WHAT IS 'BLACK MONEY'?

Proceeds, usually received in cash, from underground economic activity. Black money is earned
through illegal activity and, as such, is not taxed. Recipients of black money must hide it, spend
it only in the underground economy, or attempt to give it the appearance of legitimacy through
illegal moneylaundering. Possible sources of black money include drug trafficking, weapons
trading, terrorism, prostitution, selling counterfeit or stolen goods and selling pirated versions of
copyrighted items such as software and musical recordings. In India, Black money refers to
funds earned on theblack market, on which income and other taxes have not been paid. The total
amount of black money deposited in foreign banks by Indians is unknown. Some reports claim a
total exceeding US$1.4 trillion are stashed in Switzerland. Other reports, including those
reported by Swiss Bankers Association and the Government of Switzerland, claim that these
reports are false and fabricated, and the total amount held in all Swiss banks by citizens of India
is about US$2 billion. In February 2012, the director of theCentral Bureau of Investigationsaid
that Indians have $500 billion of illegal funds in foreign tax havens, more than any other
country. In March 2012, the Government of India clarified in its parliament that the CBI
Director's statement on $500 billion of illegal money was an estimate based on a statement
made to India's Supreme Court in July 2011.
Advantages and Disadvantages of Black Money
ADVANTAGES OF BLACK MONEY:
The following are the advantages of black money:
 The black economy is a cash economy.
 It is liquid and fast.
 It increases the velocity of money.
 It injects much needed foreign exchange into the economy and inadvertently
increases the effective money supply and the resulting money aggregates.
DISADVANTAGES OF BLACK MONEY:
The following are the disadvantages of black money:
It is exploitative.
The money that the state collects from them is invested, for instance, in infrastructure
(roads, phones, electricity) or used to pay for public services (education, defense,
policing). The operators of the black economy enjoy these services without paying for
them, without bearing the costs.
We all live in societies, which are regulated by bureaucracies that are controlled by
politicians. These elites have a tendency to misuse and to abuse resources and to allocate
them in an inefficient manner.
Causes of Generating Black Money in India
Some of the most important causes of generating black money in India are as follows: 1.
Unrealistic Tax Laws and Tax Frauds 2. Different Rates of Excise Duty 3. Control Policy 4.
Quota System 5. Scarcity 6. Inflation 7. Elections in a Democratic System and Political Funding
8. Real Estate Transactions 9. Privatization 10. Agricultural Income.
1. Unrealistic Tax Laws and Tax Frauds:
The increase in taxes and duties compel some people to evade them. The present rules (June
1997) prescribe the limit of Rs. 40,000 (excluding standard deduction of Rs. 20,000) as free
income for levying income tax. Can a middle-class person survive within this limit in this age of
inflation? A mason or a carpenter earns about Rs. 100 to Rs. 120 per day in a city and Rs. 120 to
Rs. 150 per day in metropolitan areas.
Even a good gol-gappa seller or a pan shopkeeper earns more than Rs. 200 a day. Assuming that
these people work for 300 days in a year their income will exceed the prescribed income tax
limit. And how many of these workers pay income tax? A film actor getting Rs. 30 or 40 lakh
per film had to pay 40 per cent of his income as income tax up to March 1997 which has now
been reduced to 30 per cent.
Instead of paying such a tax, he maintains ‘double’ accounts and evades paying tax and
possesses more black money. A doctor with a private practice of more than Rs. 500 per day, a
surgeon charging a fee of Rs. 5,000 per operation and doing at least ten operations a month, an
advocate charging Rs. 2,000 per hearing, a shopkeeper doing a business of more than Rs. 5,000
per day, a contractor with a turnover business of Rs. 10 crore per year, an industrialist with a
profit of millions of rupees per year—all are bound to hide their real income to escape paying
income tax of 30 per cent of the total income (after May 1997). Indirect taxes, like excise duty,
custom duty, sales tax and octroi, etc. also encourage evasion of taxes and increase in black
money.
The tax evasion by big companies and corporations is suspected to be around Rs. 400 crore a
year in the form of excise duty and Rs. 3,500 crore in the form of customs duty. The excise duty
evasion detected in five years, from 1991 to 1996, by the Directorate General of AntiEvasion
increased from Rs. 562 crore in 1991-92 to Rs. 1,236 crore in 1995-96, while the amounts
involved in FERA violations increased from Rs. 663 crore in 1994-95 to Rs. 1,447 crore in
1995-96 (India Today, November 30, 1996: 97-103). Overall estimate of excise and customs
duty evasion (i.e., combining the two duties) ranges at anywhere between Rs. 7,500 crore and
Rs. 10,000 crore or slightly over a tenth of the total collections from these two duties. The
FERA violations of around Rs. 300 crore by a top company (ITC) came to light in the last
quarter of 1996. If this could happen in the case of one reputable firm can others lag behind?
The recent cases of a few ministers in Narasimha Rao’s government (like Petroleum and
Communication Ministers) being involved in corruption cases of more than Rs. 25 crore each
point out the nexus between politicians and big business and the emergence of black money in
the country. In a recent survey in 1996 by World Economic Forum of 200 business executives
from 49 countries in the world on specified index of corruption, in tax evasion India was ranked
40 (i.e., as dishonest) and corporates ensuring honesty were ranked 46 (India Today, November
30,1996:97). If income taxes are further reduced, there is more likelihood of hiding less and
thereby increasing the revenue. This was demonstrated in 1993-94 when the maximum rate of
income tax was lowered to 40 per cent. Besides, fixing a reasonable tax amount for shopkeepers
and the other self-employed also resulted in greater tax collection as more people willingly
entered into the tax net.
Different Rates of Excise Duty:
Within similar products, there are different rates of excise duty. For instance, in textiles and
cigarettes, this leads to tax evasion through misclassification of output. In textiles, separate rates
of excise are charged for cloth of different varieties. Manufacturers regularly downgrade a
product to pay lower rates of excise. This alone generates Rs. 1,000 crore a year in black
money. For the entire manufacturing sector, including steel, evasion in excise, custom and sales
taxes accounts for over Rs. 50,000 crore in black money every year.
2. Control Policy:
Another cause of black money is the price-control policy of the government. In selecting
commodities for control and in determining their prices, the government fails to take into
account the elasticities involved in demand and supply. For example, according to the report of
the National Council of Applied Economic Research (NCAER) for the year 1981, black money
worth Rs. 840 crore was created in the Indian economy over the period of nine years from 1965-
66 to 1974-75 as a result of the operation of price controls in six commodities viz. cement, steel,
paper, vanaspati, automobile tyres and fertilizers. Similarly, as a result of control on sugar,
about Rs. 400 crore of black money were generated in the year 1991-92. Regulation of foreign
exchange also leads to over-invoicing of imports and under-invoicing of exports and black-
marketing of currency. Thus, the more stringent the measures of control and the more regulated
