What is Black Money?
There is no as such uniform or accepted definition of ‘black’ money. It can be best
understood as any money that breaks laws in its origin, movement or use, and is not reported
for tax purposes, then such money would fall within the meaning of black money. In other
words, any money to be classified as Black money must fall under either of the two
categories: –
I. First, any money earned through any activity defined as illegal by virtue of any
law prevailing in the country.
II. II. The second category comprises of the generation of income from a legal
activity that is not reported to the tax authorities and any audit trail relating thereto
has been removed, leading to evasion of one or more taxes.
To summarize, Black money proceeds are usually received in cash from
underground/parallel economic activity and, as such, are not taxed. Recipients of black
money usually hide it, spend it only in the underground/parallel economy, or attempt to
give it the appearance of legitimacy through money laundering. Also, several terms are
used to describe Black Money – ‘black income’, ‘dirty money’, ‘black wealth’,
‘underground wealth’, ‘black economy’, ‘parallel economy’, ‘shadow economy’,
‘underground’ or ‘unofficial’ economy.
What is Parallel economy & why does it exist?
The black money/unaccounted money cannot be transacted in the normal economy as it
will catch the government’s eye and tax authorities would figure out the generation of
such black money. Therefore, to avoid that, a parallel economy exists. The word
“parallel” means the occurrence of something in a similar fashion or at the same time.
The “economy” of the country constitutes people buying, selling, and creating goods and
services. These financial transactions are meant to help common people and the country.
Now, if we do the same thing: buy, sell and create (an economic system) but with black
money and without involving government or without government’s knowledge which
basically means we are creating an analogous or similar system which operates in parallel
to government system without giving the country and people it’s due share, further, these
transactions do not get compiled with the national income data. Thus, it is called the
parallel economy.
What is Money Laundering?
We know how black money is generated and used for a transaction, but what if a person
wants to use this money for expenditure into the white economy as legitimate money,
then such person needs to convert such money into white money through the process of
money laundering. There are three stages involved in money laundering:
1. Placement – First is injecting the black money into the official financial system.
2. Layering – After placement comes, layering stage. The layering stage is the most
complex part of the process. In this the money spreads into various different accounts in
different countries and constantly moving it from one account to another or even from
country to country, each time exploiting the loopholes in the system. The more level of
layering, the detection of the origin of money will be more difficult.
3. Integration – The final stage of the money laundering process is termed the integration
stage. It is at the integration stage where the money is returned to the person making it
seem like a legitimate source.
Causes for the creation of black money/Source/Reasons:
1.Corruption
There are many reasons because of which black money is created in our country and
corruption is one of them. Corrupt practices such as taking or giving bribes, transactions in
black money done by bureaucrats, politicians, civil servants and high profile businessman
leads to the creation of black money. The transactions in black money are rarely caught
because of the high profile back-ups because of which the culprits are never caught by the
government.
2.High Taxes
This is another root cause of black money. Higher rate of taxes has forced the earning part of
the population for not paying taxes and keeping that part of income illegally with them which
is later termed as black money. Tax evasion has led to the generation of a huge amount of
black money in India. A middle-class person cannot survive under high rate tax laws because
of which tax evasion is quite common.
3.Foreign Banks
Foreign banks are safety lockers for the hoarders of black money. Especially the Swiss
Banks which do not disclose any information of their customers having an account in their
banks have become the safest place for those who don’t want to pay taxes and hide their
income from the government. Moreover, such banks have encouraged more and more people
to generate black money.
4.Election Campaigns
As India is a democracy, elections are must which begins by-election campaigns. Elections
campaigns are the other main sources which generate black money. Campaigns conducted by
the candidates for elections of parliament or assembly elections or any other elections at the
local level has led to the generation of crores of black money.
5.Donations or Funds
The huge amount of donations given to educational institutions for admissions are another
big generator of black money. Such donations are never paid by cheques, even the institutions
don’t write such transactions in their official accounts, neither any proper receipt is issued for
the made transactions.
There are many other factors including the mentioned above which are the reason for the
generation of black money such as corrupt tax officials, chit funds, money laundering
financial companies, corrupt charitable trusts and societies, smuggling and commissions etc..
