Black Money

in India
As we know that in ancient times our country, INDIA, was popularly known as Golden Bird
because people of our country were more enlightened in terms of coordination and co-
operation, worked in a very enthusiastic & honest manner so as to provide fruits of their work
to everyone without any selfishness and/or jealousy i.e., they were not concerned about their
earnings as compared to others.

They focused on the welfare of the nation as a whole. So, it could be predicted at that time
that our country will become one of the greatest economies in the world and be at the top as
regards developed country very soon, but sadly it didn't happen.

There were many reasons behind it but the basic reason was use of black money to a large
extent in our country. In Ancient times the ways to generate money as well as its usage was
very transparent i.e., everyone knew the sources of money and its application, which may be
referred as white money. So, in the past, White Money was in use but now the color of
Indian money has changed to Black. Before discussing the use of black money, one must
know what Black Money is.
Meaning:
There is no definition for black money in economics because in the present time, black
money is used in our country up to a very large extent so it not possible for us to define it
properly or with an accurate definition. Different people define it different ways with different
terms such as unaccounted income, underground income, black wealth, or at economy
level it is known as parallel economy, black economy, shadow economy and unofficial
economy.

Broadly or in layman's language we can define it as, money that has been acquired through
illegitimate means or money which is unaccounted for, that is, for which tax is not paid to
the government. Black money may be generated either by illegitimately drug trade,
terrorism, corruption, or legitimate failure to pay the dues to the public exchequer yielding
the generation of unaccounted wealth.

There are certain sectors and activities like land and real estate transactions, bullion and
jeweler dealings, complex financial market transactions, charitable activities, informal sector
and cash economy, self-employed professionals, external trade and transfer pricing, which
give birth to the generation of black money.
In addition to wealth earned through illegal means, the term black money would also include
legal income that is concealed from public authorities:
to evade payment of taxes (income tax, excise duty, sales tax, stamp duty, etc)

 to evade payment of other statutory contributions

 to evade compliance with the provisions of industrial laws such as the Industrial Dispute Act
1947, Minimum Wages Act 1948, Payment of Bonus Act 1936, Factories Act 1948, and
Contract Labour (Regulation and Abolition) Act 1970

 to evade compliance with other laws and administrative procedures.

The portion of a country's income tied to black money affects the economic growth of the
country. Black money causes financial leakage, as unreported income that is not taxed causes
the government to lose revenue. In addition, these funds rarely enter the banking system. As a
result, it can be more difficult for legitimate small businesses and entrepreneurs to obtain
loans.
Furthermore, black money causes the financial health of a nation to be underestimated.
It is extremely difficult to estimate the amount of black money in any economy. That is
not surprising, given that participants in the underground economy have strong
incentives to conceal their activities.

These unreported earnings cannot be included in a country's gross national product

(GNP) or gross domestic product (GDP). Thus, a nation's estimates of savings,
consumption, and other macroeconomic variables would be misleading. These
inaccuracies adversely affect planning and policymaking.

Black Money

Nature and Sources of black money:

Black Market and Black Money came into light during Second World War. At that time due
to various control on distribution and prices of goods, a secret market came into light where
goods were available but at a higher price than the controlled one. The term "black money"
became current to describe the money received or paid in "black market". With time black
money acquired a wider area much wider than black market.
Sources of black money can be divided into two broad categories, which are:

Legal Activities:
Here the basic activity is to earn income legally but evade tax on that income (which can be
termed as tax envision). The evasion of tax be it direct tax on income or indirect tax on
commodities, results in unexplained income. The factors or causes of tax evasion are the high
level of tax rates, less respect to the Government and its laws, lenient penal action, and nature
of the economy. High tax rates usually make tax evasion more tempting.

Tax evasion is more in those countries where there is general apathy on the part of people
towards the Government and its laws. Tax evasion by politicians sends wrong signals to the
general public relating to noncompliance with rules and laws; lenient penal action also
sometimes encourages tax evasion. Usually, countries with relatively poor implementation of
regulations tend to have a high share of the unaccounted economy than others performing due
to the implementation of the same and sound deterrence.
Increasing globalization and economic freedom is also contributing towards black money.
Country like ours which is still developing is losing a lot of resources due transfer price
manipulation, which largely due multi-national company misusing transfer pricing.
Illegal Activities:
It consists of criminal part of black money, it includes activities which are of anti-social
type like smuggling of goods, embezzlement, forgery, chit funds , production/ trade of
contraband goods (i.e. narcotics, illicit liquor and arms), illegal mining and falling of
forests; hoarding and black marketing of pricecontrolled materials and services, theft,
robbery, kidnapping and extortion, human trafficking, sexual exploitation and
blackmailing, bribes to public offices to secure favours such as altering land use,
regularizing authorized constructions, speed money to circumvent/fast-track
procedures, and commission to secure government purchase orders. These activities
reflect declining moral and social value and are punishable under the various Acts of
the Central and State Governments and also the schedule of Prevention of Money
Laundering Act, 2002.
Methods to Generate Black Money:

Black money may be generated through the crude approach of not declaring or reporting the
income or the activities leading to it. This is the likely approach in all cases of criminal, illegal, and
impermissible activities. Another approach can be by not declaring or reporting activities and the
income generated there from may also be followed in cases of failure to comply with regulatory
obligations or tax evasion on income from legitimate activities.