an economy, the greater will be the effort to violate it, which will increase hoarding, fraud,
artificial scarcity and the resultant black money.
3. Quota System:
Yet another source of black money is the quota system. The import quota, the export quota and
the foreign exchange quota are generally misused by selling them at a premium. Unrealistic
controls spawn a culture which encourages corporates to break the tax laws, particularly FERA
laws. When the government came out with a scheme a few years age (1992-93) to allow
exporters to import goods without paying any customs duty, ingenious ways were devised to
make money even out of this scheme, i.e., the way of over-invoicing exports to get more import
benefits as well as avail of the tax setoffs given to exports. During 1992- 96, the Directorate of
Revenue Intelligence (DRI) and the Customs authorities detected 605 such cases. One export
house (Ganpati Exports) benefited as much as Rs. 85 crore (India Today, November 30, 1996).
4. Scarcity:
Black money is also caused by scarcity and defective public distribution system. When essential
goods become scarce, people have to pay higher than the controlled price, which generates
black money. The scarcity of cooking gas, cement, kerosene, sugar, refined oil, etc. have always
resulted in illegitimate transactions and black money.
5. Inflation:
The increase in prices of commodities like petrol, etc. in international market, increase in prices
of commodities due to high increase in duties and taxes imposed by the government, the
conspicuous consumption created by people with unaccountable money, diverting resources
from production to speculation—all these cause inflation which in turn creates black money.
6. Elections in a Democratic System and Political Funding:
Each election in the country involves thousands of crores of rupees. For contesting Lok Sabha
election, a candidate normally spends more than one million rupees and for contesting Vidhan
Sabha election, one spends more than Rs. 5 lakh in the present times. It is estimated that a single
Lok Sabha election alone could see political parties spend around Rs. 1,000 crore to pay for poll
expenses. Politicians also need to draw on business resources to nurse their constituencies.
Given the mind-boggling numbers, black money naturally is built into the system. For funding
politicians, even honest corporate houses have no option but to find ways to generate
unaccounted-for money. Since the expenditure allowed by law for a candidate is limited and the
companies are allowed to give up to 5 per cent of their half profits as donations to political
parties for elections, the elections are generally financed by the black money holders. These
people expect political patronage and economic concessions which are obtained with the
consent and the connivance of political elite in power in the form of artificial controls on
commodities, laxity in the means of distribution, etc. All these methods create black money.
7. Real Estate Transactions:
Estate transaction is an important source of generating black money. In these days, purchasing a
house and/or land is considered to be very profitable. There is a growing tendency of
transforming the rural agricultural land to urban residential land due to the paucity of building
sites in the urban areas. Establishing unapproved colonies on agricultural land is illegal.
The transaction value shown by the colonizers in registration deeds is much less than the actual
amount or the market value. This enables the seller of the land to evade capital gain tax.
According to an estimate, the illegal transaction of property alone generates about Rs. 2,000
crore of black money in a year, assuming that there are about 50 lakh transactions in urban
property every year. The high rates of stamp duty—ranging between 14.5 per cent and 28 per
cent in different states—are a major cause for under-valuation of property and unreported deals,
or both. The suggestion is that if duties are reduced to 2 per cent to 3 per cent, it will prevent
evasion. Another hurdle is the Urban Land Ceiling Act, which reduces the supply of land and
creates a black market. Roughly over Rs. 13,000 crore a year are generated through the real
estate route
8. Privatization:
Privatization has opened up a new area to the private sector as well as to ministers and
bureaucrats for making black money. One recent example is the Ministry of Communication in
which the minister concerned (in Narasimha Rao’s government) had the authority of
sanctioning contracts and licences worth Rs. 1,50,000 crore. The Minister rode roughshod over
departmental colleagues to give contracts to favoured companies. While the case is still
pending against the former minister in the court, the Income Tax Department alone is said to be
thinking (in November 1996) of realizing from him a fine of Rs. 20 crore for violating the
income tax rules. The former Union Steel Minister (in Narasimha Rao’s government) is another
powerful person who had been accused of having made huge black money of Rs. 16 crore by
clearing the privatization of a mine at a very low price to one concern in September 1995. A
public outcry finally saw the deal getting shelved, though the minister managed to get away.
The Petroleum Ministry also was involved in a scam relating to privatization. The ministry
threw open select oil fields in 1992. In one deal, a particular concern was awarded a contract for
an oil field and the former Petroleum Minister is alleged to have received Rs. 7 crore for helping
the group in getting the contract. The case at present is under the CBI investigation (India
Today, November 30, 1996: 99). It is expected that many scams will come to light for making
black money through privatization.
10. Agricultural Income:
The unwillingness to bring agricultural income in the ambit of income tax has also
contributed to generation of black money. Big industrial houses, over the past few decades
have entered the agriculture sector in a big way by acquiring large farms, growing and
producing nothing. The black money accrued from other sources is sought to be converted
into white by showing it on the agricultural income account. Taxing agricultural income
may help contain this phenomenon.
Corrupt practices indulged into by corrupt people at all levels
There are several causes due to which the black money is created in a country. Black money is
created by the corrupt practices indulged in by politicians, bureaucrats and other high and low
level civil servants. They take huge or small bribes which are kept hidden as they illegal sources
of earning money. The transactions in black money do take place in the market due to which the
term parallel economy comes into existence. Only very rarely these transactions are caught and
most of the offenders of creation of black money are never known to the government. The
second important reason that these transactions remain hidden is that both the offenders and the
executors of law collude with each other and become the sharers in black money. People in all
walks of life from the rich business tycoons, the high level politicians, the senior bureaucrats,
high ranking officers of the government, big contractors to the low level government servants
including class IV employees are involved in this phenomenon of black money creation.
Recently a racket of fake certificates of OBCs and SCs has been found for admission into Delhi
University. It is reported that Rs.3 – Rs.5 lakh were paid to obtain these bribe certificates.
Complex tax structure and corrupt tax officials
Adding fuel to the fire, is the country's complex tax structure and corrupt tax officials which is
the cause of creation of black money. The honest and sincere people who may otherwise be
willing to pay taxes shy away from paying them before the complex procedures, forms and