Impact of Black Money on Indian Economy:
Consequences of black money will have an adverse impact on the Indian economy. Along
with the economic effects, black money also has social consequences. Some of them are
mentioned below:-
• Loss of revenue to the government and running of parallel economy in the
country– The increase and spread of black money has a serious impact on the
economy as it results in the reduction if government revenues. The black money is
in such amount that it is said that a separate economy including only black money
is running parallel to the current Indian economy. If only some part of the black
money which has been in circulation in the economy could have been paid as taxes
to the government, it would have benefitted the Indian economy to a large extent.
• Vicious circle as a result of black money and corruption– As a known fact
India already has a number of corrupt practices going on. Black money has added
to this corruption by the illegal transactions which are made to hide the black
money. The bribes are given by the people to the bureaucrats, government
officials, etc. for getting their work done go to the unaccounted books and is never
shown as income which adds more black money to the society. Therefore black
money is the result of corruption and the already existing corruption is the result of
black money which forms a vicious circle which is never going to end unless some
serious step is taken by the government.
• Effects on national income and real capita income– Black money is a result of
revealing low income to the government while paying tax by the people which
also results in low national income of the country. The national income of the
country will take a big jump if the amount of black money in circulation is backed
up to the national economy of the country. This will also increase the quality of
life for the whole country.
• Decrease in the quality of public goods & services– This is somewhat related to
the existing corruption in the country. The people who give bribe to the producers
and marketing staff or the services provider will naturally get good quality
products and services in comparison to the general public who will not be
provided with the same products and quality of services has to suffe.
• Higher taxation and inflation– The main reason behind the taxation is to earn
revenues for the expenditures done by the government in order to make a balanced
budget. Therefore it is obvious that if the amount of black money which the people
are hiding from the government is revealed and included in the budget of the
government then the tax rate will surely come down as the revenues which the
government wants to earn from the people by imposing high taxes will already be
with the government. Similarly, rising prices are the result of too much money in
circulation for some particular goods in the market.
• Difficulty in the formation of monetary and fiscal policy– This is an obvious
impact as the government while making these policies is not able to count the
exact national income because of the hidden black money which makes such
policies unrealistic. Such policies can only have some impact on the Indian
economy if these are made with exact calculation keeping in mind the
consequences and needs of the people.
• Increased criminal activities in the society– The illegally earned or the black
usually gives rise to various illegal activities in society and corruption is one of
them. The duration of elections is also the time when the illegal use of black
money can be seen. Various terrorist activities have backup power of hoarders of
black money which is even harmful to the whole country. The illegal weapons
with various groups of unsocial elements are usually bought up by the use of black
money. Drugs are the biggest enemy for the youth of the country.
Steps taken by the government to tackle black money and money laundering:
1. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act,
2015 (“BMA”) Enactment of BMA is to specifically deal with black money stashed abroad.
2. The Benami Transactions (Prohibition) Amendment Act, 2016: the main aim of this act is
to striking the benami transactions and inter alia confiscate Benami property and prosecute
benamidar and the beneficial owner.
3. Prevention of Money-Laundering Act, 2002 (PMLA): It forms the core of the legal
framework put in place by India to combat Money Laundering.
4. Constitution of the Special Investigation Team (SIT)
5. Constitution of Multi-Agency Group
6. Engagement with Foreign Governments. enhancing the exchange of information under
Double Tax Avoidance Agreement/Tax Information Exchange Agreements/multilateral
conventions.
7. Introducing General Anti- Avoidance Rule (GAAR) to enable authorities to neutralise the
tax edge obtained through shell companies/companies in tax havens.
8. Restrictions on Cash transactions.
9. The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976: It
covers penalty of illegally acquired properties of smugglers and foreign exchange
manipulators and for matters connected therewith and incidental thereto.
10. Narcotic Drugs and Psychotropic Substances Act, 1985: It provides for the penalty of
property derived from/or used in illegal traffic in narcotic drugs.
11. Financial Intelligence Unit-IND: It is an independent body reporting directly to
the Economic Intelligence Council (EIC) headed by the Finance Minister.
12. India is a full-fledged member of the Financial Action Task Force (FATF).
