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The Black Money Saga in India A Short Analysis
The Black Money Saga in India A Short Analysis
clearias.com/black-money-india/
We hear news about Black Money in Indian economy very often these days. But what
exactly is Black money? What makes money black or white? This short analysis is a
humble attempt to cover essentials one should know about the black money issue in
India.
Table of Contents
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But if money change hands without proper accounting (Eg: cash transactions),
government may fail to notice even the presence of such money in the economy. Besides,
there are many economic transactions in the countries which are by the nature itself
illegal (Eg: Smuggling). These transactions can by now means taxed. All these
unaccounted money can be classified under the umbrella term – black money.
Sellers who don’t give bills for sales creates a form of black money.
In the land registration process and in other reality sector business, people tend to
undervalue their costs (sssets) so as to reduce the tax and registration fees to be
paid.
People investing in jewelry and bullion so as to to hide their actual income. Money is
also hidden in places like bank lockers and underground tunnels.
Nonprofit organizations, trusts, financial markets etc are often pointed for their
involvement in black money.
Tax heavens, round tripping, transfer pricing, hawala transactions, treaty shopping
etc. (to be dealt in detail later.)
Participatory Notes otherwise called P – Notes are another source of black money.
Till recently bitcoins were also considered to be a source of funding of black money
as it provides a safe platform for investors with handsome returns from its value
appreciation.
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The problem of black money in India started popping up by 1960’s. This is mainly
attributed due to the high level of income tax and corporate tax charged then. This
resulted in huge tax evasion by individuals and business communities. Now, after
liberalization in 1991, the black money issue has compounded.
A former CBI Director of India has said that the total black money in India is around
500 billion US dollars.
Global Financial Integrity Report has mentioned that India lost around 120 billion US
Dollars in the time frame of 2001-2010. It ranked India in 8th spot in black money
generation.
Indians’ share in tax-havens across the world is estimated at $152-181 billion (Rs.
10 lakh crore), by one calculation of Bank of Italy. Note – 6-7 trillion dollars worth of
black wealth lies hidden in tax havens across the world, according the senior
economists from the Bank of Italy.
According to one study, out of 100 rupees of black money generated in our country, 90
percent stays in India. The balance 10 percent is takes the form of round tripping and
transfer pricing; while a little portion is consumed abroad itself.
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Can black money be made white money?
Recipients of black money must hide it, spend it only in the underground economy, or
attempt to give it the appearance of legitimacy through money laundering. Money
laundering is the process by which black money is converted to white money. One of the
practice involved in money laundering is round-tripping, where tax-evaded money
comes back to the same country as foreign investment.
It affects the financial system of the country. RBI may not be able to control the
money supply in the economy and thereby leading to higher inflation in the system.
The persistent level of high inflation is detrimental to the economy as it will erode
the value of money and eats up investments and savings.
It will affect the credibility of our country.
The money generated in the form of black money is often routed for terrorism and
hence, it becomes an issue of national security.
A parallel economy will be created in the country and hence, governance will be
ineffective to a large extent. We have the examples like Mexico where a parallel
economy is rampant due to illegal drug trafficking.
There is a huge loss of money for government exchequer because of tax loss for
the country
Real estate prices may shoot up. This may result in asset bubble which is
detrimental to an economy.
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Government and RBI are promoting the cashless economy. The government has
either slashed taxes or surcharge on online / card transactions to make transfers
accountable and try to bring the money into the normal banking system.
Government has scrapped Rs.500 and Rs.1000 notes and changed the cash
withdrawal limits from banks and ATMs.
India joined FATF ( Financial action Task forece) in 2005 to combat against
financing terrorism through the black money route. We also framed AML / PML
laws in 2003 for combating money laundering activities in our country.
Prevention of Corruption Act and Binami Transactions Act were other such
steps in the right direction.
Under pressure from India and other countries Switzerland and other tax havens
have agreed in principle to share the details of accounts to the public authorities on
a case to case basis.
Making PAN number mandatory for real estate and bullion purchases.
The government is in a process of renegotiating DTAAs with countries which we
have already signed.
Limitation of benefits clause needs to be invoked in appropriate areas where it
deemed necessary.
2015 HSBC leak.
2016 Panama Papers leak.
Summary
It is to be noted here that though we have formulated different strategies and policies to
combat black money, its effect is not reflected in implementation. The need of the hour is
greater political will and global coordination to counter the issue.
Article by Sandeep A
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