There is not any specific definition given for black money but any money which is being utilised parallel to the regular economy and is hidden from the tax authority is called as black money. It incorporates money earned from legal means (but not paid taxes for it) and illegal means like smuggling or extortion.
- Underreporting of Income: Small businesses avoid issuing genuine purchase bills, leading to income undervaluation.
- For instance, a general store owner might provide a bill for Rs. 5,000 for a business transaction worth Rs. 10,000. This Rs. 5,000 would go unreported and is an example of tax evasion.
- Real Estate Manipulation: Builders exploit value fluctuations to reduce capital gains tax and stamp duty.
- For instance, a real estate developer might showcase a house worth Rs. 1 lakh as being worth Rs. 60,000. With this, he will be able to pay less tax and would incur lower property registration charges.
- Shell Companies: Non-operational entities used to funnel revenue and evade taxes.
- For instance, A shell company can be used to evade taxes by transferring money from Company A to Company B, and then to Company C, making it difficult for tax authorities to trace the funds and identify the true source of income.
- Non-Governmental Organisations (NGOs): Limited financial reporting leads to misuse of funds and tax evasion.
- For instance, people donate money to NGOs as the donated money does not incur taxes. People partner up with NGOs and show the donation amount in their accounts. However, these NGOs take their cut and return the remaining amount to the ‘donor’. This remaining amount on which tax has not been paid is called black money
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- Tax Havens: Multinational corporations use lax regulation and low taxes to exploit international loopholes.
- Big companies often show profits in low-tax countries to minimise their tax liabilities. For instance, a company like Google India might transfer money to Bermuda and report profits there, as Bermuda has no tax on profits. This legal strategy allows such companies to save on taxes.
- Hawala System: Informal money transfer system used for money laundering and terrorist financing.
- Hawala is an informal money transfer system. For instance, if someone needs to send money from Mumbai to Dubai, the actual money won’t be delivered physically. Instead, the money will be transferred through codes. The government cannot trace how the money is transferred. This is a form of money laundering.
- Participatory Notes (P-Notes): Instruments for anonymous investment in Indian markets, facilitating black money generation.
- P-Notes allow foreign investors to invest money anonymously in the Indian market. Although this money, once invested in the stock market, is converted into white money, it also increases the risk of stock market manipulation
- Tax Evasion: Hiding revenue or failing to record transactions to avoid taxes (illegal).
- For instance, a company earned revenue through three sources but showed only two to the government and hid the third one, receiving the money in cash. This cash in turn becomes black money.
- Tax Avoidance: Legal methods to minimise tax liabilities through concessions.
- Illegal Sources of Earning: Black money generated from smuggling, weapon trade, extortion, corruption, and money laundering.
Challenge Of Curbing Black Money
- Interference and Resistance: Political-criminal nexus hinders enforcement efforts.
- For instance, a criminal might get nabbed by the police, but they have to release him as they received orders from a politician.
- State’s Authority: States’ tax and regulatory powers complicate uniform enforcement.
- Difference in rules like some states have higher stamp duty and some don’t. This shows lack of uniformity.
- Globalisation Impact: Varied anti-money laundering regulations impede cross-border efforts.
- Some countries share information like Switzerland and some don’t like the Cayman Islands which shows lack of global coordination.
- Cash Economy: Predominantly cash-based transactions hinder monitoring.
- There are certain sectors (local or small vendors) where cash transactions take place which is harder to track.
- Ineffective Laws: Existing laws inadequately address black money issues.
- There is a presence of laws like Prohibition of Benami property Transaction Act, 1988 yet there is ineffective implementation. Many people would buy property in the name of their driver, househelp, etc.
- Loopholes: Tax concessions facilitate tax evasion and black money generation.
- Agricultural income does not incur taxes. Some people show their non-agricultural income as agricultural one to save taxes taking advantage of loopholes.
- Corruption: Bureaucratic corruption undermines enforcement efforts.
- For instance, bribing an officer to shut the case for tax evasion.
- Digitization Delay: Slow digitization of land records hampers tracking and valuation.
- Many land records in villages are still not digitalised. This non-digitisation makes the manipulation easy.
- Non-quantifiable Data: Due to Anonymity and informal sector involvement.
- Informal sector is quite big in India. Income from such sectors does not get counted in the GDP.
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Conclusion
Tackling black money requires a multifaceted approach. Effective enforcement, digitization, and international cooperation are crucial to overcoming the challenges posed by black money.
September 14, 2024