returns involved in the payment of taxes. Only a few sincere government employees whose
income is paid from the government estimates are made to compulsorily pay the taxes. But the
majority of the business community, traders, professionals and all incomes which do not come
within the organised sector are left to the sincerity of the earners to disclose their wealth.
Complicated and lengthy rules and regulations which are even beyond the comprehension of the
common earners stand in the way of taxes to be paid by them. There are no incentives to the
raise the morale of the honest taxpayers. The honest taxpayer grumbles when he or she sees that
how his or her hard earned money is is swindled by the corrupt officials of the government. The
funds allotted by the government for developmental projects are drained half way by the corrupt
officials before they finally reach the beneficiaries.
Foreign banks are havens for black money hoarders
Foreign banks especially the Swiss Banks which do not disclose the particulars of the account
holders have become a safe haven for the people who want to hide their income withoutpaying
the taxes. There are different versions by different sources as to amount of the black money
stashed in Swiss Banks. As alleged by Baba Ramdev during his agitations against black money,
the amount of black money stashed in the Swiss banks ranges between Rs.50- 75 lakh crores of
rupees. Even if there is only half the truth in the allegation, then also the money stashed in the
Swiss banks is so high that it can make our economy quite sound if this can be brought back to
India and deposited in the government treasury. According to one report the Swiss Banks have
admitted that Indians stand at the top in the list of the people who have deposited money in the
Swiss banks. The black money in Swiss banks became a hot debate in 2009 general elections
when the issue was raked up by the BJP prime ministerial candidate Mr L K Advani. He quoted
from Global Financial Integrity Study undertaken in 2006 which estimated Rs.43 – Rs.51 lakh
crores lost by developing countries over a period of five years due to illicit financial outflows
from these countries.
Lot of black money is transacted during election campaigns
The election process of our country is also a big generator of black money. Election campaigns
run by the candidates for parliamentary or assembly elections or for any local bodies generated
crores and crores of black money during the period of election. A study by the Mumbai-based
Centre for Monitoring Indian Economics (CMIE) found in 2006 that each parliamentary poll
generates between $10.19 billion and $11.33 billion of black money. It will become a shocking
and mind boggling figure and the black money so created will run into several crores of rupees
if we also include the elections to the legislative assemblies of the states and union territories
and the local bodies.
Black money laundering financial companies and chit funds
Money laundering financial companies and chit funds are another source of creating black
money. Instances have come to notice that several financial companies had been running and
might still be running without paying any income tax paid for their transactions which are not
brought to the knowledge of the government. We know that there are several lakhs of
unauthorised chit funds which are running by individuals in the colonies of the towns and cities
and even in villages including certain government offices and industrial complexes where the
money is collected and circulated among small time individual earners. The operation of non-
banking financial companies (NBFCs) had become so uncontrolled that the government had to
bring in a legislation on the Non-Banking Financial Companies in 1997 and a separate
Department of Non-Banking Financial Companies was opened in all offices of the Reserve
Bank of India in March 1997 to make these companies to follow the regulations laid down
under the Act. Consequently several hundreds of those NBFCs which could not comply with the
rules and regulations of the government went out of operation.
Unscrupulous charitable trusts and societies create black money
Unscrupulous charitable trusts and societies including religious institutions manipulate the
funds of the institutions run and managed by them and create black money. A stark example of
this has come to light when crores of rupees in hard cash and several more crores of rupees
worth jewellery, diamonds and other valuables have been taken over when the personal
chambers of the late Satya Sai Baba were opened recently at Puttaparthy in Andhra Pradesh.
There are a lot of discussions going on in the matter whether the money found at Satya Sai
Baba's Ashram at Puttaparthy is accounted or unaccounted money. Only sincere investigations
undertaken by the government in this matter can find out the exact truth. This is one example
which has come to light and many more are still likely to exist running this fraudulent business
simply because such institutions had been exempted to submit the reports of their income and
expenditure. It is feared that a lot of black money is being generated by the religious, social and
educational trusts throughout the length and breadth of the country.
Hawala business is a great source of black money transactions
The transactions of cash made through the hawala route are also one of the greatest sources of
creation and use of black money. Several hawala rackets were busted by the police on many
occasions but the hawala operations are still going on. Transactions through hawala route are
thought to be the south Asia's biggest money transactions system. The hawala transactions are
common across our national and international borders where money changes hands through
non-banking channels and thus goes unrecorded and becomes black money. The individuals
running hawala rackets have developed their own codes to transact this illegal business. Such
tax evading scams have been found several times especially in Maharashtra and Gujarat, two of
India's rich states. Daily hawala transactions are reported to be running transacting in foreign
exchange thus robbing the government of the taxes which should otherwise have gone to the
government' treasury.
Investments in property, jewellery, luxury cars, rare pieces of art etc
Investments in property, jewellery, diamonds, costly and rare paintings, luxury cars, rare pieces
of art etc. are some of the other sources where black money is transacted. It was reported
sometime back that when the officials raided a few builders in Mumbai a few years back, it was
revealed that the chartered accountants had advised their clients to hide their black money in
rare art collections. It was found that a businessman had in invested $4,50,000 in a painting. The
authorities found that builders had invested over a crore of rupees of their undeclared income in
paintings bought from local art galleries of Mumbai. Investment of unaccounted income is done
at a large scale in gold and diamond jewellery. It is pertinent to note that India is one of the
largest consumers of gold. Stock market is another channel to invest black money. One can earn
big profits after one pays a small amount of capital gains tax @ 10%. Past cases of stock scams
have shown that brokers, banks, industrial houses have all colluded to trigger the stock markets.
A few years back a woman from Gujarat named Roopal ben Panchal reportedly opened 10,669
fake accounts. In a circular dated December 2, 2005 the Reserve Bank of India had alerted the
banks with regarding to the black-money laundering activities going on and wanted them to
have watch on any suspicious banking activity. But what when the banks themselves start
colluding with the stock brokers to effect the prices in the stock market.

