Black Money A Challenge For Indian Economy
Author : CA A. K. Jain
Chapter Headings-
A. Preamble
B. The Menace of Black Money
1. Black Money Problem In India Before Independence :
2. Sources of Black Money :
3. British Efforts to Curb Black Money :
C. Black Money also Exists in Other Parts of the World
1. Switzerland :
2. Panama :
3. Russia: China :
4. Nigeria :
5. Brazil :
6. Italy :
7. United States :
D. Impact on Development
E. Solutions to Combat Black Money
1. Strengthening Legal Framework :
2. Enhancing Tax Compliance :
3. Strengthening Enforcement Mechanisms :
4. Promoting Transparency and Accountability :
5. Whether Lowering Tax Rates Will Resolve Problem :
6. Stronger Enforcement :
7. Transparency and Accountability :
8. International Cooperation :
9. Simplification of Tax Laws :
10. Promoting Formal Economy :
F. Government Efforts To Deal With Black Money
1. Amnesty and Voluntary Disclosure Schemes :
2. High-Level Committees :
3. Tax Reforms :
4. Demonetization :
5. Benami Transactions (Prohibition) Amendment Act (1988 ) :
6. Foreign Account Tax Compliance Act & Common Reporting ( 2015) :
7. Goods and Services Tax ( 2017 ) :
8. Prevention of Money Laundering Act ( 2002 ) :
9. Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act ( 2015 ) :
10. The Fugitive Economic Offenders Act (2018 ) :
11. Crackdown on Shell Companies :
12. Focus on Digital Payments :
13. International Cooperation :
14. Strengthening Tax Administration :
G. Quantum of Black Money
H. Real Estate: Breeding Ground for Black Money
1. Legal Reforms and Enforcement
2. Technological Interventions
3. Taxation and Incentives
4. Financial Regulations
5. Withdrawal of Circle Rates
6. Cross-Departmental Coordination
7. Old Asset Declaration Scheme
I. Corruption In Public Service
1. Strengthening Legal Frameworks :
2. Whistleblower Protection :
3. Public Disclosure :
4. Promoting Financial Inclusion :
5. Enhancing Institutional Capacity :
6. Judicial Reforms :
7. International Cooperation :
J. Government Initiatives
1. Demonetisation :
2. Aadhaar and Direct Benefit Transfer :
3. Digitization of Services :
4. Right to Information (RTI) :
5. Improving Law Enforcement and Prosecution :
K. Indian Institutions Dealing With Black Money
L. Conclusion
Preamble
In the vibrant tapestry of India's economic landscape, there exists a shadowy realm known as the parallel economy, fuelled by the clandestine flow of black money. This parallel economy, characterized by unreported income, tax evasion, and illicit transactions, poses a significant obstacle to the nation's development aspirations. Addressing this issue is not merely a matter of fiscal rectitude; it is imperative for fostering sustainable growth, ensuring social justice, and fortifying the integrity of India's financial system.
The Menace of Black Money
Black money, often generated through illegal activities like corruption, tax evasion, smuggling, and money laundering, undermines the very foundation of a transparent and equitable economic system. Its existence distorts market dynamics, fosters inequality, diminishes tax revenues, and erodes public trust in governance institutions. Moreover, the parallel economy siphons off resources that could otherwise be channelled into critical sectors such as education, healthcare, and infrastructure, impeding the nation's progress towards inclusive development.
Black Money Problem In India Before Independence :
The issue of black money in India existed even before independence in 1947. During the British colonial period in India, the issue of black money was prevalent, albeit in a different context compared to contemporary times. Black money referred to income earned through illegal means, tax evasion, or illicit trade practices, which often went unreported to the colonial authorities. The British colonial government in India was aware of the existence of black money and its adverse effects on the economy.
Sources of Black Money :
1. Tax Evasion : Indians often resorted to under-reporting income or concealing wealth to avoid high taxes imposed by the British Raj
2. Smuggling : Illicit trade across borders, particularly opium trade, flourished, generating unaccounted income.
3. Bribery and Corruption : Corruption was prevalent within the British administration, creating opportunities for hidden wealth generation.
