Black Money: Definition and Sources

Black Money Definition and Sources

• Black money is money hidden from tax authorities. It's also referred to as the parallel economy or illegal economy.
• Sources can be legal (underreporting, tax avoidance) or illegal (smuggling, corruption).

Key Sources of Black Money

• Underreporting of Income: Small businesses avoiding purchase bills.
• Real Estate Manipulation: Builders manipulating property values.
• Shell Companies: Non-operational companies used to funnel revenue.
• NGO Misuse: Limited financial reporting leading to tax evasion.
• Tax Havens: Multinational corporations use tax loopholes internationally.
• Hawala System: Informal money transfer system for laundering.
• Participatory Notes (P-Notes): Facilitating anonymous investments in India.
• Tax Evasion: Hiding revenue or not recording transactions.
• Tax Avoidance: Minimizing taxes legally via concessions.
• Illegal Earnings: From smuggling, weapons trade, extortion, and corruption.

Challenges in Curbing Black Money

• Political-Criminal Nexus: Interference and resistance to enforcement.
• State Authority Limitations: Varied tax and regulatory powers across states.
• Globalization Impact: Different anti-money laundering rules.
• Cash-Based Economy: Predominantly cash transactions hindering monitoring.
• Ineffective Laws: Existing laws don't fully address black money.
• Tax Loopholes: Facilitate tax and black money generation.
• Bureaucratic Corruption: Undermines enforcement.
• Slow Digitization: Of land records hampers tracking and valuation.
• Non-quantifiable Data: Due to the anonymity and informal sector.

Consequences of Black Money on the Economy

• Regressive Income Distribution: Widens wealth gap, concentrating wealth.
• Limited Circulation: Stored in gold, real estate, and hidden assets.
• Increased Inflation: Raises inflation disproportionately affecting the poor.
• Capital Flight: Domestic capital escapes to tax havens.
• National Security Risks: Funds criminal and anti-state activities.
• Fueled Corruption: Major contributor to and result of corruption.
• Weakened Monetary Policy: RBI struggles due to hidden nature and government neglect.

Measures to Curb Black Money

Legislative Measures

• Tax Rationalization: Reforms in tax slabs and TDS (tax deducted at source).
• Voluntary Disclosure Schemes: Opportunities to report hidden wealth.
• PMLA (2002): Combats money laundering through various means.
• Benami Transactions Prohibition Act: Bans transactions using pseudonyms.
• Lokpal and Lokayukta Act: Establishes bodies for oversight and enforcement.
• Black Money Act: Disclosure of undisclosed foreign assets.

Institutional Measures

• CBDT (Central Board of Direct Taxes): Enforces direct tax laws and combats black money.
• Enforcement Directorate: Investigations and prosecutions regarding money laundering.
• Financial Intelligence Unit: Coordinates global efforts against terrorism financing.
• Directorate of Revenue Intelligence: Agency leading the fight against smuggling.
• Other Agencies: CBI, Serious Fraud Investigation Office, etc.

International Measures

• G-20 Initiatives: Support for OECD's BEPS Project and tax information exchange.
• Double Taxation Avoidance Agreements: Agreements for shared tax information.
• Multilateral Convention on Tax Matters: Improves global tax law efficiency.
• Financial Action Task Force: Monitors global money laundering and terrorism financing.

Additional Stats

• Panama and Paradise Papers: 20,353 crore undisclosed credits detected for 930 India-linked entities.
• 2014 Study: Estimated 90% of unaccounted wealth/black money in India.