CLFIN/005

IBS Center for Management Research

Reigning in Black Money - Will the Indian Government Fulfill its

Promise?
This caselet was written by Nagendra Kumar M.V, and Manish Agarwal, under the direction of
D Satish, IBS Hyderabad. It was compiled from published sources, and is intended to be used as a
basis for class discussion rather than to illustrate either effective or ineffective handling of a
management situation.

License to use for the Class of 2022,

MBA-Semester – IV, IBS Hyderabad.
Course: Public Policy

 2016, IBS Center for Management Research. All rights reserved.

To order copies, call +91 9640901313 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally,
Sankarapally Road, Hyderabad 501 203, Telangana, India or email: info@icmrindia.org

www.icmrindia.org
 CLFIN/005

Reigning in Black Money - Will the Indian Government

Fulfill its Promise?
On May 11, 2016, the Ministry of Finance, Government of India (GoI), announced that in the
previous two years (since 2014), the GoI had unearthed indirect tax evasions to the tune of Rs. 500
billion and had been able to trace Rs.210 billion of undisclosed income1. The Narendra Modi-led
National Democratic Alliance (NDA) government had promised in its election manifesto in the
year 2014 that it would unearth the black money stashed abroad and take measures to curb the
malaise in the country. Since the NDA government had won the elections in the year 2014, the GoI
had initiated several measures to fulfill its promise. It had constituted a Special Investigation Team
(SIT) and passed a bill “The Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015” (Refer to Exhibit – I for Key Provisions of the Black Money Act) to
overcome the challenge of curbing and recovering black money.
“The government has taken sustained steps for curbing black money, which includes enactment of
a new Black Money Act with strict penalty provisions and new income disclosure scheme
formulated for domestic black money,” said an official of Ministry of Finance2.
According to a statement from the Ministry of Finance, the initiation of the measures also resulted
in the seizure of Rs. 39.63 billion worth of smuggled goods in the past two years (2014-16)3. In
addition to these measures, the GoI was also contemplating on coming up with measures like the
introduction of a cashless economy to weed out black money. However, despite focusing on
curbing black money, the GoI was facing criticism that it had not achieved much in the way of
bringing back the black money stashed abroad in tax havens, or in curbing the problem.

THE GLOBAL SCENARIO

According to estimations of Global Financial Integrity (GFI) 4, developing countries like China and
India had lost around US$5.9 trillion in the form of illicit money transfers across the borders
during the period 2002 to 20115. With black money estimated at US$1.08 trillion China stood first
while India, with US$343.9 billion, was fifth6.

1
“Finance Ministry unearths Rs 71,000 crore of black money in 2 years,” http://economictimes.indiatimes.
com/, May 11, 2016.
2
Ibid.
3
“Govt unearths Rs. 71,000 cr of undisclosed income in 2 years,” www.thehindubusinessline.com, May
10, 2016.
4
GFI is a not-for-profit global advisory and advocacy organization that analyzes and interprets the impact
of crimes, corruption, and tax evasions on the growth and economic development of various countries
across the globe and suggests measures for improvements and change.
5
Dev Kar and Brian LeBlanc, Illicit Financial Flows from Developing Countries: 2002-2011,
www.gfintegrity.org, December 11, 2013
6
Ibid.

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 Reigning in Black Money - Will the Indian Government Fulfill its Promise?

GFI also reported that more than10 times the foreign aid and assistance received by developing
nations for growth and development had been crossing the borders in the form of black money7.
The money that crossed the borders was safely locked up in around 60 tax havens across the world
(Refer to Exhibit-II for Top 10 Tax Havens). These tax havens enabled the evaders to save the
black money by creating trusts and corporations, and helped them to bring back the money to their
original countries in the form of investments.
According to a survey conducted by the International Monetary Fund (IMF) in the year 2010 to
assess the amount of black money generated in economically developed countries, around US$18
trillion of illicit money was stashed abroad in tax havens across the world by the developed nations
(This survey excluded countries like Switzerland, China, Taiwan, and Oil Exporting countries).
According to IMF estimates, by the end of year 2008, the amount of foreign investments in
Luxembourg amounted to US$1.5 trillion, whereas the statistics revealed by the government of
Luxembourg put the amount at US$2.5 trillion, showing a gap of US$1 trillion in comparison with
the estimated statistics. Gian Maria Milesi-Ferretti, an economist for the IMF, said, “This is a huge
difference, almost 40%, and is unlikely to be entirely accounted for by the fact that some countries
do not report their portfolio investments or their destination to the fund.”8
The situation also highlighted the gap in the evaluation process of black money generation.
According to another survey conducted by Tax Justice Network9, by the end of the year 2011,
around $21 trillion had been stashed in tax havens by the super-rich nations10.