4. Princely States : Some Princely States had independent taxation systems, and some rulers might have accumulated wealth outside official channels.
British Efforts to Curb Black Money :
Efforts to address the issue of black money during British rule were limited and often focused on maintaining control and maximizing revenue for the colonial administration. Some of the measures undertaken by the British government to deal with black money included:
1. Taxation Policies : The British imposed various taxes on Indian agricultural produce, land revenue, and trade. However, these taxation policies were often exploitative and disproportionately burdened the Indian population, leading to widespread resentment and tax evasion.
2. Revenue Administration : The British implemented revenue administration systems such as the Permanent Settlement (1793) and the Ryotwari System (1820s), which aimed to establish fixed land revenue assessments. However, these systems were often riddled with corruption and inefficiencies, allowing for the generation of black money through underreporting of income and evasion of taxes.
3. Anti-Corruption Measures : The British government established anti-corruption bodies and enacted laws to address corruption within the colonial administration. However, these efforts were largely ineffective in curbing corruption and black money generation.
4. Financial Regulations : The British government introduced financial regulations and banking systems in India to regulate monetary transactions. However, these regulations primarily served the interests of the colonial administration and did not effectively address the issue of black money.
5. Salt Laws : The infamous Salt Acts, which heavily taxed salt production and sales, led to widespread smuggling and black markets.
6. Commissions and Committees : The British government did recognize the black money issue. For example, the Ayers Committee (1936) investigated black money and recommended stricter tax enforcement and measures to protect honest taxpayers.
Overall, the British government's efforts to deal with the problem of black money in colonial India were largely ineffective and often exacerbated by the exploitative nature of colonial rule. The issue persisted even after independence, and successive Indian governments have grappled with implementing measures to address black money and corruption in the country.
Black Money also Exists in Other Parts of the World
Black money, also known as illicit money or unaccounted money, exists as a significant issue in various countries around the world, not just in India. It typically refers to income illegally obtained or not declared for tax purposes. Here are some examples of countries where black money is a major concern:
1. Switzerland : Historically known for its banking secrecy laws, Switzerland has been a popular destination for individuals and entities seeking to hide their wealth from tax authorities in their home countries.
2. Panama : The Panama Papers leak in 2016 revealed extensive details of offshore accounts and shell companies used by individuals and entities worldwide to conceal assets and evade taxes.
3. Russia : Russia has faced challenges with widespread corruption and illicit financial flows, leading to concerns about the existence of black money within its economy.
4. China : Despite strict capital controls, China has struggled with underground economies and illicit financial activities, including corruption and tax evasion.
5. Nigeria : Corruption and money laundering are significant issues in Nigeria, leading to the accumulation of black money within the country and abroad.
6. Brazil : Brazil has grappled with corruption scandals and money laundering, with high-profile cases involving politicians, businesses, and public officials.
7. Italy : Italy has faced challenges with tax evasion and underground economic activities, contributing to the existence of black money within its economy.
8. United States : While not as prevalent as in some other countries, the United States still experiences issues with tax evasion, money laundering, and illicit financial activities, particularly in sectors like real estate and finance.
These examples demonstrate that black money is a global phenomenon, with various factors such as corruption, weak enforcement of financial regulations, and inadequate tax compliance contributing to its persistence in different parts of the world.
Black Money Impact on Development
The corrosive influence of black money permeates every facet of India's socio-economic fabric, impeding its march towards prosperity. It hampers the government's ability to fund essential services and infrastructure projects, perpetuating disparities in access to healthcare, education, and basic amenities. Furthermore, the underground economy fosters a culture of opacity and impunity, stifling entrepreneurship, deterring foreign investment, and impeding the emergence of a robust formal sector.
Solutions to Combat Black Money
Confronting the scourge of black money demands a multifaceted approach, blending legislative reforms, technological innovation, and concerted enforcement efforts. Here are some strategic interventions to curb this menace and propel India towards a more transparent and inclusive economic paradigm:
1. Strengthening Legal Framework : Enactment and rigorous enforcement of stringent laws are imperative to deter tax evasion, money laundering, and illicit financial activities. Additionally, measures such as the Benami Transactions (Prohibition) Act and the Prevention of Money Laundering Act need to be bolstered to close loopholes and enhance accountability.
