Black Money and its impact on economy [black money scam]

 what is black money and how is it produced

 Black money is a term used for the funds earned through illegal activity and

otherwise legal income that is not recorded for tax purposes. The illegitimate

money may have been generated through illegitimate activities not permissible

under the law, like crime, drug trade, terrorism and corruption, all of which are

punishable under the legal framework of the state.

Black money, often called unaccounted income or parallel economy has crippled

Indian economy. Black money causes financial leakage as unreported income that is

not taxed caused the government to lose revenue. It has led to deep penetration

of the roots of corruption and led to the human greed. Apart from this, it leads

to erosion of societal values of honesty, truthfulness, faith and fulfillment of one’s

duty. The web of black money overshadows transparency, accountability, efficiency

and reliability.

How much black money in india 

There have been several estimates regarding the extent of black money economy in

India. A former CBI Director of India claimed that total black money in India is

estimated around $500 billion. Although black money in India is a decades old

problem, it has become real threat after the liberalisation era. Illegal activities such

as crime and corruption, non-compliance with taxation requirements, complex

procedural regulations, cultural and social practices, globalisation, weak institutional

policy, legal and implementation structures have given rise to and sustained the

black money economy.

The criminal component of black money is build up by proceeds from trafficking

in counterfeit and contraband goods, smuggling, illicit trade etc. The corrupt

component of the black money nurtures from leakages from government social

spending programs, black marketing of price controlled services etc.

Sources of Black Money

Black money is circulated, utilised and the profits earned are further invested in

other sectors to generate further money. The black economy of India is sustained

through various sectors. This includes the real estate sector which creates incentives

for tax evasion through under-reporting of transactions in real estate. The bullion

and jewellery sector gives the buyer an option of converting black money into

gold and bullion, which can be evaded from the eyes of the tax authorities.




Public procurement has grown phenomenally over the years in volume, scale and

variety as well as complexity. The Competition Commission of India had estimated

total public procurement figure for India at around 10 to 11 lakh crore per year

which has provided ample scope of corruption due to rigged procurement process,

generating black money. The Financial Action Task Force (FATF) highlights black

economy prevalent in non-profit organisations where taxation laws that allow

certain privileges and incentives for promoting charitable activities are misused and

manipulated. Further, unregulated cash economy, tax havens, hawala transactions

and offshore financial centers specialising in non-residential financial transactions

all are prone to generating black money. Apart from this Trade-based Money

Laundering (TBML) also contributes to black money as it involves covering up the

proceeds of crime and moving a certain amount of money through the use of

trade transactions in an attempt to legitimise their illegal origins.

Impact of Black Money on indian economy

 Its major impact is the loss in revenue collection as it loses the tax which would have
come to the Exchequer if such transactions had been done in the open and duly
accounted for.


 Black money situation results in an under-estimation of resources available in the
country which can distort major investment targets and objectives of government’s
planning.


 In order to avoid detection, these ill-gotten gains are kept either outside the country as
deposits in foreign banks accounts which deprive the country of a part of its wealth
which could have been used for growth or is hoarded within the country and results in
immobilization of investible funds, which could have helped in the economic growth of
the country.

Black money provides alternative source of credit at ‘free market’ rate which defeat
Government’s economic policies, particularly related to the credit and investment, and
make them ineffective

.
Black money and tax evasion, which go hand in hand, throw a greater burden on the honest taxpayer and lead to economic inequality and concentration of wealth in the
hands of the unscrupulous few in the country.


 Since black money is in a way ‘cheap’ money too, as it has not suffered reduction by way
of taxation, there is a natural tendency among its possessors to use it for lavish
expenditure and conspicuous consumption which, to a large extent, is responsible for the
inflationary pressures, shortages, rise in prices and economically unhealthy
speculation in commodities.


 It encourages large–scale smuggling of gold, etc., into the country, causing considerable
strain on balance of payments position.


Black money encourages over-financing of business which adds further to the
inflationary pressures in the country.

