Term black money as used in modern times

• In the modern world, the term black money is used for the money which is unaccounted
and no statutory taxes are paid to the authorities since it is kept within the country of abroad
hidden from the eyes of the authorities. This underground, unrecorded and irregular
hoarding of wealth in any form is what is said to be running a shadow economy or a parallel
economy in a country. Black money can also be termed as production of goods and
services whether done legally or illegally but which is not taken into account for the official
estimation of the country's Gross Domestic Product (GDP) because it is neither detected by
the authorities nor is declared by its creators. India's stands at the 10th position as far as the
richest people in the country are concerned. This list is created by taking into account the
amount of white money which is available for investment and does not include personal
assets whether movable or immovable. Just consider what will India's position among the
richest people in the world if the amount of black money is also take into consideration while
compiling this list of the wealthy persons in the world. The paradox is that it is happening in a
country where more than 50 per cent of the population is living below the poverty line (BPL).

Causes for the creation of black money

Corrupt practices indulged into by corrupt people at all levels

• There are several causes due to which the black money is created in a
country. Black money is created by the corrupt practices indulged in by
politicians, bureaucrats and other high and low level civil servants. They
take huge or small bribes which are kept hidden as they illegal sources
of earning money. The transactions in black money do take place in
the market due to which the term parallel economy comes into
existence. Only very rarely these transactions are caught and most of
the offenders of creation of black money are never known to the
government. The second important reason that these transactions
remain hidden is that both the offenders and the executors of law collude
with each other and become the sharers in black money. People in all
walks of life from the rich business tycoons, the high level politicians, the
senior bureaucrats, high ranking officers of the government, big
contractors to the low level government servants including class IV
employees are involved in this phenomenon of black money creation.
Recently a racket of fake certificates of OBCs and SCs has been found
for admission into Delhi University. It is reported that Rs.3 – Rs.5 lakh
were paid to obtain these bribe certificates.

Complex tax structure and corrupt tax officials

• Adding fuel to the fire, is the country's complex tax structure and
corrupt tax officials which is the cause of creation of black money. The
honest and sincere people who may otherwise be willing to pay taxes
shy away from paying them before the complex procedures, forms and
returns involved in the payment of taxes. Only a few sincere government
employees whose income is paid from the government estimates are
made to compulsorily pay the taxes. But the majority of the business
community, traders, professionals and all incomes which do not come
within the organised sector are left to the sincerity of the earners to
disclose their wealth. Complicated and lengthy rules and regulations
which are even beyond the comprehension of the common earners
stand in the way of taxes to be paid by them. There are no incentives to
the raise the morale of the honest taxpayers. The honest taxpayer
grumbles when he or she sees that how his or her hard earned
money is is swindled by the corrupt officials of the government. The
funds allotted by the government for developmental projects are drained
half way by the corrupt officials before they finally reach the
beneficiaries.

Foreign banks are havens for black money hoarders

• Foreign banks especially the Swiss Banks which do not disclose the
particulars of the account holders have become a safe haven for the
people who want to hide their income without paying the taxes. There
are different versions by different sources as to amount of the black
money stashed in Swiss Banks. As alleged by Baba Ramdev during
his agitations against black money, the amount of black money stashed
in the Swiss banks ranges between Rs.50- 75 lakh crores of rupees.
Even if there is only half the truth in the allegation, then also the money
stashed in the Swiss banks is so high that it can make our economy
quite sound if this can be brought back to India and deposited in the
government treasury. According to one report the Swiss Banks have
admitted that Indians stand at the top in the list of the people who have
deposited money in the Swiss banks. The black money in Swiss banks
became a hot debate in 2009 general elections when the issue was
raked up by the BJP prime ministerial candidate Mr L K Advani. He
quoted from Global Financial Integrity Study undertaken in 2006 which
estimated Rs.43 – Rs.51 lakh crores lost by developing countries over a
period of five years due to illicit financial outflows from these countries
including India.

Lot of black money is transacted during election campaigns

• The election process of our country is also a big generator of black

money. Election campaigns run by the candidates for parliamentary or
assembly elections or for any local bodies generated crores and crores
of black money during the period of election. A study by the Mumbai-
based Centre for Monitoring Indian Economics (CMIE) found in 2006
that each parliamentary poll generates between $10.19 billion and
$11.33 billion of black money. It will become a shocking and mind
boggling figure and the black money so created will run into several
crores of rupees if we also include the elections to the legislative
assemblies of the states and union territories and the local bodies.