2. Promoting Digitalization : Embracing digital payment systems and fostering a cashless economy can help curb the circulation of unaccounted money. Initiatives like Aadhaar-enabled payment systems, UPI (Unified Payments Interface), and digital KYC (Know Your Customer) verification can enhance transparency and traceability in financial transactions.
3. Enhancing Tax Compliance : Simplifying tax regimes, rationalizing tax rates, and leveraging technology for real-time monitoring can incentivize voluntary compliance and broaden the tax base. Moreover, promoting tax literacy and providing incentives for timely tax filing can foster a culture of fiscal responsibility among citizens.
4. Strengthening Enforcement Mechanisms : Bolstering the capacity of enforcement agencies such as the Income Tax Department, Enforcement Directorate, and Financial Intelligence Unit is crucial for detecting, investigating, and prosecuting cases of tax evasion and money laundering. Collaborative efforts with international counterparts for information exchange and mutual legal assistance can enhance the effectiveness of anti-money laundering measures.
5. Promoting Transparency and Accountability : Instituting measures to enhance transparency in political funding, public procurement, and corporate governance can mitigate the avenues for generating and concealing black money. Strengthening institutions like the Central Vigilance Commission and the Central Bureau of Investigation can instil public trust and ensure accountability in governance.
Whether Lowering Tax Rates Will Resolve Problem
Lowering tax rates alone might not directly solve the black money problem in India. Black money refers to income on which taxes have not been paid, and it's often generated through various illegal activities such as corruption, tax evasion, real estate transactions, and other underground economic transactions. While lowering tax rates could potentially reduce the incentive for tax evasion to some extent, it's not a comprehensive solution. To effectively address the black money issue, a multi-pronged approach is necessary:
1. Stronger Enforcement : Strengthening tax enforcement mechanisms, such as improved auditing processes, stricter penalties for tax evasion, and better surveillance of financial transactions, can deter individuals and businesses from evading taxes.
2. Transparency and Accountability : Implementing transparent and accountable governance structures helps reduce corruption, which is a major driver of black money. Measures such as digitization of financial transactions, promoting e-governance, and enhancing transparency in government spending can contribute to reducing the generation of black money.
3. International Cooperation : Black money often flows across international borders through tax havens and offshore accounts. Therefore, international cooperation and agreements for exchanging financial information are crucial to track and curb illicit financial flows.
4. Simplification of Tax Laws : Complex tax laws can inadvertently create loopholes that facilitate tax evasion. Simplifying tax laws can make it easier for taxpayers to comply and for authorities to enforce tax regulations effectively.
5. Promoting Formal Economy : Encouraging economic activities in the formal sector through incentives, such as tax breaks for compliant businesses and individuals, can reduce the prevalence of black money generation.
While lowering tax rates could be a part of a broader strategy to address black money, it should be done cautiously, considering its potential impact on government revenue and fiscal deficit. Moreover, it's essential to ensure that tax reductions benefit honest taxpayers and do not create incentives for further tax evasion.
Government Efforts to Deal with Black Money
The Government of India has made several efforts over the years to tackle the issue of black money in the Indian economy. A report titled "Aspects of the Black Economy in India" was submitted by RJ. Chelliah from National Institute Of Public Finance And Policy in 1985 . A eighty page detailed, white paper on black money was presented in 2012 by the Finance Minister, Shri Pranab Mukherjee. Some of the major efforts by the government in this direction are listed here in below.
1. Amnesty and Voluntary Disclosure Schemes : India's efforts to address black money can be traced back to the introduction of Voluntary Disclosure Schemes in 1951, 1965, 1975, 1997 and 2016. These schemes allowed individuals to declare their undisclosed income and assets by paying a penalty, thus bringing them into the tax net.
I. Voluntary Disclosure of Income Scheme ( VDIS ) 1997 : This scheme was launched in 1997 and allowed tax defaulters to disclose their undisclosed income at the prevailing tax rates. It also ensured that the laws relating to economic offences would not be applicable for those defaulters. The scheme was a success, with over 350,000 people disclosing their income and assets. This brought in a revenue of ₹78 billion (US$980 million) to the Indian finance ministry.
