Black money and the issues around it

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?]


That’s it for now. Please keep following the news story here to stay updated with the latest developments!

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