Donations to educational institutions transacted in black money

The heavy donations paid for admissions in institutions of higher learning and even large
corporate schools and colleges are another big source of creation and circulating black money.
Are these donations received and paid by cheques? Are the proper receipts issued for the
transactions? Are the transactions written in the official accounts of the institutions as they are
done? The answer to all these questions is perhaps is a big 'No'. This is not done because many
of these private institutions are run by the bureaucrats, politicians and industrial houses that are
either do it in collusion with the law enforcing authorities or bribe them the black money they
create. Black money transactions take place in the setting and leaking of questions papers and
help rendered in examination centres to get certain students pass through unfair means or to get
some of them the top ranks in the examination. This not only involves black money transactions
but is also making the mockery of our educational system and examinations.
Issue of licences, contracts to Indian and foreign companies
Large industrial houses, big contractors, bureaucrats and politicians all collude with each other
in very heavy transactions and underhand dealings are indulged when issuing licences and
entering into contracts even with the foreign firms. The agents are brokers are involved in the
transactions on heavy fees. All these transactions among these people are not routed through
normal banking channels. The great scams like the Bofors, 2 G Scam, the Commonwealth
Games Scam, Adarash Society Scam, etc have already come to the light of the public. Many
such scams may be lying hidden and might not be brought out at all. There have been cashes
where hard cash had been discovered in the possessions of politicians like Sukhram and others.
The Mauritius Route to use black money
Taking advantages of loopholes in the Double Taxation Avoidance Convention (DTAC)
concluded two decades ago, certain people claiming themselves to be the Mauritian residents set
up paper companies in Mauritius. These companies then masqueraded at Mauritian companies.
These companies then invested in India. Thus they avoided paying taxes in India amounting to
crores of rupees under the cover of double taxation avoidance agreement between India and
Mauritius.

Consequences or the impact of black money

Loss of revenue to the government and running of parallel economy in country The circulation
of black money has a deep impact on the economy resulting in a decrease in government
revenues. A part of the black money which circulates in the economy could have gone into the
hands of the government in the form of taxes. Such is the volume of the black money in the
country that a parallel economy is said to be running in the country with the black money alone.
According to some estimates the amount of black money in the country equals 40 per cent of
our gross domestic product. (GDP)
Black money and corruption form a vicious circle
Since most of the transactions done in black money are illegal, it adds to already existing high
levels of corruption. All bribes for whatever reason they are paid goes unaccounted creasing
more black money in the society. This vicious circle of corruption generating black money and
black money generating corruption will never come to an end, unless some serious steps are
taken by the government to curb this evil practice.
Black money effects real capita income and national income of country
Since the black money circulating in the country is not recorded in the government's books of
accounts, the real per capita income of the people and the national income of the country are
shown as low. If all the black money circulating in the economy is flowed back into the national
economy of the country, there will a substantial rise in the real incomes of the people and the
national income of the country. For example, although the incomes earned by the immigrant
labour of our country help to improve the standard of living of the people earning them, yet they
don't get added into the tax net of the country if transacted through hawala. So they cannot be
taken into account in computing the national income and per capita income of the country.
Black money causes decrease in quality of public goods and services
When bribes which are to paid as black money to the producers of goods and provider of
services, it is but natural that they will provide the quality of goods and services only to the
people who pay bribes whereas the general public has to suffer as the same quality and service
is not provided to everyone. For example, if you have to get a job done in office, your work will
be done without any delay if you pay bribes to the officials who have to do your job. But for the
same kind of job, another person who does not bribe the officials has to wait for several days,
weeks or even months.
Black money results in higher taxation and inflation
The government taxes the people to earn revenue for its expenses in order to balance the budget.
It is but natural that if the black money circulating in the economy is brought back to the
government's treasury, the government will have more money in its hand for its expenses and
thereby the tax burden on the people can be reduced. Similarly the inflation results with too
much money chase too few goods available in the market. The accounted money in the market
is hyped by the figure of unaccounted money in the market and the actual money in circulation
becomes much more to chase the goods produced in the country leading to higher inflationary
trends.
Black money causes difficulty in the formation of monetary and fiscal policy
Since the government cannot take into account the black money in circulation in the economy
while forming its monetary and fiscal policies, the policies so formed by the government cannot
be realistic. It is difficult to form these policies in the absence of the exact calculation of the
black money and without bringing it in the accounting procedures of the government.