Black money laundering financial companies and chit funds

• Money laundering financial companies and chit funds are another

source of creating black money. Instances have come to notice that
several financial companies had been running and might still be running
without paying any income tax paid for their transactions which are not
brought to the knowledge of the government. We know that there are
several lakhs of unauthorised chit funds which are running by individuals
in the colonies of the towns and cities and even in villages including
certain government offices and industrial complexes where the money is
collected and circulated among small time individual earners. The
operation of non-banking financial companies (NBFCs) had become so
uncontrolled that the government had to bring in a legislation on the
Non-Banking Financial Companies in 1997 and a separate Department
of Non-Banking Financial Companies was opened in all offices of the
Reserve Bank of India in March 1997 to make these companies to follow
the regulations laid down under the Act. Consequently several hundreds
of those NBFCs which could not comply with the rules and regulations of
the government went out of operation.

Unscrupulous charitable trusts and societies create black money

• Unscrupulous charitable trusts and societies including religious

institutions manipulate the funds of the institutions run and managed by
them and create black money. A stark example of this has come to light
when crores of rupees in hard cash and several more crores of rupees
worth jewellery, diamonds and other valuables have been taken over
when the personal chambers of the late Satya Sai Baba were opened
recently at Puttaparthy in Andhra Pradesh. There are a lot of discussions
going on in the matter whether the money found at Satya Sai Baba's
Ashram at Puttaparthy is accounted or unaccounted money. Only
sincere investigations undertaken by the government in this matter can
find out the exact truth. This is one example which has come to light and
many more are still likely to exist running this fraudulent business simply
because such institutions had been exempted to submit the reports of
their income and expenditure. It is feared that a lot of black money is
being generated by the religious, social and educational trusts
throughout the length and breadth of the country.

Hawala business is a great source of black money transactions

• The transactions of cash made through the hawala route are also one
of the greatest sources of creation and use of black money. Several
hawala rackets were busted by the police on many occasions but the
hawala operations are still going on. Transactions through hawala route
are thought to be the south Asia's biggest money transactions system.
The hawala transactions are common across our national and
international borders where money changes hands through non-banking
channels and thus goes unrecorded and becomes black money. The
individuals running hawala rackets have developed their own codes to
transact this illegal business. Such tax evading scams have been found
several times especially in Maharashtra and Gujarat, two of India's rich
states. Daily hawala transactions are reported to be running transacting
in foreign exchange thus robbing the government of the taxes which
should otherwise have gone to the government' treasury.

Investments in property, jewellery, luxury cars, rare pieces of art etc

• Investments in property, jewellery, diamonds, costly and rare paintings,

luxury cars, rare pieces of art etc. are some of the other sources where
black money is transacted. It was reported sometime back that when the
officials raided a few builders in Mumbai a few years back, it was
revealed that the chartered accountants had advised their clients to hide
their black money in rare art collections. It was found that a businessman
had in invested $4,50,000 in a painting. The authorities found that
builders had invested over a crore of rupees of their undeclared income
in paintings bought from local art galleries of Mumbai. Investment of
unaccounted income is done at a large scale in gold and diamond
jewellery. It is pertinent to note that India is one of the largest consumers
of gold. Stock market is another channel to invest black money. One
can earn big profits after one pays a small amount of capital gains tax @
10%. Past cases of stock scams have shown that brokers, banks,
industrial houses have all colluded to trigger the stock markets. A few
years back a woman from Gujarat named Roopal ben Panchal
reportedly opened 10,669 fake accounts. In a circular dated December
2, 2005 the Reserve Bank of India had alerted the banks with regarding
to the black-money laundering activities going on and wanted them to
have watch on any suspicious banking activity. But what when the banks
themselves start colluding with the stock brokers to effect the prices in
the stock market.

Donations to educational institutions transacted in black money

• The heavy donations paid for admissions in institutions of higher

learning and even large corporate schools and colleges are another big
source of creation and circulating black money. Are these donations
received and paid by cheques? Are the proper receipts issued for the
transactions? Are the transactions written in the official accounts of the
institutions as they are done? The answer to all these questions is
perhaps is a big 'No'. This is not done because many of these private
institutions are run by the bureaucrats, politicians and industrial houses
that are either do it in collusion with the law enforcing authorities or bribe
them the black money they create. Black money transactions take place
in the setting and leaking of questions papers and help rendered in
examination centres to get certain students pass through unfair means
or to get some of them the top ranks in the examination. This not only
involves black money transactions but is also making the mockery of our
educational system and examinations.

Issue of licences, contracts to Indian and foreign companies

• Large industrial houses, big contractors, bureaucrats and politicians all

collude with each other in very heavy transactions and underhand
dealings are indulged when issuing licences and entering into contracts
even with the foreign firms. The agents are brokers are involved in the
transactions on heavy fees. All these transactions among these people
are not routed through normal banking channels. The great scams like
the Bofors, 2 G Scam, the Commonwealth Games Scam, Adarash
Society Scam, etc have already come to the light of the public. Many
such scams may be lying hidden and might not be brought out at all.
There have been cashes where hard cash had been discovered in the
possessions of politicians like Sukhram and others.
The Mauritius Route to use black money

• Taking advantages of loopholes in the Double Taxation Avoidance

Convention (DTAC) concluded two decades ago, certain people claiming
themselves to be the Mauritian residents set up paper companies in
Mauritius. These companies then masqueraded at Mauritian companies.
These companies then invested in India. Thus they avoided paying taxes
in India amounting to crores of rupees under the cover of double taxation
avoidance agreement between India and Mauritius.

