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

In simplest terms, black money can be considered as money that is hidden from the tax authorities. The source of black money can be legal or illegal.

Sources of Black Money 

• Undervaluation of income: Generally small businessmen avoid giving authentic bills of purchase so that transactions could not get documented.
• Real estate: Builders of real estate take advantage of shifts in the value of real estate to undervalue the deal.Transactions that are undervalued incur reduced capital gain tax and stamp duty.
• Shell companies: These are the businesses that have no genuine operations. They are employed to shift revenue under several names to avoid paying taxes, which leads to the development of black money.
• Non-government organisation: The CBI recently informed the supreme court that only 10% of NGOs submitted annual income and expense statements to the government, which raised suspicions about the organization's use of black money to divert taxes and receive tax breaks under the guise of charity. 
• Tax havens: These are the nations with the least government regulation and taxation. Many multinational corporations utilise it to take advantage of loopholes in international tax legislation, shift income to shell companies set up there to be taxed at the incredibly low rate of tax havens, and avoid paying taxes in countries where genuine activity is actually taking place. Example: Mauritius, Panama, and Caribbean countries.
• Hawala: It is the cheapest and most useful method of transferring money from one place to another place without the help of banks. Example:The underworld, drug and gun traffickers, terrorists, and smugglers all rely on this system.

Parallel Economy 

• Parallel economy is hidden and includes economic activities that remain unmeasured and unreported by current techniques of monitoring economics.
• Activities under the parallel economy are not under the purview of tax authorities hence no tax has been paid for it which results in a loss of revenue to the government.

Reasons Of Parallel Economy:

• Increase in black money: A parallel economy has emerged as a result of the growing amount of black money caused by tax law loopholes and the failure of the government to stop black money creation through illicit means.
• Higher tax rate: A higher tax rate encourages people to avoid paying taxes, which results in more money flowing into the black market.

Measures Taken to Curb Black Money Generation and its flow 

Legislative Measures:

• Tax rationalization: The government has done various tax reforms like rationalization of tax slabs, tax deduction at source (TDS) which reduce tax avoidance at least in the formal sector of the economy.
• Voluntary disclosure scheme, 2016: Many times the Government comes up with a Voluntary disclosure scheme that gives a chance of reporting black money without getting penalised. 
• Prevention of Money-laundering Act, 2002: This act curbs money laundering so that black money cannot be easily converted into white money by using various means like hawala, shell companies etc.
• Benami Transaction Prohibition Act, 1988: This act bans all benami transactions and also empowered the government to recover the benami property without paying any concession. 
• Lokpal and Lokayukta Act, 2013: Corruption is one of the measure sources of black money, hence curbing corruption by establishing a dedicated agency for reporting corruption at the central and state levels could reduce corruption as well as black money creation in the country.
• Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015: The act aims to give one time opportunity to Indians to provide information about undisclosed foreign assets and income in a time frame manner after completion of time frame holders of black money come under severe penal and prosecution measures as per law.
• The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976: It includes punishment for smugglers' and manipulators' illegally acquired property as well as for issues related to and incidental to those activities.
• The Narcotic Drugs and Psychotropic Substances Act of 1985: It establishes a penalty for possession of items generated from or used in the trafficking of illegal narcotics.

Institutional Measure:

• Central Board of direct taxes (CBDT): The Ministry of Finance has a specific agency that is responsible for upholding the Indian direct tax laws. 
• Enforcement Directorate: According to the Prevention of Money Laundering Act, it is an agency that handles the investigation and prosecution of money laundering cases and has the power to seize the proceeds of crime.
• Financial Intelligence Unit: It was created in order to improve and coordinate regional, national, and worldwide efforts to combat one of the main uses of black money: the financing of terrorism.
• Directorate of revenue intelligence:  In terms of smuggling prevention in India, it is the chief agency of Indian Customs.
• Other institutions: Other organisations including the CBI, the Serious Fraud Investigation Office, the National Intelligence Agency, and state intelligence and police departments also look into other offences involving money, corruption, and terrorism that may be directly connected to black money.

International Measures:

• G-20 countries: The OECD Base Erosion and Profit Shifting (BEPS) Project has broad G20 backing, as does automatic tax information exchange between nations.
• Double Taxation Avoidance Agreements: In order to discuss tax-sharing arrangements for taxable income falling within each nation's authority, many nations are stepping forward to join this agreement.
• Multilateral Convention of Mutual Administrative Assistance in Tax Matters: The Convention facilitates international cooperation for a better operation of national tax laws and also respects the fundamental rights of taxpayers.
• Financial Action Task Force: The global agency responsible for monitoring money laundering and terrorism financing is the Financial Action Task Force (FATF). The intergovernmental organisation creates global norms with the intention of stopping these unlawful actions and the damage they do to society.

Other Measures:
Demonetisation of high denomination currency such as Rs 2000 and 1000 notes

• Project Insight: The Income Tax Department launched 'Project Insight', an information technology-based initiative, to support its non-intrusive information-driven strategy for enhancing tax compliance and making efficient use of the information at hand.
• PAN for Transaction: Another strategy used by the government to make it more difficult to conceal transactions is to require the reporting of PAN for transactions exceeding 2.5 lakhs, prohibit cash receipts of 2 lakhs, and impose fines equal to the number of such receipts if a person violates the provision.
• Operation Clean Money: Operation Clean Money was introduced in 2017 to collect, compile, and analyse data on cash transactions, make extensive use of information technology and data analytics, tools for identifying high-risk cases, swiftly e-verify suspect cases, and take appropriate enforcement actions, such as searches, surveys, inquiries, determining income, levying taxes, penalties, etc. and filing complaints with the authorities in the appropriate cases.