INDIAN SCENARIO

Ever since India attained independence in 1947, the economy had been facing the challenge of
tackling increasing amounts of black money. In August 2014, The Hindu, a leading English
newspaper in India, reported that as per the National Institute of Public Finance and Policy
(NIPFP), the estimated size of black money held in foreign countries by Indians was about 75% of
India’s Gross Domestic Production (GDP)11.
In May 2016, an economist from Bank of Italy estimated that the Indian share in the global black
money held in tax havens around the world was around US$152-181 billion (Refer to Exhibit III
for Estimations of Black Money in India).12 This estimation included black money held in the form
of shares, bank deposits, and other types of financial securities but not black money kept in the
form of real estate, gold, etc. On this estimation, Jayant Sinha, Minister of State for Finance,
Government of India, said, “In the context of these estimation, they have reportedly put the caveat
that these estimations have to be considered with great care and in no way can represent firm
data.”13

7
GFI estimated the values without considering the black money generating through Hawala transactions,
smuggling and other cross border transactions.
8
IMF: Trillions of Undeclared Funds Offshore, https://financialtransparency.org/, March 10, 2015
9
A international advocacy group consisting of researchers, accountants, and lawyers that analyzes and
interprets the impact of tax evasions, tax competitions, and tax havens on the economic growth of the
world and suggests improvements and changes in the policies of the various countries across the globe in
this connection.
10
Tax havens: Super-rich 'hiding' at least $21tn, www.bbc.com, July 22, 2012
11
Puja Mehra, Black economy now amounts to 75% of GDP, www.thehindu.com, August 4, 2014
12
“$181 billion Indian black money in tax havens?,” http://timesofindia.indiatimes.com/india/181-billion-
Indian-black-money-in-tax-havens/articleshow/51487042.cms.
13
“No official estimate of black money stashed abroad: Govt,” http://indianexpress.com/article/india/india-
news-india/no-official-estimate-of-black-money-govt-2782640/, May 3, 2016.

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 Reigning in Black Money - Will the Indian Government Fulfill its Promise?

In India, there were various government departments and regulatory authorities responsible for
dealing with black money such as the Central Board of Direct Taxes (CBDT), the Central Board of
Excise and Customs (CBEC), the Enforcement Directorate (ED), the Financial Intelligence Unit
(FIU), the Economic Offences Wing of the State Police, the Central Bureau of Investigation (CBI),
and the Serious Frauds Investigation Office (SFIO).14
In India, black money was primarily generated through illegal activities like trading in drugs,
corruption, gambling, and tax evasion. The manipulation of financial records by business entities
was also resulting in the generation of black money (Refer to Exhibit-IV for Various Forms of
Manipulations Resulting in Tax Evasions). The major business sectors in India contributing to the
generation of black money included: real estate, gems, and jewelry, consumer goods, hotels &
hospitality, betting, and activities like stock market transactions, and not-for-profit sectors like
education. An estimated amount of US$51 billion had reportedly crossed India’s borders between
2004 and 2013 – equivalent to 30% of the country’s GDP15.

