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December 26, 2016

Hot Topic - Black Money in India

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Black Money

Overview
  • What is black money ?
  • How does black money originate ?
  • Various sources to generate black money.
  • Transferring money into offshore tax heavens. 
  • To tackle the menace some laws are introduced. 
  • Various strategies to curb black money. 
  • Making no contribution to the development of the country.
Black money can be 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. The menace of black money has not just infested Indian authorities, but has spread world-wide. Black
money can be generated by various sources which are both, illegal and legal. Not filing returns on the revenue through legal sources make it black. In India and across the world various legislations have been enacted to counter the menace of black money.


The generated money has been used by their custodians for various purposes both legal and illegal. The recent revelations of Panama Papers are the biggest revelation in this context which has taken in its fold in a powerful way in the world including India. These activities have very wide ranging ramifications on economy, society, security of any country. Government has taken various measures to curb the menace of black money.

In the economic parlance there is no unified definition of black money. Several terms with similar meaning are used widely. All these terms have the same underlying meaning attached to the income on which tax has been evaded. In this case, a technical term associated with tax reporting has a nuanced difference. 'Tax avoidance' and Tax evasion' are close terms but are diametrically opposite to each other.

Tax avoidance means investing in saving instruments which offers tax sops to investors, for example, EPF. Tax evasion on the other hand implies not reporting the income (legal or illegal) to the tax authorities thereby not paying the tax. Tax evasion creates the following synonymous money or economy: 'Parallel economy', `Dirty money', 'Unaccounted income', 'Shadow economy' etc.

Various sources which have high potential to generate black money are the following Land and Real Estate, in this sector for all illegal intents the price quoted for the transaction has two parts: one that will be reported to the tax authorities on which the stamp duty will be levied: two, the cash transaction that takes place between buyer and seller. On the second part the tax is evaded as it is an unofficial transaction, thus contributing to a parallel economy.

Real Estate generates 11% of GDP as black money. Another source which generates black money is bullion and jewellery. Here, also the receipt for sale is not given to the buyer and the buyer transacts in cash, leaving no trail of the transaction. Gold and other precious metals are liquid; therefore people consider them as a long-term investment. However, in the 2016 budget government has made certain provisions to ensure that the transactions dealing with precious metal be recorded for reporting to tax authorities.

Also, government has floated two gold schemes to mobilise liquidity in the market which can also help in checking the flow of black money. Similarly, NGOs are another source which receives very high amount of black money. According to a recent report by Intelligence Bureau (IB) in 2015, Greenpeace foundation received foreign funding to affect the economic policy of coal block allocation of Government of India.

This can have very bad impact on the affected country as the sovereign economic policy is compromised and unaccounted money flows into the economy. Similarly, political parties in India also receive large amounts of black money from various sources. An analyst in a recent TV debate made a very witty observation. The observation was made during the debate on defaulting Kingfisher Airlines thereby linking the election funding issue and corporate debt restructuring. Similarly, another conduit of black money is the education sector including the coaching centers.

The capitation fees charged and the payments made to coaching centre are mostly done through cash thereby allowing the parties, payer and receiver to not report the flow of cash. Some other sources generating black money are: illegal arms deal, drugs and narcotics, kidnapping and ransom, racketeering etc. These sources have very wide ramifications on the security of a country.

Based on the recently revealed Panama Papers it can be said that people have exploited the loopholes in legislations and have transferred their money into offshore tax heavens. Through round tripping these huge amounts of money is laundered and then reintroduced in the mother state from tax heaven countries, avoiding tax.

In the case of India through the Liberalised Investment Scheme, money is sent to offshore locations and then invested back through these tax heaven countries viz Bahamas, Cayman, Mauritius etc. Also, in the financial markets people have been investing through participatory notes. These p-notes increases the volatility of capital market, as flight of capital can take place based on market sentiments. Tobin tax was suggested to keep a check on such capitals. Unless, all the countries impose such a tax it will be detrimental to their capital market, therefore, in some way or the other every country has allowed p-notes. In this way, capital market has also contributed to the flow of black money.

In order to tackle the menace of black money, countries world over and India in particular have enacted legislations. Many associated authorities have been also been tracking black money floating in the market. Here, the role of media is also important as was revealed by the Panama Papers released by International Consortium on Investigative Journalists. The `White Paper on Black Money' has described institutions currently in place responsible for dealing with black money.