 Black money and tax evasion divert the energy of taxpayers from productive activities
to the non-productive object of manipulation of accounts and devising all sorts of facades
to escape their legitimate tax liability.



 Money parked in banks is used for terrorism or other illegal activities. Such many of the
newly rich, who enjoy material prosperity and social prestige, owe their existence really to
these anti-social activities. 



Steps Taken by Government

With an aim to curb the black money, the government has initiated Tax Reforms

such as rationalisation of income tax to improve and widen the tax base and

lower the effective taxes. Further, the government allows reporting black money

generated through tax evasion in a given time frame by the Voluntary Disclosure

Schemes. Also, to remove the existing unaccounted and illegitimate wealth from

the economy, the government demonetised the currency in 2017. Cashless

transactions are being encouraged by various incentives so that more transactions

can be carried out by the formal banking systems.

Legislative framework to fight with black money has been strengthened. This

includes Prevention of Money Laundering Act, 2002, Benami Transactions

Prohibition Act, 1988, Lokpal and Lokayukta Act, Prevention of Corruption Act,

1988 and the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill,

2015. Institutions to deal with black money have been made more effective.

Institutions such as Central Board of Direct Taxes, Enforcement Directorate,

Financial Intelligence Unit, Central Board of Excise and Customs, Central

Economic Intelligence Bureau and Other Central Agencies such as National

Investigation Agency (NIA), Central Bureau of Investigation and Police

Authorities have been given extensive powers to deal with the menace of

black money.

International cooperation has also been sought to deal with black money.

Multilateral Convention on Mutual Administrative Assistance in Tax Matters has

been signed. India has always stood beside the principles laid down in the United

Nations Convention against Corruption, United Nations Convention against

Transnational Organised Crime, United Nations Convention against illicit traffic in

Narcotic Drugs and Psychotropic Substances etc.




Evaluation of Steps Undertaken by Government

Under pressure from India and other countries, Switzerland has made key changes

in its local laws giving assistance to foreign nations in their pursuit of black

money allegedly stored in Swiss Banks. These amendments, would allow India and

other countries to make ‘group requests’ for information about suspected black

money hoarders which will make it easy for the Indian authorities to catch the

hoarders.

Various steps undertaken to fight black money shows mixed results and these are

as follow

 The government has been able to recover black money of ` 69,350 crore under

the Income Declaration Scheme and Black Money and Imposition of Tax Act.

Another ` 5000 crore was recovered under the Pradhan Mantri Garib Kalyan

Yojana (PMGKY).

 Around 650 people declared money worth ` 4,100 crore deposited in foreign

banks as the black money under Undisclosed Foreign Income and Assets

Act, 2015.

 Demonitisation which declared 86% of currency notes all in ` 500 and `1000

denominations invalid in one go, is considered to be a failure by critics.

Around ` 16000 crore (out of ` 15.44 lakh crore) returned to banks, whereas

RBI had to spend ` 21000 crore to carry out this massive exercise.

 The amended Benami Transactions (Prohibition) Act of 1988 in 2016 recorded

provisional attachments in more than 1600 benami transactions involving

benami properties valued at over ` 4300 crore.




Conclusion

Despite all the efforts, the black money problem in India is still unresolved and

lot more needs to be done to tackle it. There should be appropriate legislative

framework related to Public Procurement, Prevention of Bribery of foreign officials,

Citizens’ Grievance Redressal, Whistle Blower Protection, UID Aadhar etc.

Institutions dealing with illicit money shall be strengthened. Developing an

Integrated Taxpayer Data Management System (ITDMS) and 360 degree profiling,

setting up of Cyber Forensic Labs and Work Stations will also be helpful. As

elections are one of the biggest channel to utilise the black money, there should

be appropriate reforms to reduce money power in elections.

Black money severely affects the progress of a nation and generate economic and

social imbalance. It is a fight that no government can fight alone. The people also

must be cooperative and vigilant to fight against any kind of financial fraud or

illegal activities.