Black Money | UPSC Mains: Internal Security & Disaster Management PDF Download

• Black money includes all funds earned through illegal activity and otherwise legal income that is not recorded for tax purposes. Black money proceeds are usually received in cash from underground economic activity and, as such, are not taxed.
• There is no one definition for black money in economics. In layman’s language, it is money that has been acquired through illegitimate means or money which is unaccounted for, that is, for which tax is not paid to the government.
• There have been several approximations regarding the extent of black money economy also called as Parallel economy/ Gray Economy/ Shadow/ Underground Economy.
• Some of the approximations suggest it to be as high as up to fifty to hundred percent.
• While black money in India is decades old problem, it has become real threat post liberalization.
• Indian estimate of black money in Swiss Bank is pegged at $1.4 trillion while Swiss estimate of money in their bank is pegged at $2 billion.
• Unlawful activities such as crime and corruption, non-compliance with taxation requirements, complex procedural regulations, cultural and social practices, globalization along with weak institutional, policy, legal and implementation structures have further augmented the black money economy.

Parallel Economy:

• Parallel economy is the functioning of an illegal sector in the economy whose purposes run in opposite to the objectives of official, sanctioned or legitimate sector. The parallel economy has various aspects like political, commercial, legal, industrial, social and ethical aspects.
• Incidence of black money gives rise to parallel economy. The term parallel economy is also denoted as black economy, unaccounted economy, illegal economy, subterranean economy or unsanctioned economy.
• A striking point about parallel economy is that it helps the type of economic activities where undisclosed income remains hidden to the tax authorities. Usually, perceptible consumption, real estate, investment in foreign assets, criminal activities, corruptions etc are the typical spending pattern in the parallel economy. Transactions are performed in an opaque manner.

Generation of black money:

Sources of Black Money:

As discussed above the sources of black money are broadly of two categories – illegitimate activity and tax evasion even if the activity is legitimate.

• Real estate: The prices of real estate are increasing over the years. High stamp duty on real estate compels the builders to undervalue the transaction cost. The builders take money in cash and generate high value black money.
• Gold smuggling: As government impose high custom duties on gold and high prices of gold offers way to invest black money into gold.
• SHGs: Some Self-Help Groups (SHGs) and trusts do not provide proper sources for their funds and donations received.
• Corruption: Corruption in government and administration creates parallel economy in the government itself. Growing consumerism, quest for material status leading to more corruption and black money generation.
• Shell Companies: The government appointed task force has identified 2.25 lakh shell companies in India. These shell companies are mainly used to divert black money.
• NGOs and trusts: NGOs receiving funds from foreign sources but they rarely file their annual statement with government. The loopholes in the laws are exploited by the NGOs and their fund raisers for mobilisation of black money.
• Informal Sector and Cash Economy: Cash transactions, large un-banked and under-banked areas contribute to the large cash economy in India.
• Tax Havens: Tax havens are typically small countries/ jurisdictions, with low or nil taxation for foreigners who decide to come and settle there. Strong confidentiality or secrecy regarding wealth and accounts and allow opaque existence.
• Hawala: It is an informal and cheap method of transferring money from one place without using banks etc. It operates on codes and contacts and no paperwork and disclosure is required.
• P-notes: P-notes do not require KYC fulfilment for the investment. The anonymity in P-notes is fully exploited to invest black money in formal economy.

Impact of black money on Economy:

• Due to parallel economy, neither government nor industries get actual picture of investment sentiments. This creates market distortions.
• Black money means loss of tax revenue to the government. This reduces government’s capacity to spend more on social infrastructure.
• Corruption in government projects and procurements creates low quality infrastructure.
• As the RBI and government have no control over black money. This makes difficult for RBI to effectively target inflation and government also face problem while deciding fiscal policy.
• Black money is further driving up the prices of real estate.
• Black money generated from drugs and smuggling is being used to operate terror networks. This threatens national security.
• Black money further increases the inequality and poverty.
• There is a distortion in investment in economy. With black money the investment is made in high end and luxury goods.
• Forward trading of goods by cash rich speculators cause fluctuation in prices due to hoarding.
• Black money leads to further corruption by creating a vicious cycle.
• Generating black money means that quality is compromised in public sector projects where black money is used to manipulate tenders and offer kickbacks.