Consequences or the impact of black

money

Loss of revenue to the government and running of parallel economy in

country

• The circulation of black money has a deep impact on the

economy resulting in a decrease in government revenues. A part of the
black money which circulates in the economy could have gone into the
hands of the government in the form of taxes. Such is the volume of the
black money in the country that a parallel economy is said to be running
in the country with the black money alone. According to some estimates
the amount of black money in the country equals 40 per cent of our
gross domestic product. (GDP)
Black money and corruption form a vicious circle

• Since most of the transactions done in black money are illegal, it adds
to already existing high levels of corruption. All bribes for whatever
reason they are paid goes unaccounted creasing more black money in
the society. This vicious circle of corruption generating black money and
black money generating corruption will never come to an end, unless
some serious steps are taken by the government to curb this evil
practice.

Black money effects real capita income and national income of country

• Since the black money circulating in the country is not recorded in the
government's books of accounts, the real per capita income of the
people and the national income of the country are shown as low. If all
the black money circulating in the economy is flowed back into the
national economy of the country, there will a substantial rise in the real
incomes of the people and the national income of the country. For
example, although the incomes earned by the immigrant labour of our
country help to improve the standard of living of the people earning
them, yet they don't get added into the tax net of the country if
transacted through hawala. So they cannot be taken into account in
computing the national income and per capita income of the country.

Black money causes decrease in quality of public goods and services

• When bribes which are to paid as black money to the producers of

goods and provider of services, it is but natural that they will provide the
quality of goods and services only to the people who pay bribes whereas
the general public has to suffer as the same quality and service is not
provided to everyone. For example, if you have to get a job done in
office, your work will be done without any delay if you pay bribes to the
officials who have to do your job. But for the same kind of job, another
person who does not bribe the officials has to wait for several days,
weeks or even months.

Black money results in higher taxation and inflation

• The government taxes the people to earn revenue for its expenses in
order to balance the budget. It is but natural that if the black money
circulating in the economy is brought back to the government's treasury,
the government will have more money in its hand for its expenses and
thereby the tax burden on the people can be reduced. Similarly the
inflation results with too much money chase too few goods available in
the market. The accounted money in the market is hyped by the figure of
unaccounted money in the market and the actual money in circulation
becomes much more to chase the goods produced in the country
leading to higher inflationary trends.

Black money causes difficulty in the formation of monetary and fiscal

policy

• Since the government cannot take into account the black money in
circulation in the economy while forming its monetary and fiscal policies,
the policies so formed by the government cannot be realistic. It is difficult
to form these policies in the absence of the exact calculation of the black
money and without bringing it in the accounting procedures of the
government.

Black money results in increased criminal activities

• The ill-gotten money in the market results in all sorts of criminal

activities that go on in the society including corruption of all sorts in the
society. It encourages its illegal use especially during elections. The
black money is used to support terrorist activities which undermine even
the security of the country. It is used to get illegal weapons in the hands
of the groups of unsocial elements. The illegal money is squandered on
large scale in clubs and hotels on all types of illegal activities including
drug trafficking. Even murders are got done for political revenges where
black money changes hands among the murderers and the people who
engage these murderers to engage in these crime. It is said that money
corrupts and the excess of it corrupts extremely. And it is more so when
such excess money is in the form of black money. The lavish and
ostentatious way the hoarders of black money live in India and the
wasteful expenditure they indulge in celebrating their social, political and
even religious functions is a social crime even though the law does not
take cognisance of it.

How to control the black money

Usually, the government has to take two courses to control the black
money. The first is to convert the existing black money into white money
through various measures. The second is to take appropriate measures
to prevent the creation of black money. So, the controlling of black
money can be discussed under these two heads.

Controlling black by money by its conversion into white money

• First of all, the government should plug loopholes in its two decades
old Double Taxation Avoidance Convention entered into with Mauritius to
check inflow of black money into India by bogus companies of Mauritius
which evade paying taxes in India under the cover of this bilateral
agreement between India and Mauritius.
Voluntary disclosure of income scheme (VDIS)

• Though such measures were initiated by the government earlier

including gold bond schemes, but this was resorted on a large scale
when the government launched a Voluntary Disclosure of Income
Scheme (VDIS) on June 18, 1997 whereby the tax-defaulters were given
an opportunity to disclose their hidden incomes at the prevailing tax
rates by giving them immunity from major laws relating to economic
offences from 01 July 1997. The then Finance Minister P. Chidambaram
said that the VDIS collections amounted to collection about Rs.8,000
crores from about two lakh declarents when the scheme closed down on
December 31, 1997. The government may once again announce such a
scheme with proper guidelines to enable the people hiding their black
money to declare the scheme. The government at the same must show
its political will to enact a bill with stringent punishments against the
people who were found with undisclosed income after certain specified
date.