II. Income Declaration Scheme (IDS) 2016 : This scheme was launched in 2016 and provided an opportunity for people who had not paid full taxes in the past to come forward and declare their undisclosed income. They would have to pay tax, surcharge and penalty on the undisclosed income declared. The scheme was open for a limited period only. This scheme resulted in a collection of Rs 29,362 crore in taxes for the government.
III. Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 : This scheme was launched to provide a one-time opportunity for resolution of pending disputes related to central excise and service tax that were subsumed in the Goods and Services Tax (GST).
These VDS schemes are controversial as they grant immunity from prosecution to tax defaulters. However, they can be a successful way for the government to collect revenue from undisclosed income.
2. High-Level Committees : Over the years, the government has constituted several high-level committees to study and recommend measures to tackle black money. For example, the Wanchoo Committee (1971), the Chelliah Committee (1991), and the more recent SIT (Special Investigation Team) on Black Money.
3. Tax Reforms : Various tax reforms have been implemented to curb the generation and circulation of black money. These include lowering tax rates, simplifying tax laws, and promoting digital transactions to increase transparency and accountability.
4. Demonetization : In November 2016, the Government of India announced the demonetization of high-denomination currency notes (Rs. 500 and Rs. 1000) to curb black money, corruption, and counterfeit currency. While the move faced both praise and criticism, its impact on reducing black money remains a subject of debate.
5. Benami Transactions (Prohibition) Amendment Act (1988 ) : The Benami Transactions (Prohibition) Amendment Act was enacted in 2016 to curb the practice of holding property in the name of another person, known as benami property. This act aims to prevent the generation and circulation of black money through such transactions.
6. Foreign Account Tax Compliance Act & Common Reporting ( 2015) : India has entered into agreements with various countries to exchange financial information under FATCA and CRS frameworks. These agreements aim to prevent tax evasion and curb the flow of black money stashed abroad.
7. Goods and Services Tax ( 2017 ) : The implementation of GST in July 2017 aimed to streamline the indirect tax system in India, reducing tax evasion and the generation of black money by bringing more transactions into the formal economy.
8. Prevention of Money Laundering Act ( 2002 ) :Brought India in line with global efforts against money laundering, often linked to black money.
9. Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act ( 2015 ) : Discouraged holding black money abroad by offering a channel for disclosure with penalties.
10. The Fugitive Economic Offenders Act (2018 ) : This legislation empoweres authorities to seize assets of economic offenders who flee the country.
11. Crackdown on Shell Companies : The government has taken steps to identify and deregister shell companies that are used for money laundering and tax evasion purposes. This includes linking Aadhaar (unique identification number) with the director identification number (DIN) to curb the creation of shell companies.
12. Focus on Digital Payments : Initiatives like UPI and BHIM promote cashless transactions, making black money movement difficult.
13. International Cooperation : India actively participates in DTAAs and AEOI for greater information exchange and tax evasion prevention. India has signed various TIEAs with other countries to exchange financial information automatically. This helps in identifying individuals who have undisclosed foreign assets and income.
14. Strengthening Tax Administration : The government uses data analytics to identify suspicious transactions and improve tax collection. The government has been leveraging technology to track financial transactions and identify tax evaders. Initiatives like the use of data analytics, e-assessment, and e-filing of tax returns have made it more difficult to conceal black money.
Quantum of Black Money
Estimating the exact quantum of black money in the Indian economy is challenging due to its secretive nature. Various estimates have been proposed by different organizations and experts, but there is no consensus on a precise figure. Some reports suggest that black money could range from a few percentage points to a significant portion of India's GDP. The quantum of black money depends on factors such as the definition used, the methods of estimation, and the effectiveness of anti-black money measures.
Real Estate: Breeding Ground for Black Money
The issue of black money in real estate transactions is a significant problem in the Indian economy, affecting economic development, revenue collection, and financial transparency. A 2018 study by Assocham (Associated Chambers of Commerce and Industry of India) indicated that nearly 30% of real estate transactions in India involve black money.