Black money results in increased criminal activities

The ill-gotten money in the market results in all sorts of criminal activities that go on in the
society including corruption of all sorts in the society. It encourages its illegal use especially
during elections. The black money is used to support terrorist activities which undermine even
the security of the country. It is used to get illegal weapons in the hands of the groups of
unsocial elements. The illegal money is squandered on large scale in clubs and hotels on all
types of illegal activities including drug trafficking. Even murders are got done for political
revenges where black money changes hands among the murderers and the people who engage
these murderers to engage in these crime. It is said that money corrupts and the excess of it
corrupts extremely. And it is more so when such excess money is in the form of black money.
The lavish and ostentatious way the hoarders of black money live in India and the wasteful
expenditure they indulge in celebrating their social, political and even religious functions is a
social crime even though the law does not take cognisance of it.

How to control the black money

Usually, the government has to take two courses to control the black money. The first is to
convert the existing black money into white money through various measures. The second is to
take appropriate measures to prevent the creation of black money. So, the controlling of black
money can be discussed under these two heads.

Controlling black by money by its conversion into white money

First of all, the government should plug loopholes in its two decades old Double Taxation
Avoidance Convention entered into with Mauritius to check inflow of black money into India
by bogus companies of Mauritius which evade paying taxes in India under the cover of this
bilateral agreement between India and Mauritius.
Voluntary disclosure of income scheme (VDIS)
Though such measures were initiated by the government earlier including gold bond schemes,
but this was resorted on a large scale when the government launched a Voluntary Disclosure of
Income Scheme (VDIS) on June 18, 1997 whereby the tax-defaulters were given an opportunity
to disclose their hidden incomes at the prevailing tax rates by giving them immunity from major
laws relating to economic offences from 01 July 1997. The then Finance Minister P.
Chidambaram said that the VDIS collections amounted to collection about Rs.8,000 crores from
about two lakh declarents when the scheme closed down on December 31, 1997. The
government may once again announce such a scheme with proper guidelines to enable the
people hiding their black money to declare the scheme. The government at the same must show
its political will to enact a bill with stringent punishments against the people who were found
with undisclosed income after certain specified date.

How to bring back money from the Swiss banks

A similar option must also be given to the people hiding their money in the Swiss banks giving
them a one time opportunity to voluntarily bring back their money from the Swiss banks and
deposit it in the Indian banks by paying the taxes as per the Indian laws. At the same time a
severe punishment may be threatened for the people who were found with black money in the
Swiss banks after a specified date.
Entering into bilateral agreements with the foreign governments
The government should take all possible measures to enter into bilateral agreements with the
foreign countries to disclose the names of the account holders and the money deposited in
foreign banks. The government has already initiated some steps in this direction by revising the
Double Taxation Avoidance Agreement to provide means for investigations of black money in
Swiss banks in August 2010. This revision is likely to take effect in January 2012. To curb
black money, the Indian government has also signed Tax Information Exchange Agreement
(TIEA) with 10 countries, namely - Bahamas, Bermuda, the British Virgin islands, the Isle of
Man, the Cayman Island, the British island of Jersey, Monaco,St. Kitts and Nevis, Argentina
and the Marshal Islands. The government should take immediate steps to sign more such
agreements with other countries as well.
Block loopholes in the Mauritius route
The government should block loopholes in the Double Taxation Avoidance Convention
(DTAC) entered into about two decades ago to prevent unscrupulous investors to escape from
paying taxes in India.
Court cases and severe punishments for economic offences
The courts in India should give due importance to the cases involving black money and must
give the severest of the punishments to the persons involved in the cases. The Supreme Court of
India is doing a commendable job in this respect. The Supreme Court asked the government in
January 2011 as to why the names of those have stashed money in the Liechtenstein Bank have
not been disclosed. In April 2011, Hasan Ali Khan was arrested on charges of stashing over
Rs.36,000 crores in foreign banks. This is one instance where a person has been arrested for
stashing black money in the foreign banks, but there may be many more against which the
government can take action only with a strong political will and conviction. Baba Ramdev had
even gone to the extent of suggesting that black money offender should be treated as traitors of
the country and should be given the severest of the punishments.

