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Table of Contents







Black Money in India


Sources of Black Money


Causes of Generation of Black Money



Ways used to Convert Black Money to White



Impacts of Black Money


Governments Effort Against Black Money









The objective of my project is :

To understand the problem of black money in India.
To know reasons of generation of black money.
What is its impact on the economy?
To find out ways to solve the problem.

Black money simply it means income earned illegally, usually in cash, and
not reported to the government so as to avoid paying taxes on it.
Its has a wider terminology attached to it which accommodates various
activities and transactions as the means for black money i.e. hoarding, black
marketing, gambling, Smuggling, human trafficking, under valuation of
assets, false income statement to name a few.


My research methodology requires gathering relevant data from the

specified documents and compiling databases in order to analyze the
material and arrive at a more complete understanding of the problem of
black money in India. The information in this project report has been taken
from secondary sources.
It describes the problem economy is facing today. It also analyses the
problems within the current system and its defects. It is crucial to understand
the root of the problem, which is causing economic problems I the country.
Equally important is to focus on constructive solutions, which combat this
inefficiency. The main purpose of this report is to explain and understand the
problems, as well as to create an effective and workable alternative.

Black Money in India

If black money deposit was an Olympics event, India would have won a
gold medal hands down. The second best Russia has 4 times lesser deposit.

U.S. is not even there in the counting in top five! India has more money in
Swiss banks than all the other countries combined.

Recently, due to international pressure, the Swiss government agreed to

disclose the names of the account holders only if the respective governments
formally asked for it. Swiss Banking Association report, details bank
deposits in the territory of Switzerland by nationals of following countries:


(billion $)


$1,456 bn
$470 bn


$390 bn
$100 bn
$96 bn

India with $1,456 billion or $1.4 trillion has more money in Swiss banks
than rest of the world combined. Public loot since 1947:
It is one of the biggest loots witnessed by mankind - the loot of the Aam
Aadmi (common man) since 1947, by his brethren occupying public office.
It has been orchestrated by politicians, bureaucrats and some businessmen.
DISHONEST INDUSTRIALISTS, scandalous politicians and corrupt IAS,
IRS, IPS officers, film actors, illegal trade and protected wildlife operators
have deposited in foreign banks in their illegal personal accounts a sum of
about $1456 billion, which have been misappropriated by them. This amount
is about 13 times larger than the country's foreign debt. With this amount 45
crore poor people can get Rs 1,00,000 each.
This huge amount has been appropriated from the people of India by
exploiting and betraying them. Once this huge amount of black money and
property comes back to India, the entire foreign debt can be repaid in 24
hours. After paying the entire foreign debt, we will have surplus amount,
almost 12 times larger than the foreign debt. If this surplus amount is
invested in earning interest, the amount of interest will be more than the
annual budget of the Central government. So even if all the taxes are
abolished, then also the Central government will be able to maintain the
country very comfortably.
Some 80,000 people travel to Switzerland every year, of whom 25,000 travel
very frequently. 'Obviously, these people won't be tourists. They must be

travelling there for some other reason, believes an official involved in

tracking illegal money. And, clearly, he isn't referring to the commerce
ministry bureaucrats who've been flitting in and out of Geneva ever since the
World Trade Organisation (WTO) negotiations went into a tailspin!
It is estimated that almost 10 Lakh Crores of Rupees are circulating in the
economy as black money. For want of enough money and under the excuse
of dearth of money, our Government is obtaining loans from foreign
countries at heavy interest rates by mortgaging our freedom. The total
foreign debt is about 7 Lakh Crores of Rupees and annual interest payment
is about 115000 crores of Rupees which is 43% of total tax revenue of the
Central Government. This amount is so much high that Government is not
able to make payment from internal resources and just to make the payment
of the interest, the Government is seeking the further loan from IMF, World
Bank etc. by further mortgaging our sovereignty and our freedom. When this
is the situation, why not to utilize our own black money circulating in the
country. What is even more depressing in that this ill-gotten wealth of ours
has been stashed away abroad into secret bank accounts located in some of
the worlds best known tax havens. And to that extent the Indian economy
has been stripped of its wealth. Ordinary Indians may not be exactly aware
of how such secret accounts operate and what are the rules and regulations
that go on to govern such tax havens. However, one may well be aware of
Swiss bank accounts, the shorthand for murky dealings, secrecy and of
course pilferage from developing countries into rich developed ones.
In fact, some finance experts and economists believe tax havens to be a
conspiracy of the western world against the poor countries. By allowing the
proliferation of tax havens in the twentieth century, the western world