Addressing this issue requires a multi-faceted approach, involving legal reforms, technological interventions, and increased transparency. Here are several strategies that can help reduce the generation of black money in real estate:
1. Legal Reforms and Enforcement :
1. Making PAN (Permanent Account Number) mandatory for all high-value property transactions can help trace and monitor financial flows.
2. The Real Estate (Regulation and Development) Act, 2016, aimed to bring transparency and protect consumer interests. Ensuring strict implementation and enforcement of RERA can deter malpractices in the sector.
3. Strengthening the enforcement of the Benami Transactions (Prohibition) Act can help identify and confiscate properties held in the names of benami (fictitious) owners. Benami Transactions refers to properties purchased in the name of proxies or benami holders to conceal the identity of the true owner, facilitating money laundering and tax evasion. This practice further complicates the regulatory oversight and enforcement of tax laws.
2. Technological Interventions :
1. Implementing and maintaining a transparent, tamper-proof digital land record system can reduce fraudulent transactions and ensure clear ownership titles. States like Karnataka and Andhra Pradesh have seen success with initiatives like the "Bhoomi" projec. The "Bhoomi" project in Karnataka is an excellent example of how digitizing land records can improve transparency. By maintaining an online repository of land records, the project has reduced the incidence of fraudulent transactions and has made it easier for citizens to access accurate land ownership information.
2. Using blockchain technology for land registration can ensure immutability and transparency in real estate transactions. The Andhra Pradesh government has initiated pilot projects in this area. Andhra Pradesh's initiative to use blockchain for land registry is another noteworthy case. The pilot project aims to create a tamper-proof ledger of property transactions, thereby preventing fraud and ensuring transparency.
3. Taxation and Incentives :
High stamp duty rates encourage underreporting of transaction values. Rationalizing stamp duty and registration fees can reduce the incentive to underreport property values. Providing tax incentives for honest reporting of property transactions can encourage compliance. This could include deductions or rebates for property buyers and sellers who accurately declare transaction values.
4. Financial Regulations :
Demonetization and Cash Transaction Limits: The 2016 demonetization was a significant step to curb black money. Continuously enforcing and possibly lowering the cash transaction limit (currently Rs. 2 lakh) can deter cash-based transactions in real estate.
5. Withdrawal of Circle Rates :
Government prescribes circle rates for the purpose of registration of properties transactions all over the country. Generally these property circle rates are substantially different from the actual rate prevailing in the market. This difference between actual rate and circle rate also induce buyers and sellers to engage in black money transactions. It is highly advisable to the government to withdraw all circle rates and allow the property transactions at the prevailing share market value.
6. Cross-Departmental Coordination :
Enhance coordination among various government departments and financial institutions to track large transactions and identify discrepancies. Use of data analytics and artificial intelligence will help in monitoring unusual or suspicious transaction patterns.
7. Old Asset Declaration Scheme :
Indian infrastructure development projects needs gigantic funds which can neither be generated through tax collections or borrowings. It is well known secret that Indian economy has a parallel economy flooded with enormous wealth generated through dubious means and methods.
In past the government made several attempts to legalize these funds but not even a fraction of total amount could be realised.
Through this is single source of funding enormous financial resources can be raised for all the financial and infrastructure needs of the country.
The government should offer a scheme for introduction of capital in specific sectors. The scheme unlike past should be open for a longer period of time maybe 3 to 5 years. Larger duration of scheme will help the entrepreneurs in planning and execution of projects.
The scheme may provide total immunity from penalties and prosecution if the declaring person pays a tax of 12.5% of the declared value of the assets and the amount is invested for the development of infrastructure e.g. education, health services, power generation, transport communication, rural development and family planning Etc. This will also facilitate transfer of Indian funds parked outside India. The scheme should be unconditionally open to all irrespective of their caste, class or creed.
Although, proposing these schemes again and again is painful but, in the overall of interest of nation, we have to make certain compromises and sacrifices with policies in the overall interest of the country. If we want development faster than China we hardly have any choice. This scheme can channelize huge amounts of black money into productive sector and reduce government reliance and dependence of tax collections.
Tackling black money in real estate requires coordinated efforts across legal, technological, financial, and educational fronts. By implementing comprehensive reforms and leveraging technology, India can significantly reduce the generation of black money in the sector, leading to enhanced economic development and financial transparency.