Demonetization of currency notes of high value like Rs.500 & Rs.1000

Another measure suggested to dig out black money is to demonetise the currency of higher
denominations like bank notes of Rs.500 and Rs.1000. But the government has already rejected
this suggestions as it is not economically viable suggestion.
Issue of Special bonds by the government

• Special bonds may be issued by the government asking the black money hoarders to
invest in them by providing them immunity from criminal proceeding existing under the
existing law.
Controlling black by money by preventive measures
Restructuring tax system & severe punishment to errant tax officials
The government should restructure its tax system including GST and VAT making it more
convenient and easy for the income earner to pay the taxes. All the cumbersome procedures in
submission of forms and returns should be done away with. The government has become aware
of this and have done a lot of work to improve the system. It has recently come out with an
announcement that salaried employees with salary income up to Rs.5 lakh and saving bank
interest up to Rs.10,000 need not to file income tax returns for the year 2011-12. Much more
needed to be done by simplifying the rules and regulations in this respect. The government
should broaden the tax base and should bring all people in whatever is the source of income
including agricultural income if the income exceeds Rs.5 lakh a year. All people above this limit
should be taxed with no exemptions. No return needs to be filed by any person if the income is
below Rs. 5 lakhs. Similar tax reforms should be made in the corporate direct tax and all other
indirect taxes. Severe punishment should be mooted out to the tax personnel who are found to
be involved in the corrupt practices including the persons who are found to have paid bribes to
the tax officials to avoid taxes. These should include tax consultants and chartered accountants
who guide the tax payers with tips to avoid tax taking advantage of loopholes in the tax laws.
Use of electronic media and banks for money transfers
Maximum use of electronic media should be made for money transfers. Most of the money
transactions should be encouraged to be made through the banking channels. Limitation should
be laid down for cash transactions in any deal. Use of PAN and identity card should be made
mandatory for all transactions amounting huge amounts. There should be a powerful Income
Tax and Vigilance department. People should be continuously made aware of the benefits of
paying taxes. People should be made aware of the evil of black money on a continual basis
Simple solutions for complex problems
Sitaram Naik Black money
Black money is major problem in developing countries and black money is the root cause of
terrorism. So it is a problem that has to be handled by every country in the world. Black money
is the accumulation of currency over a long period of time. Because currency has not changed
for so long, it got accumulated with many people. Though currency gets changed once in a
while, the old currency is also valid. It gives enough time for black money to get converted to
new currency. The illegally earned money is getting used for illegal purpose. Changing
currency is the simplest solution to clean black money. If a country decides to change the
currency, it should not give much time for people to convert it to new currency. Give, may be,
just one month time. Don’t announce the plan of currency change. Plan properly, estimate the
currency requirement, print all required currency, decide the date and announce. Request people
to deposit all the currency in banks and withdraw only required amount as new currency. When
they go to bank for depositing currency, everybody needs to give their PAN number or social
security number or some way to identify themselves.
People cannot just exchange the currency. They cannot give old currency and take new
currency. They need to deposit the money in bank account. After that they can withdraw
depending on their requirement. There is upper limit for withdrawal per day. If anybody is
depositing huge amount, keep track of that person. With this process, all the currency will get
converted. Because time given is less, people that are having black money need to decide
quickly whether to convert to the new currency or lose the money. With this way, currency part
of black money will be cleared completely.
Foreigners who came on trip can get their money converted at any bank. Foreign exchanges will
be having different procedure for currency conversion. People living in foreign countries have
to deposit the currency in foreign banks.
For poor people who are not reading news or unaware of this change, we can relax time for a
longer period. They will be having very less currency with them. For them, give monthly one
day for currency conversion. Set maximum conversion limit to 10,000 rupees or less. This
process can go for about one year. With this poor people are not getting affected. They can
change the currency within one year. Nobody is living without using money for one year. If
they go to any shop, the shop keeper will not allow the old currency. Then this person will
understand the change and how to convert. If they are earning, they will see new currency and
understand why they got new currency. Even if poor people are away from media, they will get
the information very soon. But the limit of currency that can be converted after one month is
very less. Banks will not allow anybody who tries to deposit more cash with old currency after
one month. The time limit has to be very strict.
With this process, we can find people that are having black money. If they don’t show up the
money, they are under loss because they cannot use that money later. They will be losing the
money permanently. Government will have the full details of which country is having what
amount of currency. This information is useful for economy planning and to find country
supported terrorism.
If a person withdraws huge currency, government can track the person and his/her activities
along with the currency distribution. As all the banks are connected worldwide, if any huge
transaction happens, that information should reach government immediately. Government can
keep a system (computer) just to track this information and set limits on transactions within
country and across countries. Whenever transaction crosses the limit, a log is generated in
government system. That is up to CBI to decide on how to utilise that information.
If all governments join hands to tackle terrorism, tracking of money movements will be very
easy with current technology. Governments can even predict where the terrorist accumulation is