Measure taken to curb black money generation and flow:

• Tax Reforms:
  (i) Rationalization of income tax with greater tax base and lower taxes.
  (ii) Tax deduction at source in which the tax is deducted from the payment itself by the payee.
• Institutional measures:
• CBDT
• Enforcement Directorate
• Financial Intelligence Unit
• Central Board of Excise and Customs
• Central Economic Intelligence Bureau
• Directorate of Revenue Intelligence (DRI)
• NIA
• CBI
• Police authorities
• Voluntary Disclosure Schemes: The government allows reporting black money generated through tax evasion in a given time frame, as government has given in the Black Money Bill passed this year. During 2006-2012 government has reported nearly 26000 crore black money.
• Demonetisation: In 1978 and 2016 government demonetised high value notes to tackle black money.
• Encouraging Cashless transactions: Recently government has taken many initiatives like UPI, RuPay cards, Jan Dhan Accounts to promote digital payments. Government is also incentivising digital payments.
• Legislative Framework:
  (i) Prevention of Money Laundering Act, 2002
  (ii) Benami Transactions Prohibition Act, 1988
  (iii) Prevention of Corruption Act, 1988
  (iv) The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015
  (v) Public Procurement Bill
  (vi) Lokpal and Lokayukta Act
• International Cooperation:
  (i) Multilateral Convention on Mutual Administrative Assistance in Tax Matters
  (ii) Financial Action Task Force
  (iii) United Nations Convention against Corruption
  (iv) At the G20’s London Summit of 2009 India played a major role in developing international consensus for taking actions against tax havens
  (v) FATF
  (vi) United Nations Convention against Transnational Organised Crime.
  (vii) Egmont Group
  (viii) Transfer Pricing Agreement of G20.

Recent initiatives taken to tackle the menace of Unaccounted/Black Income:

• Legislative mechanisms:
• Enactment of Central & various state Goods & Service Taxes Act
• Enactment of the Black Money (Undisclosed Foreign Income and assets) and Imposition of Tax Act, 2015
• Comprehensive amendment of the Prohibition of Benami Property Transactions Act, 1988
• Fugitive Economic Offenders Act, 2018
• Section 10(38) of the Income Tax Act has been amended to prevent the misuse of exemption by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions
• In order to check creation of shell companies which are incorporated outside but controlled from India, the concept of ‘Place of Effective Management’ (POEM) for determination of residence of a company incorporated in a foreign jurisdiction, has been introduced in the Finance Act, 2016
• Administrative mechanisms and Systems improvement:
• Expanding the ambit of TDS (tax deducted at source) provisions to track more transaction.
• International Cooperative mechanisms:
• With a view to facilitate and enhance exchange of information under the Tax Treaties, India is proactively engaging with the foreign Governments and has signed Tax Treaty framework with 146 foreign jurisdictions. g. Foreign Account Tax Compliance Act with the US.
• The Government of India has also joined the Multilateral Competent Authority Agreement (MCAA) for Automatic Exchange of Information as per Common Reporting Standards (CRS).
• India has amended its Double Taxation Avoidance Agreements with Mauritius, Singapore and Cyprus to enable measures concerning prevention of tax evasion and tax avoidance.
• General Anti Avoidance Rules (GAAR) have been implemented with a view to tacking aggressive tax planning with the use of complicated structures
• Judicial Efforts:
• On the directions of the Supreme Court, the government in 2014 constituted the Special Investigation Team (SIT) on black money. The SIT has so far submitted seven reports to Hon’ble Supreme Court.

Need for the Estimation of Unaccounted/Black Income:

• The unaccounted economy reduces the size of potential state revenue.
• To formulate effective monetary, labour and fiscal policy, it is crucial to know the level of precision in the estimates of key statistics of the economy, such as, output, price-level and unemployment. Thus, it is crucial to supplement official national accounts statistics with estimates of unaccounted economic activity.
• Some unaccounted economy activities, i.e., illicit trade in narcotics and arms trading, are hurtful not only for economy, but also hazardous for society.
• It can further lead to a vicious circle of an increase in the budget deficits or tax rates.