However, complete evasion or non-compliance may make such incomes vulnerable to detection by
authorities and lead to consequent adverse outcomes for the generator. Thus, a more sophisticated
approach for generation of this kind of black money is often preferred, involving manipulation of
financial records and accounting.

Tax evasion involves misreporting or non-reporting of the transactions in the books of account.
Different kinds of manipulations of financial statements resulting in tax evasion and
generation of black money are summarized below:

 Out of Book Transactions

 Parallel Books of Accounts
 Manipulation of Books of Account
 Manipulation of Sales / Receipts
 Under-reporting of Production
 Manipulation of Expenses
 Manipulation by Way of International Transactions through Associate Enterprises
 Manipulation of Capital
 Manipulation of Closing Stock
 Manipulation of Capital Expenses
Some can be explained as follows:

Out of Book Transactions:

This method is one of the simplest methods and that is why it is widely used. This mode is most
prevalent among small grocery shops, unskilled or semi-skilled service providers, etc. Here,
Transactions that may result in taxation of receipts or income are not entered in the books of account
by the taxpayer. The taxpayer either does not maintain books of account or maintains two sets or
records partial receipts only.

Manipulation of Books of Account:

Books of accounts are required to be maintained under Companies Act, Banking Regulation Act and
Income Tax Act. Due this it becomes difficult for tax payers to do out book transaction or to maintain
parallel books of account. Such people take help by manipulating books of accounts to evade taxes.

Manipulation of Capital:
Manipulation of capital is possible either by laundering black money or introducing it in the books of
accounts. Manipulation can also take place through shares at a high premium, bogus gifts, and
capital gains, purchase of false losses, etc.
Black money in India:
Every sector in our country generates and uses black money for its survival in the market, society,
etc. It includes Real estate, financial market, bullion & jewellery market, non-profit organisations,
external trade and so on.

In India black money persists due to the existence of Demonstration Effect i.e., the way to live a life in
terms of other points of view or we say live a life by looking at others livelihood. People of India are
very much affected by the lifestyles of other people of the society who are maintaining considerable
high status, and in turn want to be like them. For this, they want to generate money by any means.
Therefore, to fulfil these desires or to maintain their status in society they force themselves to
generate and use black money.
Corruption in India is a major issue that adversely affects every field of economy. Spirituality is
another thing that is responsible for generation of black money especially in India, as people here are
very emotional towards it. Many such person misuse these emotions and sentiments and generate a
good amount of black money. Manipulation of accounts also helps in generation of black money.
Many a times Government of India has failed to collect the estimated amount of tax from the people
of country and this is due to the black money driven by underground economy.

To estimate black money in India there is no accepted methodology for making such estimation. Even
if an estimate is made it would be and assumption only. As by the definition of black money, it is
unaccounted money, thus all attempts to estimate it will fail.
Impact of black money on Indian economy:
The existence of black money or parallel economy has disrupted the planning of the economy of the
country. And its flow is seriously affecting the entire economic system of India. Some important are as
follows:

Mass poverty:
The distribution of wealth and income in our country has been severely affected by the growth of
underground economy. The common people get affected indirectly in so many ways. The tax evaders
are keeping the money away from the deserved. If all the black money in the tax havens is recovered
and used by the Indian government, all the outstanding liabilities of the country could be paid off and
money would still be left for investment and development.

Uncontrollable inflation:
When black money is out in the market, the amount of money in the system is higher than the one
Government expects. This causes the prices of commodities to increase to a level beyond normal. This
is a direct result of people having more money and offering more money on specific items. Even if the
Government tries to control the credit flow in the market by taking necessary measures, the amount of
black money present upsets the move, resulting in some sort of pressure on the economy.
Loss of revenue to the state exchequer:
Many times, the Indian Government has failed to collect the estimated amount of tax439 from the
people and for this, credit has to go to the black money driven underground economy. A report was
submitted to the Finance Ministry of India that depicts the spread of black money in different sectors
like real estate, mining, telecom etc. The study, headed by NIPFP chief P.Kavita Rao, explains how
illicit wealth is likely to exceed 10 per cent of GDP.

Inflated real estate:

When people with deep pockets are ready to pay more for a piece of land, the price of surrounding
land also tends to increase; thus, artificially inflating the prices of an entire area. Generally, people
involved in black money market are always ready to pay more for a piece of land as this helps in
converting their coloured money to legal money.

Underestimation of GDP:
Black income has been causing underestimation of GDP in India as enormous volume of income is
diverted to this unaccounted sector resulting in growing continuation of parallel economy of the
country.
Measures taken to tackle black money:
In order to curb the menace of black money the Central Government has been taking Hercules efforts through
introduction of various laws and amendment of the existing laws. Some of the measures taken by the Government
are discussed hereunder.