happening and even their activities with money movements. If a person is suspected of having
links with terrorists, that person’s accounts and all the accounts transacting with those accounts
can be monitored all over the world. That gives an idea of where the money is moving to. When
each person’s all bank accounts are linked with PAN number or social security number, all the
accounts of the person all over the world also can be linked.
All the banks in the world can do one time review of account holders, especially for those with
large bank balance. Banks can check whether they can identify a person or an organisation as
the owner of the account. They can update account holders’ latest address and other identity
details. If they cannot trace an account owner, that account can be seized and the bank balance
can be transferred to the government. The people who earn large amounts illegally will be
depositing everything in foreign banks. With this process, if they cannot show up and link those
accounts with their identity, they lose that money to government. Public money goes back to
public. Terrorists and criminals will be under trouble with this process. If they show up, they
will be caught. Otherwise they lose money. This process of verification can be done once in a
while to find out accumulation of large amounts in illegal hands.
If we track both currency and electronic money, there is no escape route for terrorists. Terrorism
cannot live without money. The cost of this process is very less compared to the black money
and the damage it is causing. The money spent by the government to control terrorism and the
damage caused by terrorism can be saved. One time printing and distribution of new currency is
not a costly affair for any country where majority of people use electronic money for all
transactions. If all the countries do currency conversion once in this technological era, complete
black money will be cleaned from the world. It is not necessary for all countries to do it
together. But if all does it within a year, the effect will be very high.
Countries like India, with huge number of poor people who work for daily wages, may feel that
they cannot reduce currency usage. Because building construction workers or road construction
workers work for daily wages. So the contractor needs to withdraw huge amounts of currency to
give their wages. Because that is valid reason, banks allow them to withdraw huge currency.
Government can stop this and improve lives of poor people along with reduction of currency
usage. Let all poor people get savings bank account with an ATM card, with zero balance and
without any penalty for keeping no balance in their accounts. Like corporate companies,
construction contractors will also deposit workers’ wages into their accounts directly. There are
many uses of this.
1. The contractor’s time spent for distributing wages comes down to minimum. Once
all the account numbers and their wages are recorded, money distribution happens
with a single click.
2. Tax audits are easy.
 3. Latest technology reaches to poor people.
4. Poor people get savings account and a concept of saving. They can withdraw only
what they need. They can see money accumulation by leaving small amount daily
and they can use it for bigger task.
5. There is security for their hard earned money.
6. With help of bank, they can plan interest earning fixed deposits, recurring deposits
or other schemes.
If poor people start using bank accounts and ATMs, there will not be any requirement for
rich people to withdraw huge amounts of currency. After few years government can set
maximum limit for cash withdrawal. That reduces possibility of future black money
accumulation.
Sectors which absorb and recycle black money
Money generated illegally has to be parked somewhere and a large part of the money is invested
in sectors that include:
• Building and construction industry
• Gems and Jewelry industry
• Film and Entertainment industry
To fight the elections, all political parties require large sums of unaccounted money to fund
their election campaign. According to the Centre for Media Studies, Delhi, around $4.9 billion
(Rs 30,000 crore approx) was spent during this year’s election campaign for Lok Sabha and
State Assembly elections. This means that these elections were the second-most expensive
elections after the 2012 US election campaign that cost $6 billion. Political parties need large
amounts of cash to pay party workers in cash, liquor, and even drugs (as seen recently in
Punjab). Then there is the muscle power required to influence and enforce election outcomes.
The question is, who provided the money and what do they get in return? In the year 2011, a
research study conducted by Devesh Kapur and Milan Vaishnav and published for the Centre
for Global Development, concluded that there was a cyclical correlation between elections and
the price of cement. In the run up to elections, the builder segment feeds cash to the political
parties thereby leaving no money for investments in their projects. This in turn results in
weakening of demand for cement in the run-up to the elections. However, post elections, the
politicians return the favour to the builder segment by clearing various projects. This results in a
frenzy of building activity thereby resulting in an increase in demand for cement. This is just
one example that shows the money flow cycle during and post elections.
There are other sectors as well, but these are some of the largest segments where unaccounted
money circulates. These sectors then feed the political parties and individual politicians with
large sums of cash on an ‘as and when’ needed basis. In return, they get favours from the
politicians and government largesse for substantial profit gains, and the cycle of black money
continues.
There are two major issues here:
Illegal act of receiving a bribe
Non-disclosure of Income to the Income Tax authorities There is a perception that people do not
pay taxes because the taxation levels are high. This may not be entirely true. There are three
major categories of people who earn black money:
Bribe receivers.
Service providers who provide illegitimate services and therefore cannot disclose their source of
income Service providers like lawyers, doctors, consultants who provide legitimate services but
do not disclose the source of income The Income Tax Act forces an assessee to disclose not
only his income but also his ‘source’ of income. For the last two categories above, the
declaration of the source of income is the primary reason for not paying Income Tax. It is not
the tax rate that holds them back but declaring the source of income. The loser is the
government.