Corruption In Public Service
Combating black money generated through corruption in public service and life is a complex challenge that requires a multifaceted approach. The World Bank estimates that corruption in India costs the economy between 20-30% of GDP annually.
Here are some strategies for lowering corruption in public life.
1. Strengthening Legal Frameworks: Strict Anti-Corruption Laws: Enacting and enforcing stringent anti-corruption laws with severe penalties for offenders.
2. Whistleblower Protection: Implementing robust protection mechanisms for whistleblowers to encourage reporting of corrupt activities.
3. Public Disclosure: Mandating public disclosure on web site of assets by public officials.
4. Promoting Financial Inclusion : Expanding banking and digital services to rural and unbanked areas will reduce reliance on cash transactions .
5. Enhancing Institutional Capacity: Establishing independent Anti-Corruption Agencies with the authority to investigate and prosecute corruption will be helpful.
6. Judicial Reforms: Ensuring a fast-track judicial process for corruption cases to ensure timely justice.
7. International Cooperation: Collaborating with other countries to share tax information and track illicit financial flows.
Government Initiatives :
1. Demonetisation : In November 2016, the Indian government demonetized Rs.500 and Rs. 1000 banknotes, which constituted 86% of the currency in circulation. This move aimed to combat black money, counterfeit currency, and corruption. The initiative forced people to deposit their unaccounted cash into banks, where it could be scrutinized by tax authorities.
2. Aadhaar and Direct Benefit Transfer : India’s Aadhaar program, which provides a unique identification number to residents, has been linked with government benefit schemes to directly transfer subsidies and benefits to beneficiaries' bank accounts. This has reduced leakages and corruption in the distribution of subsidies, such as in the Public Distribution System (PDS) and LPG subsidies. For example, the DBT for LPG subsidies saved the government about Rs.15,000 crores by eliminating ghost beneficiaries.
3. Digitization of Services : Moving government services online reduces physical interaction between officials and citizens, minimizing opportunities for bribery.
4. Right to Information (RTI) : Empowering citizens to access information about government processes and decision-making discourages corruption.
5. Improving Law Enforcement and Prosecution : Dedicated courts to handle corruption cases can expedite trials and convictions, deterring potential offenders. Well-resourced and independent agencies with investigative powers are essential for tackling corruption.
Public awareness campaigns can highlight the negative impacts of corruption and encourage reporting of corrupt practices. The Public Service Delivery Guarantee Act of Andhra Pradesh (2011) mandates a time-bound delivery of various public services and imposes penalties for delays. Studies showed a significant reduction in petty corruption.
Combating black money and corruption in public service requires a combination of stringent laws, technological solutions, improved transparency, and international cooperation. Implementing these measures can lead to a more transparent, accountable, and efficient public service, ultimately contributing to the economic growth and development of the country.
Government Institutions Dealing With Black Money
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
Conclusion
Combating black money is critical for India's economic growth and governance. By adopting a comprehensive and sustained approach, involving legal reforms, technological advancements, international cooperation, and public participation, the government can effectively control black money. This will enhance revenue collection, reduce corruption, and foster a transparent and robust economic environment conducive to sustainable development.
While the efforts have been made, however, the curbing black money is challenging due to the clandestine nature of such transactions. The battle against black money is not merely a regulatory imperative; it is a moral and imperative for India. By dismantling the edifice of the parallel economy through robust reforms and concerted action, India can unleash its true economic potential, foster social equity, and chart a trajectory of sustainable development. However, the journey towards a transparent and inclusive economic order demands unwavering commitment, collective resolve, and visionary leadership to overcome the entrenched forces of opacity and illicit wealth accumulation.
Author : CA A. K. Jain
Email: caindia@hotmail.com
Cell: +91 9810046108
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**********Disclaimer: The information and statistics presented in this article have been compiled from various sources deemed reliable. However, readers are advised to independently verify the accuracy and relevance of the data before making any decisions or taking action based on the information provided herein. The author and publisher do not assume any responsibility or liability or any consequences resulting from reliance on the information presented in this article.