explicitly encourages the movement of scarce capital from the developing

countries to the rich.
The unaccounted money also feeds India's rampant corruption machine,
including election campaigns. A study by the Mumbai-based Center for
Monitoring Indian Economics (CMIE) found that each parliamentary poll
generates between $10.19 billion and $11.33 billion of black money.

Comparison of illicit flows


money flow as percentage of GDP between 2002 and 2011

(Source: Global Financial Integrity)

Estimates of black money in India fluctuate wildly. A World Bank report

puts Indias shadow economy at close to one-fifth of economic output.
Another study on illicit financial flows by Global Financial Integrity (GFI),
a non-profit organisation, puts these at 3% of economic output for India
between 2002-11. This difficulty in measurement is because black money is
generated through a raft of complex, sophisticated activities for the purposes
of tax evasion, crime and corruption. This makes it inherently difficult to


measure black money accurately. Some studies exclude certain sources of

black money. For example, the GFI excludes criminal activities and a part of
corporate tax evasion, both massive sources of black money. Hence, its
estimates are naturally more conservative. This study also mentions that in
the developing world, including India, corporate tax evasion is responsible
for 60% of overall black income, criminal activities are responsible for 35%,
while corruption, which has caused much furore in India, accounts for only
5%. While the reduction in personal income tax rate from nearly 100% in
the 1970s to under 30% now has reduced tax evasion, it has been offset by
higher rates of corporate taxation.

Black income seizures

Fig.2 Bars show money seized by tax authorities in Rs. crores

[Source: Central Board of Direct Taxes (CBDT)]


Fig.3 Bars show money seized by tax authorities in Rs. crores

[Source: Central Board of Direct Taxes (CBDT)]

To curb the menace of black income, Prevention of Money Laundering Act

(PMLA) was introduced on 1 July, 2005. About 1,437 cases had been
registered under PMLA till the end of financial year 2012. Moreover, 23,118
cases had been registered till 31 March, 2012 under Foreign Exchange
Management Act (FEMA), and penalties worth `1,678 crore had been levied.
But that is hardly a drop in the ocean, argue critics. Clearly, more needs to be
done. Perhaps it would be prudent for the government to focus more on
curbing further generation of black money.



1. Out of book transactions: Not entering transactions that might result in

taxation into the book of accounts. The taxpayer either maintains no book of
record or reports partial transactions only.
2. Parallel book of accounts: Adopted by those who are obliged under law
to maintain books of account. The taxpayer maintains one book for their
own use which records all transactions while another is submitted to
concerned authorities reporting part of the transactions.
3. Manipulation of books of account: When tax payers have to maintain
books under different acts like Companies Act, Income Tax Act etc, it is
difficult to maintain multiple parallel books. In that case they just
manipulate the books of account.
4. Manipulation of sales/receipts: A taxpayer is required to pay taxes on
profit or income which is the difference between sale proceeds or receipts
and expenditure. Thus manipulation of sales or receipts is the easiest method
of tax evasion. They might also divert sales to dummy or associated entities.
5. Under reporting production: Manipulation of production figure may be
resorted to for the purpose of evading central excise, sales tax, or income
6. Manipulation of expenses: Since the income on which taxes are payable
is arrived at after deducting the expenses of the business from the receipts,
manipulation of expenses is a commonly adopted method of tax evasion.
This means under reporting of income.