Magnitude of Black Economy:

A number of studies have been made to estimate the quantitative dimensions of the problem
in the economy. The studies identifies the different sources of black income as follows:
(a) Income-tax evasion
(b) Corporation tax evasion
(c) Excise duty evasion
(d) Customs duty evasion
(e) Black income from exports

(f) Evasion of state taxes.

(g) Bribes, illegal commissions.

(h) Goods supply to black market
(i) Unaccounted stock-market profit
(j) Interest earned from unorganised credit markets.
The study has provided a gross estimate of black income generated through each of these
sources. It is estimated to have gone up from Rs. 50,977 crores in 1980-81 to Rs. 10, 50,000
crores in 2006-07. Raja Chelliah has estimated that black money is generated at the rate of 20
percent of the country’s GDP.

Effects of Black Economy:

The effects of black money in a country are discussed under the following heads:
(i) False Information about the Economy:
The most important effect of black money is provide false information about the actual
economy because it remains outside the purview of the economic policies. The presence of
a sizeable black money casts doubts on the validity of the data on national income estimates,
per capita income, and distribution of income, consumption, savings and investment. The
economic planning losses it’s worth, because they are based on macro-economic parameters
which completely ignore the black money.
(ii) Impact on Fiscal System:
Government is fully based on tax revenue. Evasion of taxes has serious consequences for
the economy’s fiscal system. In long-run consequence of such revenue loss is to reduce the
builtin elasticity of the tax system. To raise a given target of revenue the Government is
obliged to depend increasingly on discretionary hikes in tax rates or to expand the array of
taxes.
Direct Taxes Enquiry Committee in this connection mentioned “Black money and tax
evasion, which go hand in hand, have also the effect of seriously undermining the equity
concept of taxation and warping its progressiveness. Together, they throw a greater burden
to the economy.”
(iii) Create Inequalities:
 The black money creates inequalities among people. The excess of money leads to purchase
non- essential articles, which gives demonstration effect. The overall consumption pattern is
titled in favour of rich and elite classes.
A rise in the overall consumption on non-essential products leaves less resources for
investment in priority areas. These distortions in the product-mix in favour of non-essential
consumption have adverse effects on production and thus they distort the objectives of
planning.
(iv) Misguiding on Resource Allocation:
Block money distorts resource allocation in the economy and often leads to wasteful and
often leads to wasteful use of money. It leads to conspicuous consumption and in turn
results in the diversion of large funds to unproductive channels which ultimately put the
economy out of order.
(v) Implications for Monetary Policy:
The black money related to the stock of ‘black liquidity’. The stock of ‘black liquidity’ is
defined as the cumulation of black savings (from black incomes) in the form of cash and
other readily convertible assets such as gold and silver. It is the ‘black liquidity’ which
creates a lot of problems for monetary authorities to regulate the economy. The existence of
sizable ‘black liquidity’ in our country misguide the Government to diverting credit from
more urgent to the less urgent.

Tax Evasion:
In March 1970, an enquiry committee was appointed under the chairmanship of Mr. Justice
K.N. Wanchoo, former Chief Justice of Supreme Court, to study the problem of black money,
tax evasion, tax avoidance and tax arrears. According to the Wanchoo Committee Report,
“Black money denotes not only unaccounted currency which is either hoarded or is in
circulation outside disclosed trading channels but also its investment in gold, jewellery and even
precious stones made secretly, and in land and buildings and business assets over and above the
amounts shown in the books”. It can be easily seen that tax evasion is the Mother of Black
Money.
Government Measures:
(1) Penalties and Prosecutions: To stop tax evasion, tax laws also provide monetary
penalties for the prosecution (and imprisonment) of tax evaders.
(2) Settlement Commission: Following the recommendation of the Wanchoo Committee.
The Settlement Commission was established in 1976. Its objective was to provide a
mechanism for the quick and final disposal of these cases, where tax evader was willing
to make confession and face the consequences.
(3) Voluntary Disclosure of Income Scheme (VDIS): Finance Minister P. Chidambaram
has introduced Voluntary Disclosure of Income Scheme (VDIS) while presenting the
annual budget for 1997-98. The was introduced on 1st July 1997 and closed on 31 st
December 1997. The main Slogan of the Scheme “30% tax and 100% mental relief” and
was quite successful in achieving a good result. The Government gave assurance that the
source of amount disclosed (in cash and valuables) under the scheme will not be
investigated.
Highlights of VDIS—1997: The highlights of VDIS—1997 are as follows:
 (a) Under the scheme individuals were required to pay a tax of 30% and the companies were
required to pay a tax of 35% on the Disclosed income.
(b) It is help to yield tax revenue of Rs. 10,500 crores, which is an unprecedented revenue
gain from any VDIS scheme launched in India.
(c) A record of 4.66 Lakh persons or corporations made disclosures of income amounting to
over Rs. 33,000 crores which implied large per unit disclosures by individuals as well as
corporations.
(4) Statutory Provision:
Compulsory filing of tax returns by everyone with taxable income, compulsory maintenance
of accounts by businessmen and professionals and their compulsory audit, if income or
turnover exceeds a specific limit, compulsory canalising of transactions involving payment
exceeding Rs. 10.000 through banks, etc.
(5) Tax Raids and Seizures:
Raids are conducted from time to time by the tax enforcement machinery, on the premises
of the people who are suspected of possessing black money. After the raids, wide publicity
is usually given to the amount of money and other assets that are seized.
Schemes for the Disclosure of Black Money:
The Government of India introduced a series of 5 new schemes on 1st October 1991 to unearth
the black money and to improve foreign exchange reserves in the country. The schemes are as
follows;
(a) Scheme One:
State Bank of India issued Bharat Development Bond in which Non-Residential Indians
(NRIs) were permitted to deposit foreign reserves of US dollar and British Pound (no upper
limit) for 5 years. There bonds were sold upto January 31, 1992. The Government
announced the rebate of income tax on the income earned as interest on the bond.
(b) Scheme Two:
The Government introduced a scheme to promote the inflow of foreign currency in the country.
Under this scheme any person residing in foreign country could send unlimited foreign
exchange to any Indian citizen without declaring its source. This scheme was open upto
January 31, 1992. Under this scheme, the inflow amount of foreign exchange was exempted
from various taxes and Foreign Exchange Regulation Act restrictions.

(c) Scheme Three:

Under this scheme, any reason could deposit his black money upto January 31, 1992 in National
Housing Bank. The depositor was authorised to with draw the 60% of deposited amount but the
remaining 40% was to be used for constructing low cost houses for poor people.
(d) Scheme Four:
Under this scheme, the Government amended clause 273A of the Income Tax Act tor giving
one more chance to the people having black money to declare it, but this opportunity can be
availed by persons only once in their life.
(e) Scheme Five:
This scheme provided for exemption from penalties on declared black money and assets if the
tax payer declared his black money at the time of his tax assessment. In continuing that, the
Government of India also introduced the Gold Bond Scheme in 15 th March 1993 to unearthing
black money.