Income Tax

Impact of Black Money on the Indian Economy

Black Money

Black money has been the subject of heated political debate in India for a long time. Successive governments have been accused of ignoring the issues of black money, and several politicians and other wealthy and renowned persons have been reported to have such money stashed abroad, mostly in Swiss.

Although black money has been a problem in India for decades, it has become a severe threat since the liberalization of the country. Criminal and corrupt activities, complicated procedural restrictions, non-compliance with taxes laws, cultural and social norms, globalization, and a lack of policy, institutional, legal, and implementation frameworks have all led to the creation of the black money sector.

 The present article shall discuss the aspects related to black money, its causes and its impact on the Indian economy, along with the measures taken by the government to curb the same.

Definition of Black Money

There isn’t any definition of black money in the literature or economic theory. In fact, several terms with similar connotations have been in vogue, including ‘unaccounted income’, ‘ ‘dirty money’, black income’ ‘, black wealth’, ‘underground wealth’, ‘black economy’, ‘parallel economy’, ‘shadow economy’, and ‘underground’ or ‘unofficial’ economy. All these terms usually mean any income on which the taxes imposed by the government or public authorities haven’t been paid. Such wealth may comprise income generated from legitimate activities or activities that are illegitimate per se, like counterfeit currency, smuggling illicit trade in banned substances, arms trafficking, terrorism, and corruption.

 This definition of black money is in tune with the definition used by the National Institute of Public Finance and Policy (NIPFP). In its 1985 report on Aspects of Black Economy, the NIPFP defined ‘black income’ as ‘the aggregates of incomes which are taxable but not reported to the tax authorities. Further, black incomes or unaccounted incomes are ‘the extent to which estimates of national income and output are biased downwards because of deliberate, false reporting of incomes, output and transactions for reasons of tax evasion, flouting of other economic controls and relative motives.’

Thus, in addition to wealth earned through illegal means, this term shall also include legal income which has been concealed from public authorities:

  • For the evasion of  payment of taxes (income tax, excise duty, sales tax, stamp duty, etc.);
  •  For the evasion of  payment of other statutory contributions;
  • For evasion of with the provisions of industrial laws like  the Industrial Disputes Act 1947,  Minimum Wages Act 1948, Payment of Bonus Act 1936, Factories Act 1948, and Contract Labour (Regulation and Abolition) Act 1970[1]; and/or
  • For the evasion of compliance with other laws and administrative procedures.

Factors Leading to the Creation of Black Money

The  factors which  have led to the creation of black money in India are discussed below –

Illegal Actions

The illegal actions include Smuggling, sexual offences, embezzlement, corruption, illegal mining, contraband drug trafficking, and other unlawful activities are common sources of this type of money.

Manipulation of Accounts

While some black money owners simply avoid reporting or recording their whole income, others employ sophisticated deception methods for concealing such money by altering their financial records. Owners of such wealth manipulate accounts in a variety of ways, including out-of-book transactions, parallel books of accounts, under-reporting, and so on. These methods allow traders for carrying out financial transactions without ever entering them into the books. Due to the absence of any written record of these transactions, they are concluded not to have occurred at all.

Transactions in Jewellery

The jewellery industry is dominated by black money, due to which the owners of such money prefer to deal in gems. As a result, they might be able to get rid of their illegal funds by converting them into externally lawful items such as gold and other jewellery. This is a fairly common practice that, unfortunately, is difficult to remove due to the relative secrecy of the Indian jewellery trade.

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Land and Real Estate Transactions

Land and real-estate transactions work in a similar manner as the jewellery business but on a far larger scale. Owing to the high monetary value of some pieces of land, the real estate market includes many sellers and purchasers who prefer cash payment to avoid the tax payment on the final sale of the piece of land or property.

Offshore Financial Centres/Tax Havens

The tax havens, more commonly known as “offshore financial hubs,” significantly contribute to the generation of black money in India. Once created, either via criminal activities or through a lack of disclosure, such money is generally stowed away in the fabled Swiss banks. Owners of substantial amounts of unlawfully obtained black money utilize this approach for transferring their illegally obtained black money into land or real estate, which, if done quietly enough, avoids official notice.

Election Campaigns

As India is a democracy, elections are a must, which begins by-election campaigns. Elections campaigns are the other main sources generating this type of money. Campaigns conducted by the candidates for elections of parliament or assembly elections or any other elections at the local level have resulted in the generation of the same. During the campaigning for Lok Sabha Elections 2019, more than Rs 3,166 crore worth of cash, liquor, drugs jewellery was seized by the Election Commission of India and all of which was unaccounted for.

Donations or Funds

The huge amount of donations given to educational institutions for admissions generates black money. Such donations are never paid by cheque. Even the institutions don’t write such transactions in their official accounts, nor is any proper receipt issued for the made transactions. Nowadays, almost all educational institutions have fixed seats for admission in quota management.

Impact of Black Money on the Indian Economy

Black money can adversely impact the Indian economy. The different ways in which it can impact the Indian economy are listed below –

Revenue loss to the Government and running of a parallel economy in the country

 The increase and spread of such money can seriously impact the economy as it can significantly reduce government revenue. This type of wealth is available in the economy in large amounts, which can result in the running of a parallel economy.

Vicious circle as a result of black money and corruption

It is a well-known fact that India already has various corrupt practices. Black money has added to this corruption through illegal transactions which are made for concealing the black money. The most common way in which corruption is practised in this country is by way of bribing bureaucrats, government officials, etc., for getting their work done. Such money goes to unaccounted books and is never shown as income, thereby adding this type of money to the Indian economy. Therefore black money is consequential to corruption, and the already existing corruption is consequential to such money, thereby forming a never-ending vicious circle unless some serious step is taken by the government.