How to bring back money from the Swiss banks

• A similar option must also be given to the people hiding their money in
the Swiss banks giving them a one time opportunity to voluntarily bring
back their money from the Swiss banks and deposit it in the Indian
banks by paying the taxes as per the Indian laws. At the same time a
severe punishment may be threatened for the people who were found
with black money in the Swiss banks after a specified date.

Entering into bilateral agreements with the foreign governments

• The government should take all possible measures to enter into

bilateral agreements with the foreign countries to disclose the names of
the account holders and the money deposited in foreign banks. The
government has already initiated some steps in this direction by revising
the Double Taxation Avoidance Agreement to provide means for
investigations of black money in Swiss banks in August 2010. This
revision is likely to take effect in January 2012. To curb black money, the
Indian government has also signed Tax Information Exchange
Agreement (TIEA) with 10 countries, namely - Bahamas, Bermuda, the
British Virgin islands, the Isle of Man, the Cayman Island, the British
island of Jersey, Monaco,St. Kitts and Nevis, Argentina and the Marshal
Islands. The government should take immediate steps to sign more such
agreements with other countries as well.

Block loopholes in the Mauritius route

• The government should block loopholes in the Double Taxation

Avoidance Convention (DTAC) entered into about two decades ago to
prevent unscrupulous investors to escape from paying taxes in India.

Court cases and severe punishments for economic offences

• The courts in India should give due importance to the cases involving
black money and must give the severest of the punishments to the
persons involved in the cases. The Supreme Court of India is doing a
commendable job in this respect. The Supreme Court asked the
government in January 2011 as to why the names of those have stashed
money in the Liechtenstein Bank have not been disclosed. In April 2011,
Hasan Ali Khan was arrested on charges of stashing over Rs.36,000
crores in foreign banks. This is one instance where a person has been
arrested for stashing black money in the foreign banks, but there may be
many more against which the government can take action only with a
strong political will and conviction. Baba Ramdev had even gone to the
extent of suggesting that black money offender should be treated as
traitors of the country and should be given the severest of the
punishments.
Demonetization of currency notes of high value like Rs.500 & Rs.1000

• Another measure suggested to dig out black money is to demonetise

the currency of higher denominations like bank notes of Rs.500 and
Rs.1000. But the government has already rejected this suggestions as it
is not economically viable suggestion.

Issue of Special bonds by the government

• Special bonds may be issued by the government asking the black

money hoarders to invest in them by providing them immunity from
criminal proceeding existing under the existing law.

Controlling black by money by preventive measures

Restructuring tax system & severe punishment to errant tax officials

• The government should restructure its tax system including GST and
VAT making it more convenient and easy for the income earner to pay
the taxes. All the cumbersome procedures in submission of forms and
returns should be done away with. The government has become aware
of this and have done a lot of work to improve the system. It has recently
come out with an announcement that salaried employees with salary
income up to Rs.5 lakh and saving bank interest up to Rs.10,000 need
not to file income tax returns for the year 2011-12. Much more needed to
be done by simplifying the rules and regulations in this respect. The
government should broaden the tax base and should bring all people in
whatever is the source of income including agricultural income if the
income exceeds Rs.5 lakh a year. All people above this limit should be
taxed with no exemptions. No return needs to be filed by any person if
the income is below Rs. 5 lakhs. Similar tax reforms should be made in
the corporate direct tax and all other indirect taxes.

Severe punishment should be mooted out to the tax personnel who are
found to be involved in the corrupt practices including the persons who
are found to have paid bribes to the tax officials to avoid taxes. These
should include tax consultants and chartered accountants who guide the
tax payers with tips to avoid tax taking advantage of loopholes in the tax
laws.

Use of electronic media and banks for money transfers

• Maximum use of electronic media should be made for money transfers.

Most of the money transactions should be encouraged to be made
through the banking channels. Limitation should be laid down for cash
transactions in any deal. Use of PAN and identity card should be made
mandatory for all transactions amounting huge amounts. There should
be a powerful Income Tax and Vigilance department. People should be
continuously made aware of the benefits of paying taxes.

People should be made aware of the evil of black money on a continual

basis

• People should be made aware of the consequences of black money.

The recent movements run by certain reputed personalities like Baba
Ramdev and Anna Hazare whether successful or not has brought about
a social revolution in the society to make the people aware of this great
evil. It has alerted the government at all levels to take cognisance of the
matter and the government is said to have constituted a high level
committee to go into this aspect.