Recommendations of the Committee Headed by Chairman, CBDT on Black Money:

• India must ensure transparent, time-bound & better regulated approvals / permits, single window delivery of services to the extent possible and speedier judicial processes. The Electronic Delivery of Services Bill, 2011 that seeks to provide for electronic delivery of public services by the government to all persons to ensure transparency, efficiency, accountability, accessibility and reliability in delivery of such services has been tabled before the Parliament in December, 2011.
• The fight against the monstrosity of black money has to be at ethical, socio-economic and administrative levels. At the ethical level, we have to reinforce value / moral education in the school curriculum and build good character citizens, particularly highlighting the ills of tax evasion and black money. At the socio-economic level, the thrust of public policy should be to discourage conspicuous & wasteful consumption / expenditure, encourage savings, frugality and simplicity, and reduce the gap between the rich and the poor.
• In order to ensure transparent and efficient allocation of natural and man-made resources, oversight in the form of comprehensive regulations, and ombudsman for grievance redressal, particularly for scarce resources – as in land, minerals, forests, telecom, etc. – needs to be introduced and implemented expeditiously.
• Social sector schemes involving huge public expenditure under various programmes reportedly suffer from possible manipulations and leakages. Direct transfers to the accounts of beneficiaries can provide a solution, as it would prevent manipulations like bogus muster rolls, etc.
• There should be a dedicated training center for all law enforcement agencies dealing with financial crimes and offences, as this requires special skills.
• To reduce the element of black money in transactions relating to immovable properties, provision for NOC should be introduced in the Income Tax law with safeguards to reduce administrative complications and increased ease of compliance, so that an appropriate and uniform data-base is also set up, and a proper national-level regulation is put in place.
• The RBI could consider stricter implementation of KYC norms and limit number of accounts that can be introduced by a single person, the number of accounts that can be maintained in the same branch by any entity and alerts about same address being used for opening accounts in different names.
• Government must consider ways to mitigate the manpower shortage issues which are seriously hampering the functioning of various agencies particularly the CBDT and CBEC.
• Effective battle against black money cannot be ensured unless the judicial machinery to deal with it is specialized and the trial of offences is expeditious and punishments exemplary. The legal support to various law enforcement agencies should be enhanced. All financial offences should be tried through fast track special courts.

What is Demonetization?

• It is a financial step where in a currency unit’s status as a legal tender is declared invalid.
• This is usually done when old currencies are to be replaced with the news ones.

Demonetisation followed a series of earlier efforts to curb illicit activities:

• Creation of the Special Investigative Team (SIT) in the 2014 budget;
• The Black Money and Imposition of Tax Act 2015;
• Benami Transactions Act 2016;
• Information exchange agreement with Switzerland;
• Changes in the tax treaties with Mauritius, Cyprus and Singapore; and
• The Income Disclosure Scheme.

The aim of the action was fourfold:

• To curb corruption;
• Counterfeiting;
• The use of high denomination notes for terrorist activities; and
• Accumulation of “black money”, generated by income that has not been declared to the tax authorities.

Implications of Demonetization:

• Parallel black economy would collapse. Of the Rs 17 lakh crore of total currency in circulation in the country, black money is estimated at mindboggling Rs 3 lakh crore.
• Counterfeit currency: Death blow to the counterfeit Indian currency syndicate operating both inside and outside the country
• On security:
  (i) Terror financing: Terror financing is sourced through counterfeit currency and hawala transactions.
  (ii) Kashmir unrest: The four-month-long unrest in Kashmir valley is on a backburner
• North-East insurgency and Maoists: Black money is the oxygen for Maoists collected through donations, levy and extortions. The illicit money is used to purchase arms and ammunition.

Way Forward: Black Money

The black money menace is still untamed and lot more needs to be done to tackle it. Some of the strengthening steps that can be taken are:

• Appropriate legislative framework related to: Public Procurement, Prevention of Bribery of foreign officials, citizens grievance redressal, whistle blower protection, UID Adhar.
• Setting up and strengthening institutions dealing with illicit money: Directorate of Criminal Investigation Cell for Exchange of Information, Income Tax Overseas Units- ITOUs at Mauritius and Singapore have been very useful, Strengthening the Foreign TAX, Tax Research and Investigation Division of the CBDT.
• Developing systems for implementation: Integrated Taxpayer Data Management System (ITDMS) and 360- degree profiling, Setting up of Cyber Forensic Labs and Work Stations, implementation of Goods and Services Tax and Direct Tax Code.
• Imparting skills to personnel for effective action: Both domestic and international training pertaining to the concerned area. For instance, the Financial Intelligence Unit-India makes proactive efforts to regularly upgrade the skills of its employees by providing them opportunities for training on anti-money laundering, terrorist financing, and related economic issues.
• Electoral Reforms: Elections are one of the biggest channel to utilize the black money. Appropriate reforms to reduce money power in elections.