process such information

Know about Directorate of Revenue Intelligence

  1. DRI is a centralized agency to deal with cases of violations of Customs laws
  2. Parent Organisation: Central Excise and Customs
  3. Focus: It enforces prohibition of smuggling of drugs, gold, diamonds, electronics, foreign currency, counterfeit Indian currency, etc
  4. Importance: It has been successful in combating the menace of fake Indian currency

SIT verifying outflow of illicit funds

  1. The News: SIT has asked the Directorate of Revenue Intelligence to verify claims made by Global Financial Report
  2. Background: Global Financial Report asserted that illicit financial flows worth $505 billion left India between 2004 and 2013
  3. Challenge: It is impossible to accurately ascertain how much money has gone
  4. Any estimate of the quantum of illicit money incorporates a number of assumptions
  5. Future: The Indian govt has entered into several bilateral agreements with other countries to share tax information, which will help in curbing the outflow of illicit funds

In 5 years, black money detection up 15.5 times

Undisclosed income detected during each survey has shot up drastically in two years

  1. Context: The nationwide crackdown on black money has meant a steady increase in detection of undisclosed income, which has jumped 15.5 times
  2. Background: Director General of Income Tax report shows business houses, including diamond traders, steel magnates and pharma companies coming under taxmen’s scanner
  3. Action: Taken through direct enquiry regarding investment and expenditure under Section 131, 133A and 132 of IT Act
  4. The News: More and more companies are involved in making bogus entries in their accounts
  5. Findings: Under this jamakharchi or ‘accommodation entry business’, paper entries are made in account books to facilitate cash movement

Black money amnesty scheme nets Rs. 4,164 cr.

The Union govt. has received 644 declarations for black money worth Rs. 4,164 crore.

  1. The declarations were made under one-time, come-clean compliance window provided to evaders.
  2. It was provided by Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
  3. The govt. has also earned Rs 2,428.4 crore by way tax and penalty on the declared sums.

How black money law will be invoked against offenders?

  1. The expiry of the compliance window sets the stage for the provisions of the new law to be invoked against offenders.
  2. Any illegal overseas assets or income discovered by the tax authorities now will attract tax at the rate of 120% and penalty.
  3. In addition, the offenders could also face imprisonment of up to 10 years.

India fourth-largest source of black money: Report

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.

  1. This was stated in a report which was released recently by Global Financial Integrity (GFI), a research and advisory group based in Washington.
  2. According to the report, $1.1 trillion flowed out of developing and emerging economies illicitly in 2013 alone.
  3. The capital outflow mainly stemmed from tax evasion, crime, corruption and other illegal activities.
  4. China tops the list for 2004-2013, with $139 billion average illicit financial flow per annum, followed by Russia and Mexico.

Hiding foreign assets to be a ‘very risky affair,’ Sinha

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.

  1. Cooperation among countries and sharing of information is the key to unearthing illicit money stashed in safe havens.
  2. Strict bank secrecy has ended, and a new environment of transparency is now operational.
  3. India is an early adopter of Common Reporting Standard and committed to adopting it by 2017.

India yet to utilise info on black money

  1. HSBC whistle-blower said he is willing to cooperate with the investigative agencies in their black money probe but would need protection.
  2. He claimed that lot of information on illicit funds is lying unused by the Indian authorities.
  3. He also claimed that millions of crores worth illicit funds are flowing out of India.

Meet to devise new strategy to combat money laundering

  1. International groups combating money laundering rackets funding terror activities and organised crime syndicates will come together.
  2. They will meet in Delhi for brainstorming to build greater inter-regional coordination in law enforcement and intelligence-sharing.
  3. It will address a wide range of issues pertaining to trans-border illicit financial transactions by organised criminal syndicates and terror outfits.
  4. It will make recommendations to strengthen the South Asia Regional Information and Coordination Center for more concerted action in the region.

Payments banks to help in move to ‘cashless economy’

  1. The opening of a large number of payment gateways, Internet banking, payment banks will prompt the use of banking transactions and plastic money to rise significantly.
  2. The govt. was considering making it mandatory to provide PAN card details for cash transactions beyond a certain limit.
  3. The monitoring regime of the income tax department has been strengthened.
  4. The department can detect large cash withdrawals, or large cash transactions which enter the system.
  5. The Finance Minister lays the blame for incidence of tax evasion on previous govts and their high tax rates.

Black money totalling Rs. 3,770 cr. declared

  1. The govt.’s declaration window under the new Black Money Act, saw all of 638 declarations worth Rs.3,770 crore.
  2. This amount is Rs 2,800 crore less than what PM had declared that he would recover, during his Independence day speech.

Centre yet to notify crucial FEMA amendments

  1. The Union government has not yet notified the amendments to the Foreign Exchange Management Act (FEMA).
  2. These ammendments were incorporated into the legislation after President Pranab Mukherjee’s assent in May 2015.
  3. The delay may have implications for the pending cases of foreign exchange violations, including those allegedly involving the former IPL chief, Lalit Modi.
  4. What do we mean by notifications? Wasn’t the bill already passed by the president!

India & Automatic Exchange of Financial Account Information

  1. India has joined the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Financial Account Information (AEOI).
  2. Necessary legislative changes will be made in section 285BA of the Income Tax Act, 1961.
  3. These standards will enable India to receive information from almost every country in the world including offshore financial centres.
  4. It will directly help the Government to curb tax evasion and deal with the menace of black money stashed abroad.

Automatic info exchange only way to tackle black money

  1. Common Reporting Standards on Automatic Exchange of Information should be implemented on a fully reciprocal global basis.
  2. This can help tackle the problem of the problem of black money & illicit flow to offshore jurisdictions and tax havens.
  3. Base erosion and profit shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes!
  4. India welcomes the progress made in BEPS project incorporating the participation of 8 non-Oecd G20 countries

:( We are working on most probable questions. Do check back this section.

Highest Rated App. Over 3 lakh users. Click to Download!!!