PANAMA PAPERS

Besides curbing black money in the country, another major challenge before the government was
to bring back money stashed aboard. Several reports had been published by various investigating
agencies across the globe revealing the names of defaulters across the world and the amounts they
had stashed abroad in different tax havens. The Panama Papers16 that were leaked in the month of
April 2016 also revealed crucial and astonishing information about the black money. These papers
showed how rich people had taken advantage of gaps in rules and regulations to avoid taxes and
cleaned up their money.
The leaked papers also showed how Mossack provided various services to its clients to hide their
assets. The Panama Papers comprised around 11.5 million papers containing details of such
financial information of more than 214,000 entities.17 This was the biggest leak in human history,
with about 2,600 Gigabytes (GB) of information getting out. In comparison, the data size of
WikiLeaks, another popular leak, was just 1.7 GB and the size of Offshore Secrets, which came
out in 2013, was about 260 GB. The Panama Papers named many politicians, states heads, players,
film actors, relatives, and associates of state heads, etc.
Some of the well-known personalities were the brother-in-law of China's President Xi Jinping,
close associates of the Russia's President, Vladimir Putin, three children of the Pakistan’s Prime
Minister Nawaz Sharif, the UK Prime Minister David Cameron, Fédération Internationale de
Football Association (FIFA) etc. The names of some leading banks also came up in the Panama
Papers, such as HSBC, Credit Suisse Channel Islands Limited, Experta Corporate & Trust
Services, Banque J. Safra Sarasin - Luxembourg S.A., UBS AG, Coutts & Co. Trustees (Jersey)
Limited, Landsbanki Luxembourg S.A. etc.18,19 The Panama Papers also mentioned the names of
some prominent Indian personalities such as actors Amitabh Bachchan and Aishwarya Rai
Bachchan, businessman Vijay Mallya, DLF owner K P Singh, and the promoters of Apollo Tyres
and Indiabulls20.

14
“Black Money,” http://finmin.nic.in/reports/whitepaper_backmoney2012.pdf, May, 2012.
15
“Data by Country,” www.gfintegrity.org/issues/data-by-country/.
16
Panama papers was the name given to the collection of leaked documents from Mossack Fonseca & Co.,
(Mossack)a Panama based law firm. Documents leaked from Mossack went to SüddeutscheZeitung, a
daily German newspaper published form Munich and then to The International Consortium of
Investigative Journalists (ICIJ), a global network of investigative journalists.
17
www.bbc.com/news/world-latin-america-36249982
18
https://panamapapers.icij.org/graphs/8/
19
“Panama Papers Q&A: What is the scandal about?,” www.bbc.com/news/world-35954224, April 6, 2016.
20
Panama Papers: SC agrees to examine plea for CBI investigation, http://indianexpress.com/, May 10,
2016

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 Reigning in Black Money - Will the Indian Government Fulfill its Promise?

In response to the leaked documents, a Public Interest Litigation (PIL) was filed in the Supreme
Court of India by an advocate seeking an order to the Central Bureau of Investigation (CBI) to
probe into the allegations raised against the Indian nationals. The Supreme Court issued notices to
the central government and to the CBI seeking a reply within four weeks to the queries raised by
petitioner. The court also issued notices to the Reserve Bank of India and the stock market
regulator Securities Exchange Board of India (SEBI).

CRITICISM

Despite focusing on curbing the generation of black money in the country, the government had
been facing severe criticism for not initiating any measures to bring back the black money stashed
abroad in tax havens. It would therefore be interesting to see how it reacted to the revelations in
the Panama Papers and what action it would initiate to fulfill its election promise of bringing back
black money stashed abroad.
Also, according to a report submitted by the Federation of Indian Chambers of Commerce and
Industry (FICCI) in the year 2015, several gaps had been identified in the existing legal and
administrative mechanisms, resulting in the increase of tax evasions.
The report suggested that proper data mining tools be utilized to analyze the cash transactions of
both the organized and unorganized segments of the economy, and suggested for increasing the
manpower of various government departments to improve the efficiency of the policy measures. It
observed that due to lack of competent and qualified manpower, the administrative agencies were
unable to function efficiently and efficiently.

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 Reigning in Black Money - Will the Indian Government Fulfill its Promise?