Demonetization:
Demonetization is the act of stripping a currency unit of its status as legal tender. Demonetization refers to the
withdrawal of currency from circulation which is done to ambush black market currency and unaccounted money.
Demonetization undertaken twice in the past miserably failed, with less than 15 per cent of high currency notes
being exchanged, leaving more than 85 per cent of high value currencies untouched as the owners suspected
penal action by the government agencies.

Quite apart from the relatively paltry results obtained on the two occasions on which it has been tried, there are
other good reasons to doubt the efficacy of this measure in combating black income generation. First, the measure
is limited to inflicting penalties on those who hold their black wealth in the form of cash at the moment of
demonetization. Second, even for holders of cash, there exist avenues for converting high denomination notes into
lower valued ones, at a discount, through intermediaries.

Third, and perhaps most importantly, the measure does not address the underlying causes of black income
generation. Hence, subsequent generation of such incomes can continue unabated with due precautions for the
form in which unspent black incomes are held. The once-andfor-all penalty exacted by demonetization simply puts
everyone on their guard for the future, but does nothing to alter the incentives which spawn the black incomes. Of
course, since cash is the principal vehicle for conducting black transactions, there is undoubtedly a temporary
dislocation in such activities. The point is that the dislocation is temporary.
Raids:
Income tax department's powers have to be considerably enlarged and it should be
empowered to conduct raids on the premises and properties of the taxpayers or any other
individuals and can seize the unaccounted income and wealth and take necessary legal
actions against the tax evaders.

Linking Aadaar to Pan for income tax returns and to bank accounts:
The Aadhaar Card is now a necessity in various fields - to register for a SIM card, for opening
bank accounts and to file income tax returns. The recent step taken by the government to link
Aadhaar to PAN for filing income tax returns is mandatory as it would help the authorities to
keep track of tax evaders.

The Aadhaar and the PAN details would help officials keep track whether the taxpayer is
fulfilling the requirement of filing for ITR. On the same note, linking Aadhaar to bank accounts
is also compulsory. This will help officials to keep track of the digital transactions, transfers, etc.
Prevention of Money Laundering Act, 2002:
The Prevention of Money Laundering Act 2002 (PMLA) was enacted to prevent money laundering
and provide for confiscation of property derived from, or involved in, money laundering and for
matters connected therewith or incidental thereto. The Act also addressed international obligations
under the Political Declaration and Global Programme of Action adopted by the General Assembly
of the United Nations to prevent money laundering. The Act prescribes that any person found
guilty of money-laundering shall be punishable with rigorous imprisonment from three years to
seven years. He could also be liable to fine of up to Rupees five lakhs.

Benami Transaction (Prohibition) Act, 1988:

Benami is a Persian language word that means "without name" or "no name". In this Act, the word
is used to define a transaction in which the real beneficiary is not the one in whose name the
property is purchased. As a result, the person in whose name the property is purchased is just a
mask of the real beneficiary.

Benami Transactions (Prohibition) Act, 1988 prohibits holding of property that is "benami" or not in
the name of the person who purchased the property.
Conclusion
Prevention and control of black money is pre-requisite for establishing an equitable, transparent and efficient
economy. As economy is the backbone of a country, black money will paralyze the economy and the country
will be in doldrums. It becomes a hurdle in the development of the economy and will definitely destroy the
same.

After an uproar in Parliament, the Government of India came out with a White Paper on Black Money in May
2012 (Ministry of Finance, 2012), presenting the different facets of black money and its complex relationship
with policy and administrative regime in the country which also reflected upon the policy options and strategies,
the Government has been following to address the issue of black money and corruption in public life.

The fight against generation and accumulation of black money and curbing black money is far more complex
and prolonged requiring new strategies and stronger intervention of the state, which, in turn, needs a hardy
legal framework, coextensive administrative setup and a very strong determination to fight the threat. Effective
implementation of the tax laws can arrest tax evasion.

Relaxation in tax laws, simplification of tax laws, removal of drawbacks in the tax system, proper processing of
information available can be the best tool for the betterment of Indian tax compliance. Educating the people
about the tax laws is vital as it will create an atmosphere to perform their duties to the nation. A multi-pronged
strategy is essential to deal with the issue of generation of black money and its illicit transfer outside the
country and for bringing back to India. The factors leading to a generation of black money in India along with
the various may exist due to lack of adequate and reliable data.
Black money is obtained through illegal things.

India is one of the poorest countries in the world despite all the dirty
money that is handled in that country.

Effective implementation of the tax laws can arrest tax

evasion.
Proper processing of information available can be the best
tool for the betterment of Indian tax compliance.

Educating the people about the tax laws is vital as it will

create an atmosphere to perform their duties to the nation.
A multi-pronged strategy is essential to deal with the issue of
generation of black money and its illicit transfer outside the
country.