These include : Central Board of Direct taxes (CBDT), Enforcement Directorate (ED), Financial Intelligence Unit (FILO, Central Board of Excise and Customs (CBEC). The coordinating agencies are: Central Economic Intelligence Bureau (CEIB), National Investigating Agency (NIA). Government of India has enacted the following major legislations to counter the menace.


Prominent among them are : Prevention of Money Laundering Act, Benami Transaction Act, Whistle Blowers Act, Defense Procurement Policy, Double Taxation Avoidance Agreement (DTAA), General Anti-Avoidance Rule (yet to be passed). The recent debate on Base Erosion and Profit Sharing (BEPS) called as Google tax is also important in this regard. At the international level the role of Financial Action Task Force (FATF) is relevant, as they have helped in identifying the choke points where the money laundering process may encounter roadblocks.

The framework which the government has identified with its committees to keep a check on black money works through acts like joining the global crusade against black money; enacting appropriate legislations for checking the generation of black money; setting up specialist institution for dealing with black money; developing appropriate system for implementing the rules and making the personnel able to deal with the menace effectively.

The 'White Paper on Black Money' has identified various long-term strategies to curb black money generation which are as follows
  • Increasing incentives for voluntary compliance, this may include rationalisation of tax structure, tax rate etc. 
  • Reforming the sectors generating large tranches of black money viz for Real Estate tax to be deducted at source and incentivising payment made electronically. 
  • Creating effective credible deterrence by policies reducing the flow of black money. 
  • The paper advocates for legislating on Goods and Services Tax (GST), strengthening the tax administration, prosecution mechanism for defaulters be made swifter. 
  • Supportive measures which includes creating effective awareness programmes, effective audit systems, greater accountability and coordination at the international level.

In line with the government's objective of freeing India from the menace of black money and with the intention of providing last opportunity to come out clean in so far as the undisclosed income is concerned, the Hon'ble Finance Minister of India, Shri Arun Jaitley, introduced the Income Declaration Scheme (IDS). The purpose of IDS is to unearth black money in the country. It is an amnesty scheme and allows people to declare undisclosed income or assets. They will have to pay 45% tax on the disclosed income and will not attract any further action. No criminal charges will be brought against them and their information will be kept strictly confidential.

But after the deadline it is possible that a massive crackdown will ensure, since the govenment has been capturing and collating financial data from various sources. Using all that data the tax authorities will pursue the balck money hoarders. The Prime Minister himself has warned that after the deadline harsh measures may follow.

As a crack down on black money in the country, the demonetisation of ₹500 and ₹1,000 banknotes was enacted by the Government of India on 8 November 2016, ceasing the usage of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series as legal tender in India from 9 November 2016. We need to wait and see to check the results of these measures.

Black money is docile money. It does not play any economic function. Thousands of crores of rupees lie idle in lockers and benami accounts making no contribution to the development of the country. India, at the threshold of fast economic development, needs huge amount of capital. The government funds are short because of tax avoidance and other corrupt practices by the hoarders of black money. If the black money reaches the government, there will be faster development.

Difficult Words with Meanings :
  • Menace something that threatens to cause evil, harm, injury etc; a threat
  • Revelation the act of disclosing; disclosure
  • Ramification a related or derived subject, problem etc; outgrowth; consequence
  • Evaded to escape by trickery or cleverness
  • Nuanced a subtle difference or distinction in expression, meaning, response etc
  • Diametrically in direct opposition
  • Sops something given to pracify or quiet; or as a bribe
  • Bullion gold or silver in the form of bars or ingots
  • Mobilise organise (people or resources) for particular task
  • Sovereign a person who has Vocab supreme power or authority
  • Conduit a similar natural passage; Card
  • Narcotics an addictive drug especially an illegal one that affects mood or behaviour
  • Tripping light and quick, as a slip or pace
  • Laundered to disguise the source of illegal or secret funds or profits
  • Off-shore in a foreign country
  • Volatility tending to fluctuate sharply and regularly
  • Detrimental causing detriment, as a loss or injury, damaging; harmful
  • Procurement the act of obtaining equipment, meterials or supplies
  • Crusade lead or take part in a vigorous campaign for social, political or religious changes
  •  Compliance the act of conforming or yielding; 21. Tranches any part division or installment of a large unit
shared by Nisheeta Mirchandani
 
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