Exhibit – I
Key Provisions of the Black Money Act
 An Act to make provisions to deal with the problem of the Black money that is undisclosed
foreign income and assets, the procedure for dealing with such income and assets.
 To provide for imposition of tax on any undisclosed foreign income and asset held outside
India and for matters connected therewith or incidental thereto.
 Subject to the provisions of this Act, there shall be a charge at the rate of thirty per cent on
every assesse for every assessment year commencing on or after the 1st day of April, 2016,
in respect of his total undisclosed foreign income and assets of the previous year.
 The income-tax authorities specified in section 116 of the Income-tax Act shall be the tax
authorities for the purposes of this Act. Every such authority shall exercise the powers and
perform the functions of a tax Authority under this Act in respect of any person within his
jurisdiction.
 The tax authority who succeeds another authority as a result of change in jurisdiction or for
any other reason, shall continue the proceedings from the stage at which it was left by his
predecessor. The assesse in such a case may be given an opportunity of being heard, if he so
requests in writing, before passing any order in his case.
 The prescribed tax authorities shall, for the purposes of this Act, have the same powers as
are vested in a court under the Code of Civil Procedure, 1908.
 Any proceeding under this Act before a tax authority shall be deemed to be a judicial
proceeding within the meaning of section 193 and section 228 and for the purposes of
section 196 of the Indian Penal Code.
 Every tax authority shall be deemed to be a civil court for the purposes of section 195, but
not for the purposes of Chapter XXVI of the Code of Criminal Procedure, 1973.
 No order of assessment or reassessment shall be made after the expiry of two years from the
end of the financial year in which the notice was issued by the Assessing Officer.
 Any sum payable in consequence of any order made under this Act shall be demanded by a
tax authority by serving upon the assesse a notice of demand in such form and manner as
may be prescribed.
 Notwithstanding any appeal preferred to the High Court or the Supreme Court, the tax shall
be paid in accordance with the assessment made under this Act.
 Any amount specified as payable in a notice of demand under section 13 shall be paid
within a period of thirty days of the service of the notice, to the credit of the Central
Government in such manner as may be prescribed.
 The Assessing Officer or the Tax Recovery Officer may require the employer of the assesse
to deduct from any payment to the assesse such amount as is sufficient to meet the tax arrear
from the assesse.
 The liquidator shall inform the Assessing Officer, who has jurisdiction to assess the
undisclosed foreign income and asset of the company, of his appointment within a period of
thirty days of his becoming the liquidator.
 Every person being a manager at any time during the financial year shall be jointly and
severally liable for the payment of any amount due under this Act in respect of the company
for the financial year, if the amount cannot be recovered from the company.
Contd…

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 Reigning in Black Money - Will the Indian Government Fulfill its Promise?

Contd…
 Every person, being a participant in an unincorporated body at any time during the financial
year, or the representative assesse of the deceased participant, shall be jointly and severally
liable, along with the unincorporated body, for payment of any amount payable by the
unincorporated body under this Act and all the provisions of this Act shall apply
accordingly.
 Where the assesse has any income from a source outside India which has not been disclosed
in the return of income furnished under sub-section (1) of section 139 of the Income-tax Act
or the return of income has not been furnished under the said subsection, interest shall be
chargeable in accordance with the provisions of section 234A of the Income-tax Act.
 The Assessing Officer may direct that in a case where tax has been computed in respect of
undisclosed foreign income and asset, the assesse shall pay by way of penalty, in addition to
tax, if any, payable by him, a sum equal to three times the tax computed.
 No order imposing a penalty shall be passed after the expiry of a period of one year from the
end of the financial year in which the notice for imposition of penalty is issued.
 If any difficulty arises in giving effect to the provisions of this Act, the Central Government
may, by order, not inconsistent with the provisions of this Act, remove the difficulty.
Source: Ministry of Law and Justice (Legislative Department), Government of India, The Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, http://lawmin.nic.in/.

Exhibit – II
Top 10 Tax Havens
S. No Country
1 Luxembourg
2 Cayman Islands
3 Isle of Man
4 Jersey
5 Ireland
6 Mauritius
7 Bermuda
8 Monaco
9 Switzerland
10 Bahamas
Source: Elyssa Kirkham, 10 Best Tax Havens in the World, www.gobankingrates.com, April 15, 2016

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 Reigning in Black Money - Will the Indian Government Fulfill its Promise?