Effects on National Income and Real Capita Income

Black money is a result of disclosing low income to the government while paying taxes by the people, which also results in low national income for the country. The national income of the country can significantly increase if the amount of such wealth in circulation is backed up by the national economy of the country, which would also contribute to increasing 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 giving bribes to the producers and marketing staff or the services provider naturally receive quality products and services compared to the general public who won’t be provided with the same products, and quality of services has to suffer.

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Higher Taxation and Inflation

 The main reason behind the imposition of taxes is the generation of revenue for the expenditures incurred by the government for the purpose of making a balanced budget. Therefore if the amount of black money which have been hidden by the people from the government is revealed and included in the budget of government, the tax rate will surely reduce as the revenues which the government wants to earn from the people through the imposition of high taxes will already be with the government. Similarly, rising prices are consequential to 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, at the time of making these policies, isn’t able to calculate the exact national income because of the hidden black money, thereby making them unrealistic. Such policies can only have some impact on the Indian economy if these are made with exact calculations taking into account the consequences and needs of the people.

Increased criminal activities in society

The illegally earned money or the black usually gives rise to numerous illegal activities in society, and corruption is among them. The time period of elections is also the time when the illegal and illicit use of black money can be seen. Various terrorist activities are backed by the holders of black money, which is even harmful to the whole country.

Government Initiatives for Curbing Black Money

The government has taken the below mentioned initiates to combat the menace  of black money in India and reduce its adverse impact on the economy-

Black Money Declaration Scheme 2017

This scheme was launched by the government headed by the Prime Minister of India. This scheme allowed the black money hoarders the declaration of their whole illegal income till 31st March 2017. As per this scheme, everyone was allowed for disclosing their illegal income either with the bank or the post office. The person was required to pay tax, surcharge and penalty amounting to 49.90% of the total unaccounted income. From the unaccounted income, 25% of it was to be deposited in Pradhan Mantri Garib Kalyan Yojna. The deposits made in this scheme were free of interest and were deposited for a fixed period of 4 years without any allowance for withdrawal. Even the person against whom a search or survey operation was initiated was allowed for a declaration under this scheme.

Demonetization

This was one of the biggest steps taken by the present government for curbing such money from the country.  8 November 2016 was the day when the central government declared the demonetization of Rs 500 and Rs 1000 and introduced new notes of Rs 500 and Rs 2000. However, it must be noted that Rs 2000 notes were withdrawn as well wef 19th May 2023. This initiative was taken by the government as the economy lacked behind the other economies of the world and for the purpose of curbing various terrorist activities which were generated in the country.

Linking Bank Accounts with Aadhaar & PAN

The linking of the Aadhaar card and PAN card was initiated by the government for keeping track of the accounts of each and every citizen and even their bank statements so that the government could have a way of determining the source of income of every citizen along with its taxable income and the quantum which is paid as tax. However, this scheme has a huge contribution to tracking fake bank accounts or ghost accounts. This scheme is also really helpful in tracking suspicious transactions that involve huge amounts.

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Benami Transactions (Prohibition) Amendment Act, 2016.

This Act prevents Benami transactions and deals with the confiscation of the benami property. Though this act has been in existence since 1988, the amendment bill introduced in Lok Sabha on May 13, 2016, seeks to amend this act. The amended law provides that in the event of a person being found guilty of the offence under benami transactions by the court, he will be liable for punishment of imprisonment for a  minimum term of  1 year, with a maximum extension of 7 years, along with that, the person will be liable to pay a fine which can be maximum up to 25% of the exact market value of the property. The Benami Transactions (Prohibition) Amendment Act, 2016, came into effect on 1st November 2016. This amendment act has stricter provisions for the confiscation of various benami properties.

Double Tax Avoidance Agreement (DTAA)- 

The DTAA is a tax treaty signed by India with other countries for the prevention of double payment of taxes by the assessees on their taxable income, i.e. paying both at the resident country as well as the source country. The problem arises when the government has to compute the total tax of a particular person, and there is an imbalance in tax collection on account of the global income of individuals. DTAA is considered to be one of the most beneficial agreements signed by India, which is helpful for both the assessee and the tax collecting authority. 

New Benami Transactions Informants Reward Scheme, 2018

 This scheme is launched by the Income Tax Department for encouraging large participation by the people in evading black money from the economy. Under this scheme, the informant will be rewarded an amount up to Rs one crore upon providing a Joint or Additional Commissioners of Benami Prohibition Units (BPUs) in Investigation Directorates of Income Tax Department the specific information about any benami transactions and properties in a prescribed manner.     

Possible Solutions for Tackling Black Money

  • The tax system must be realistic in nature as the high tax rates will only force the people to evasion of taxes, whether it is income tax, wealth tax, capital gains tax or any other tax, which will further lead to the generation of black money in India The authority which is responsible for the collection of taxes should be honest, devoid of any corruption. All the officials should be more focused and more efficient in their work.
  • Various different incentives should be given so that people voluntarily agree to disclose their real income.
  • The economic Intelligence unit must be maintained thoroughly and should be regularly monitored. Honest officials and staff must be rewarded for encouraging honest staff in the department.
  • Corruption in the administration at all levels must be stopped at any cost.

Conclusion

The fight against the generation and accumulation of black money and curbing the same is far more complex and prolonged, with new strategies and stronger intervention of the state, thereby needing a hardy legal framework, coextensive administrative setup and a very strong determination to fight the threat. Effective implementation of tax laws can arrest tax evasion.

 It is essential to have a multi-prolonged strategy for dealing with the issue of the generation and illicit transfer of black money outside the jurisdiction of the country, followed by bringing it back to India. The factors leading to the generation of this money in India, along with the various may exist due to a lack of adequate and reliable data.

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