7. Other manipulations: Besides inflation of purchase or raw material cost,

expenses like labour charges, entertainment expenses, and commission can
be inflated or falsely booked to reduce profits, generally done through
showing wrong bills.
8. Manipulation by Way of International Transactions through
Associate Enterprises: Manipulation of profits and taxes payable thereon
may involve using associated enterprises in low tax jurisdictions through
which goods or other material may be passed on. This may lead to
accumulation of black money earned from within India to another country
which are typically tax havens.
9. Manipulation of capital: The capital of the taxpayer reported in the
balance sheet is the accumulated wealth which is invested in the form of
assets or as working capital of the business. Manipulation of capital can be
one of the ways of laundering and introduction of black money in books of
10. Manipulation of closing stock: Suppression of closing stock both in
terms of quality and value is one of the most common methods of
understating profit. This might include undervaluation of inventory, which
means that while the expenses are being accounted for in the books, the
value being added is not accounted for, thereby artificially reducing the
11. Manipulation of capital expenses: Over-invoicing plant and equipment
or any capital asset is an approach adopted to claim higher depreciation and
thereby reduce the profit of the business.


12. Land and real estate transaction: The taxes applicable on real estate
transactions in form of stamp duty and capital gains tax can be avoided by
under-reporting of transaction price.
13. Bullion and Jewellery Transactions: Cash sales in the gold and
jewellery trade allows the buyer to convert black money into gold and
bullion, while the trader can keep his unaccounted wealth in the form of
stock, not disclosed in the books or valued at less than market price.
14. Financial market transaction: Financial markets can generate black
money, especially in IPOs by rigging of the markets.
15. Public procurement: The total public procurement figure for India has
grown phenomenally and is currently estimates at around Rs 10-11 lakh
crore per year giving ample opportunity for creation of black money.
16. Non profit sector: Taxation laws allow certain privileges and incentives
for promoting charitable activities. These can be misused through entities
claimed to be constituted for nonprofit motive and are among possible
sources of generation of black money.
17. Informal Sector and Cash Economy: Dependence on agriculture,
existence of a large informal sector, and insufficient banking infrastructure
with large un-banked and under-banked areas have meant huge cash
transactions in the economy making it vulnerable to more black money.
18. External trade and Transfer Pricing: More than 60 per cent of global
trade is carried out between associated enterprises of multinational
enterprises who function across geographies. They might manipulate to take


use of different taxation regimes they work across giving rise to more black
19. Trade-based Money Laundering: This is the process of disguising the
proceeds of crime and moving value through the use of trade transactions in
an attempt at legitimising their illicit origins.
20. Tax Havens: These are typically characterised by no or very low taxes,
lack of effective exchange of information, and lack of transparency about
substantial activities. Though they have agreed to share more information
over time, they can be used to generate more black money.
21. Off shore financial centres (OFC): Some of the old tax havens have
adopted the more benign designation of OFC and tend to describe
themselves as financial centres specializing in non-residential financial
transactions. They generally can also generate black money with their array
of secrecy provisions that lack regulation.


Causes for Generation of black

There are several factors responsible for the emergence - of black money. It
would be relevant to discuss those factors so that a correct understanding
about the genesis, growth and expansion of black money can be made. The
principal factors are:
(i) Beginning of the evil: The beginning of this evil can be traced to the
Second World War. During this period supplies of industrial goods from the
traditional suppliers of the West were cut off. This resulted in severe
shortages in many vital lines. The British Government indulged in large
inflationary finance for war efforts. This led to price escalation. Taxes too
were raised sharply on higher incomes and excess profits. In these
circumstances many indulged in black marketing. And at the same time, they
evaded taxes.
(ii) Controls and licensing system: The system of controls, permits, quotas
and licenses which are associated with misdistributions of the commodities
in short supply results in the generation of black money.
Price and distribution controls have in the past led to the generation of black
money on a significant scale. Any price control without any adequate
machinery of distribution and speedy arrangement for increasing supplies is
potentially a source of black money generation.