Exhibit – III
Black Money Estimates in India
Year Estimates for Black Money (in Rs. Billion) Percent of GDP
1975 99.58 to 118.70 15% to 18%
1980 203.62 to 236.78 18% to 21%
1983 315.84 to 367.84 19% to 21%
2012 >10,000.00 10%
2013 28,000 30%
Source: “A Study ON Widening OF Tax Base and Tackling Black Money,”
http://ficci.in/spdocument/20548/STUDY-ON-WIDENING-OF-TAX-BASE-AND-TACKLING-BLACK-
MONEY.pdf, February, 2015 and “Black money estimated at 30% of GDP,” www.business-
standard.com/article/economy-policy/black-money-estimated-at-30-of-gdp-113011300067_1.html, January
13, 2013.

Exhibit-IV
Various Forms of Manipulations Resulting in Tax Evasions

Source: White Paper of Black Money, http://finmin.nic.in/, May, 2012, accessed on April 30, 2016.

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 Reigning in Black Money - Will the Indian Government Fulfill its Promise?

Suggested Readings and References:

1. Dheeraj Tiwari, “Curbing black money: Government plans to promote cashless economy”,
http://economictimes.indiatimes.com, May 11, 2016
2. “Finance Ministry unearths Rs 71,000 crore of black money in 2 years”,
http://economictimes.indiatimes.com, May 11, 2016
3. Shehzad Poonawalla, “Five White lies of Modi's black money promise”, http://www.dailyo.in,
May 11, 2015
4. “Government Unearths Indirect Tax Evasion of Rs 50,000 Crore in 2 Years”,
http://profit.ndtv.com, May 10, 2016
5. “Govt unearths Rs. 71,000 cr of undisclosed income in 2 years”, www.thehindubusinessline.com,
May 10, 2016
6. “Tax Havens - Panama papers”, www.caclubindia.com, accessed on April 30, 2016
7. “Indian Black Money Abroad In Secret Banks and Tax Havens”, www.bjp.org,accessed on
April 30, 2016
8. “$181 billion Indian black money in tax havens?”, http://timesofindia.indiatimes.com, March 21,
2016
9. G.Sampath, “The hidden wealth of nations”, www.thehindu.com, January 21, 2016
10. “The Black Money Act: Ignorance is not bliss!”, www.grantthornton.in, 2015.
11. “Why black money scheme was a superflop, and what Modi can do to redeem it”,
http://www.firstpost.com/, October 3, 2015
12. Anilesh S Mahajan and Dipak Mondal, “Your complete guide to understanding the black money
puzzle”, www.businesstoday.in, September 24, 2015
13. “EY Tax Alert”, www.ey.com, July 07, 2015
14. Manpreet Kaur & Akriti, “Black Money in India: Current Status and Impact on Economy”,
www.abhinavjournal.com, April, 2015
15. “A Study on Widening of Tax base and Tackling black money”, http://ficci.in/, February, 2015
16. “Black money: BJP promised to initiate action in 100 days, says Naidu”,
http://timesofindia.indiatimes.com, November 28, 2014
17. “Bringing back black money in 100 days? We aren’t so immature, says Venkaiah”,
www.thehindu.com, November 27, 2014
18. Puja Mehra, “Black economy now amounts to 75% of GDP”, www.thehindu.com, August 4, 2014
19. “BJP releases manifesto, promises to improve economy, end policy paralysis”,
http://timesofindia.indiatimes.com, April 7, 2014
20. “BJP manifesto is all about tackling inflation, black money and job creation”,
http://www.firstpost.com/, April 7, 2014
21. “Highlights of BJP manifesto 2014”, http://indianexpress.com, April 7, 2014
22. Dev Kar and Brian LeBlanc, “Illicit Financial Flows from Developing Countries: 2002-2011”,
www.gfintegrity.org, December 11, 2013
23. “Measures to Tackle Black Money in India and Abroad”, www.itatonline.org, 2012
24. Rajni Arora, “Black Money in India: Present Status and Future Challenges”, http://ijsetr.org/,
November 2012
25. “Tax havens: Super-rich 'hiding' at least $21tn”, www.bbc.com, July 22, 2012
26. “White Paper on Black Money”, http://finmin.nic.in/, May 2012
27. Sukanta Sarkar, “The Parallel Economy in India:Causes, Impacts and Government Initiatives”,
http://indianstrategicknowledgeonline.com/, 2010
28. “IMF: Trillions of Undeclared Funds Offshore”, https://financialtransparency.org/, March 15,
2010