Saturday Brain Storming Thought (222) 11/05/2024


Black Money

Black Money means all funds earned through illegal activity and legal income that is not recorded for tax purposes

Black money proceeds are usually received in cash from underground economic activity and, as such, are not taxed

Key Takeaways of Black Money

1) Black Money includes all funds earned through illegal activity

2) Black Money includes all legal income that is not recorded for tax purposes

3) Higher amounts of black money in the economy often lead to increased corruption

4) Black Money can reduce the negative impact of oppressive laws

5) Black Money can be illegally disguised as legitimate money through money laundering

White Money

White Money is money that is earned through legitimate means and is accounted for, for which income or other tax is paid

Cash transactions without proper accounting are known as black money

Black Money generation

1) Illegitimate activities

The illegal activities that can lead to black money generation are

a) Crime

b) Corruption

c) Non-compliance with tax requirements

d) Complex procedural regulations

e) Money laundering

f) Smuggling

2) Tax evasion

This is where an entity wilfully does not pay taxes that are due to the government

3) Tax avoidance

This is where an entity takes advantage of the existing loopholes in the system and avoids paying taxes, though this is not illegal

Sources of Black Money in India

1) Sellers and traders who do not give bills or receipts create black money

2) Many people invest in bullion or jewellery to hide their actual income from the authorities

3) In the real estate sector, many people undervalue their real assets to refrain from paying the rightful tax

4) They cheat the government of the correct amount of property tax

5) Some Self-help Groups (SHGs) and trusts do not provide proper sources for their funds and donations received

6) Tax heavens are generally small countries where foreigners don’t have to pay taxes

7) These countries generally have very liberal regulatory frameworks, which big corporations take advantage of

8) They set up shell companies there and redirect all their profits to the entity, by which they can reduce their tax liabilities by a huge margin

9) Hawala is an informal method by which money can change hands without use of banks

10) This works through codes, contacts and trust with no paperwork at all

11) Investments through innovative derivative instruments like participatory notes also are a means to hide black money

Size of Black Money problem in India

1) India is ranked eighth in the world in black money generation by the Global Financial Integrity Report

2) A former director of the Central Bureau of Investigations has said that the total black money in India is around USD 500 billion+

Effects of Black Money in India

1) It affects the financial system of the country

2) The central bank is not able to control money supply in the economy causing higher inflation

3) This will lead to a fall in the value of the currency

4) Black Money affects the creditability of a country negatively

5) Black Money is most often used for illegal activities such as drugs and narcotics dealing, terrorism etc which is detrimental to the health of the country

6) The government suffers a big loss in the form of taxes because of black money

7) Black Money creates a parallel economy in the country, which is completely underground

8) This leads to governance problems

9) Black Money can also cause real estate prices to go up, which may lead to an asset bubble

Measures by the government to curb Black Money

1) Tax reforms have been initiated with a view to resisting black money

2) The tax base has been increased and rates have been slashed

3) Reforms are being made to incorporate tax deduction at the source itself

4) Through the Black Money Bill, the government has allowed the reporting of black money generated through tax evasion in a given time frame

5) Demonetisation of Rs 500 and Rs 1000 was carried out in 2016 with the primary view of making black money useless

6) The government is encouraging cashless / digital transactions with a view to making things more transparent

7) Electoral reforms are also intended to curb Black money as much of the Black money generated in India is used in elections

Legislative framework to deal with Black Money

1) Prevention of Corruption Act, 1988

2) Benami Transactions Prohibition Act, 1988

3) Prevention of Money Laundering Act, 2002

4) The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015

5) Lokpal and Lokayukta Act

Institutions to deal with Black Money in India

1) Enforcement Directorate ( ED)

2) Central Board of Direct Taxes (CBDT)

3) Financial Intelligence Unit

4) Central Board of Excise and Customs

5) Directorate of Revenue Intelligence (DRI)

6) National Investigation Agency (NIA)

7) Central Economic Intelligence Bureau

8) Central Bureau of Investigation (CBI)

9) Police Authorities

Steps to prevent Black Money creation

1) Mandatory digitisation of all land and property records linked to Pan/Aadhar numbers

2) Tax on agricultural income based on farm holding, leaving small and marginal farmers untouched and unaffected

3) The land shall not be allowed to be mortgaged to anyone except banks for crop loan only

4) Plastic money should be encouraged

5) Cash transaction fee must be introduced

6) Encourage credit/debit card payments

7) Capital gains tax on traded security should be calculated by the tax department by linking Pan and demat account

8) Funding to political parties should come under purview of Right to Information and income tax authorities

Sources of Black Money

1) Gambling

2) False income statement

3) Drug trafficking

4) Weapons trading

5) Terrorism

6) Selling counterfeit or stolen goods

7) Selling pirated versions of copyrighted items such as software and musical recordings

Importance if Black Money comes back in india

1) The black money reserves are 13 times greater than our foreign debts and we can clear them

2) We can see that every house in the country with light

3) We can have water supply for all the rural areas

4) We can distribute money for every village for development and they can be turned into metropolitan villages

5) We can create employment for lakhs of unemployed youth

6) No need to provide taxes for many years to government

7) We can create good roads in villages

8) possibility of creating inflation

9) possibility of creating economical chaos

10) The government can use that money for development and not distribute in people

Declaration of Black Money

1) Declaration of cash or deposits

2) Payment of tax and making a deposit

3) Complete the declaration by making payment and submitting the deposit proof

4) Declaration by misrepresentation of facts


Er. Avinash Kulkarni

Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer

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