Black Money in India | LawJi

What is Black Money?

Black money refers to concealed money from government. It can be generated mainly from two sources. One is where source activity of that money is legitimate but income is concealed from taxation authorities and the other is where the source of money is illegitimate. In the former case, activities can be smuggling of arms, drugs, etc, or human trafficking, counterfeit notes, gambling or any activity which is prohibited by law. Incomes from such activities are concealed with great effort as avoiding tax is not the main interest but safeguard of that activity is. However, not all the unaccounted money is black. It is only that money which was legally required to be disclosed. Income tax provisions permit income below a certain threshold without disclosure.

Black Money: History

Black money issue has been a major issue since independence. In the 1970's due to frequent droughts, heavy investments in agriculture and after effects of war resulted into an increment of income tax to a level of 85 percent. As a result, people started concealing their money. But it was posted LPG era, which witnessed the expansion of the black economy and also escalation of offshore black money flow as it reduced costs and regulation over the transfer of funds abroad. After this there was an increasing flow of transnational investments, MNC's started mushrooming stock markets became robust and attracted FIIs. This all resulted in increased round-tripping of investment.

Black Money: Estimation of Black Money

Estimation of Black Money is a difficult task as it is concealed money and no one knows the deepness of the concealing. Its estimate range from 10% to 100% of GDP in India. Though the black money problem is more associated with developing countries, developed countries are also suffering from this problem. According to an estimate, the USA has around $2 trillion of Black Money, and in Europe, it is around $1 trillion.

Black Money: Reason behind the black money

Main reason Of Black Money is that people do not pay their taxes. Even if they pay taxes, they are not in the correct proportions to their incomes. The tax evasions by corporate and industrial houses are to the tune of billions of rupees. It is also earned by gifts, Hawala transactions and illegal foreign exchange deals. The sale and purchase of assets also lead to the generation of black money as the value of the property is shown to be very low in the documents whereas it has a very high value in the actual transaction. The non-billed amounts are retained by the individuals and the firms as black money.

Black Money: Its effect on the economy

Effects of the Black money on a country are manifold but the main impact is on the economy of a country. It is the chief inhibiting factor in the process of national economic development. It causes huge loss to the government in form of tax revenue as tax from this money is not paid. It is one of the reasons high fiscal deficit of the country. Moreover, the morality of the issue has to be understood by people as the government spends his earning for the welfare os same people who conceal money through tax evasions.

Black Money and RBI

For Reserve Bank of India(RBI), it is difficult to frame effective monetary policies due to black money. Its floating estimation in the market is difficult to calculate. RBI uses tools like Repo rate, CRR, SLR, etc. to regulate the money in the market according to inflation and growth. But more there is black money, more is the ineffectiveness of these measures. In the International market, Black Money increases the supply of rupees and demand of Dollars, which results in depreciation of the respective country.

Black Money: It affects the National Security

Black money also affects the national security of the country. It provides finance to criminals and other anti-state actors. It is a root cause of terrorism in the country. It has promoted hawala agents inside the country which are linked with anti-state actors. Being illegal in nature, Black money cannot be directly invested in legal works. Thus, it gets invested into illegal activities in the country and cause threat to internal security of the country.

Black Money: A cause of Corruption

Black Money also causes corruption in the country. Various reports reveal that it is being used by the political candidates during their election campaigning. Once politicians get the funding for election, they get obliged to favour such groups and people from whom they get funding. This way, black money issue gets a soft corner from the legislature of the country or may get politicize as the case may be.

Black Money: Increases gap between Rich & Poor

Black Money also increases the gap between rich and poor. Rich people are getting richer through black money. They do not distribute the benefits of growth to people rather exploit them. Thus, black money hampers the concept of 'Distributive justice' in the country. Black Money also results in unrealistic real estate prices which deprive genuine and needful buyers.

Black Money: Benefit of Black Money

Black Money has some minor benefits as well. With round tripping, it comes back to the country in form of investment which increases capital formation inside the country. The capital formation results in employment generation and so the development of the country. It also increases foreign exchange reserves of the country, which increases the financial strength of the country. But these positive benefits are too little before the huge negative impacts of the black money.

Black Money: Steps taken by the Indian Government to reduce Black Money

Recently Government of India has amended its Money Laundering Act, 2002 to make it stricter to prevent money laundering. It also announced to introduce General Anti Avoidance Rules (GAAR), but it has been postponed for some time due to a reduction in FDI after the announcement. RBI also introduced new currency notes and made an announcement to exchange currencies of 2005 and earlier with new ones to get the black money out from the pocket of people. The government also constituted a Special Investigation Team for black money on directions by Supreme Court.

Black Money: Steps taken to reduce black money at international level

At the international level, many countries are insisting on the conclusion of 'Double Taxation Avoidance Agreements (DTAA)' and 'Tax Information Exchange Agreement (TIEA)'. India has signed TIEA with many countries including Bermuda, Bahamas, Liechtenstein etc. India has also become a member of the Financial Action Task Force, Asia Pacific Group on Money Laundering etc. to prevent money laundering.

Conclusion

To bring long-lasting change, public perception and acceptance of this system need to be changed. This can be done by the efficient administration, easy and non-ambitious laws which facilitate the life of people. This will increase the faith of people in government and over the time, they will feel more responsible to pay their taxes.