(iii) Tax structure: High tax rates and defective tax structure have also
been responsible for the existence of black money to a large extent. Take for
instance direct taxation. Till recently the tax on income and on wealth was
very high to invite evasion. The marginal rate of income tax was as high as
75 per cent. In these circumstances the temptation / gain from tax evasion
was substantial. Even in the case of indirect taxes the situation is no better.
In fact worse, as the revenue from these taxes constitutes a big proportion of
all the tax revenues.
(iv) Donation to political parties: Ever since the Government decided to
ban donations to political parties in 1968, it prompted businessmen to fund
political parties, especially the ruling party, with the help of black money.
Ostensibly, this decision was taken to reduce the influence of big business on
the electoral process, but in practice what happened was precisely the
(v) Ineffective enforcement of tax laws : Whereas the Government has an
armoury of tax laws pertaining to income tax, sales tax, stamp duties, excise
duty etc., their enforcement is very weak due to widespread corruption in
these departments. The high rates of these taxes induce businessmen to
avoid recording of these transactions. This evasion largely goes unchecked
and thus sets in a chain reaction for the generation of black money at the
wholesale, retail as well as production levels.
(vi) Generation of black money in the public sector: Every successive
five-year plan is planned for a larger size of investment in the public sector.
The projects undertaken by the public sector have to be monitored by the
bureaucrats in Government departments and public sector undertakings.


Tenders are invited for the various works and these tenders are awarded by
the bureaucracy in consultation with the political bosses.Thus, a symbiotic
relationship develops between the contractors, bureaucracy and the
politicians and by a large number of devices costs are artificially escalated
and black money is generated by underhand deals.
(Vii) Ceiling on depreciation and other business expenses: Government


restriction. It

has also




advertisement, entertainment, guest houses, payment of perquisites to

directors. The purpose of these restrictions is to protect the shareholders and
consumers from the unscrupulous action of businessmen. But businessmen
feel that these restrictions are unjustified. They take the maximum advantage
of these provisions but do not like to part with the remaining part of by
various clandestine devices; they convert it into black money and use it
either for conspicuous production to satisfy the wants of the rich and elite
sections of society.


Ways used to Convert Black

Money to White MONEY
The following are the ways used in India to convert Black Money to White
1. Donation






anonymously the black money to some charitable institution and it

would convert into white money. Even though there is some tax
exemptions for charitable donation, the black money holders cannot
donate with their name, because they have to show the account for
that amount. It is one of a method of transferring Black Money to
White Money. But very few follow this method, because there is no
advantage for the donator.
2. Altering the Source of Income: Get to a Jewellery. Give him the
amount you want to convert into white as cash. he would give you a
Cheque back for the same amount less some percentage. He would
give you a purchase bill to show that you have sold Jewellery to him.
On the amount of the cheque when you file your returns you will have
to pay capital gain tax, the money is white now. SOURCE OF
3. Using the money for Fraudulent Transactions: if you want to get a
medical/engineering seat you have to pay something for which no
receipt is given. The something amount you pay cannot be shown


officially because the giver and taker both will face government
problem. In this way, you cant convert the Black money to white
money instead you can use your black money. It is again Black money
for the recipient.
4. Investing in Movies: Now, the Black money is invested in
Bollywood to make the money white. But not directly.
5. HAWALA: It is one of the Famous method used to convert Black
Money to White Money. Money is transferred via a network of hawala
brokers, or hawaladars. A customer approaches a hawala broker in
one city and gives a sum of money to be transferred to a recipient in
another city. The hawala broker calls another hawala broker in the
recipient's city, gives disposition instructions of the funds (usually
minus a small commission), and promises to settle the debt at a later
6. Through Real Estate: The BM holder buys land worth 20 lakhs. But
he shows the government that he bought that land for 1 crore. With a
loss of 20 lakhs, remaining 80 is converted into white! (with a land
worth 20 in the BM Holders hand)


Impacts of Black Money in India

1. Affecting the GDP Growth:
As India's GDP is now estimated at Rs 17,70,000 crore (as per the
Centre for Monitoring Indian Economy), the unaccounted black
money circulating in the system works out to a whopping Rs 3,54,000
crores, the Indira Gandhi Institute of Development Research (IGIDR)
estimates that India's black economy is around 18-21 per cent of the
GDP. If the growth of the black income has been the same as the
white economy so that black income forms roughly 20% of GDP,
tapping even 10% of this income through better tax compliance will
fetch the government two per cent of GDP.
2. Greater Burden to Honesty Tax Payers:
While amnesty schemes generally add to current revenue, they can
also have implications in terms of future revenue generation, future
tax base and taxpayer behaviour in the presence of amnesties.
Expectation of a future amnesty scheme leads to continued tax
evasion. These schemes are perceived as being unfair to honest
taxpayers who bear relatively greater tax burden. By allowing tax
evaders to evaluate their assetsat prices prevailing several years ago,
such scheme help the beneficiaries effectively pay much lower tax
than applicable
3. Inflation:
Due to huge accumulation of unaccounted money in the hands of tax
evaders, smugglers, builders and corrupt politicians and government


servants etc the black money is playing a vital role in cause of

inflation in India.
4. Impact on Society:
Even after 62 years of independence, our country is faced with poverty and
numerous economic ills. The concept of mixed economy has been harmful
to both private and public enterprises. It has jeopardized our economy and
hit the common man below the belt. The poor man has been becoming
poorer and rich richer just because of the economic ills like inflation and
black money.Black money is harming our national economy and we have
achieved an economic growth rate of five percent per annum whereas the
economy should have grown at the rate of eight percent in order to make up
for the rising population pressures and infrastructural development
requirements. Black money is the chief inhibiting factor in the process of
national economic development. The menace of black money has also
increased the rich poor divide. The poor families are unable to afford even
the square meals whereas the rich and the neo-rich are enjoying the luxuries
of life. The Indian society has become poorer. Only the few sections of the
society, which account for fifteen percent of the total population, have been
able to enjoy the highest standards of living in this subcontinent. Therefore,
the real poverty has increased and not decreased over a period of fifty years.


Government's effort against

Black Money
FIU (Financial Intelligence Unit) to Track Black Money:
The Indian government set up the Financial Intelligence Unit - India (FIUIND) in 2004 for receiving, processing, analysing and disseminating
information relating to suspect financial transactions. All banks and finance
companies are bound every month to inform FIU-IND about all cash
transactions of over Rs.1 million and its equivalent in foreign currencies; all
cash transactions below Rs.1 million and its equivalent in foreign currencies;
all cash transactions in forged or counterfeit currency notes and all
suspicious transactions

Governments Effort on Chasing Black Money

1. The government has, in an unprecedented move, posted two senior
Indian Revenue Service (IRS) officers to Singapore and Mauritius,
intensifying its efforts to crack down on money laundering amid
growing concerns of links between tax evasion and terror funding.
2. The Central Board of Direct Taxes (CBDT) has appointed additional
commissioners GT Venkateswara Rao and M Sampath as first


secretaries at the countrys missions in Singapore and Port Louis for

three years.
3. CBDT is not alone in posting officers abroad. The Central Board of
Excise & Customs (CBEC) has officials permanently posted in
Washington and Singapore for the same purpose. The Enforcement
Directorate, too, has an official posted in Dubai to check on
transactions that can have Indian connections.
Committees Formed by Government against Black Money:
1. Income tax investigation committee 1947
2. Taxation enquiry committee 1953
3. Nicholas Kadler to Study Indian tax structure and tax evasion 1956
4. Direct tax administration enquiry committee 1958
5. Committee on prevention of corruption 1964
6. Monopoly enquiry committee 1965
7. Committee on departmental officers 1968
8. Direct taxation enquiry committee - tax evasion and black money
9. Study team on leakage of foreign exchange 1969
10. Indirect txaes enquiry committee 1970
11. Direct taxation law committee 1977
12. National institute of public finance and policy 1985


Whatever rules and regulations that our government put in to action to
eradicate the Black Money, our peoples will find a loop hole to do the same
mistake again. So, the total eradication is in hands of the Citizens of India.
If this situation persists the Rich with get richer and the poor will become
poorer. We, the Citizens of India should help our Country to Develop by
killing the evil Black Money, that itself will lead to reduction of the unlawful
activities like corruption, tax evasion etc. and lead our country to the mark of
a Developed Nation.