Name - Sanskriti Rai

Course - BBA LLB

Roll no - 2014305
Smart Card id-
Lwali20018
Subject - Economics
Topic - Black Money
 Black money

Laws that regulate black money in India

With the government talking about a crackdown on unaccounted ('black') money, it is worthwhile to
take a look at the laws meant to check its growth.

Interestingly, Indian tax laws do not have any clear definition of the term 'black money'. Generally,
money can be referred to as black money in two scenarios. One is where it has been earned by illegal
activities like the drug trade, terrorism, corruption, etc. The second is where wealth has been created
out of money on which taxes have not been paid.

"The term is not easy to define as it might have the characteristics of a chameleon, changing its
colour to suit the purpose. It includes 'unaccounted income', 'black income', 'dirty money', 'black
wealth', 'underground wealth', 'black economy', 'parallel economy', 'shadow economy', and
'underground' or 'unofficial' economy"," says Vidya Rajarao, partner, forensic services, Grant
Thornton India LLP.

Corporate law experts say tax authorities are increasingly likely to verify whether foreign currency
accounts held by resident and non-resident Indians comply with the foreign exchange regulations,
and were disclosed properly in annual tax returns.

According to Deep Roy, associate partner, Economic Laws Practice, no person resident in India is
allowed to open any foreign currency account without approval of the Reserve Bank of India (RBI).

However a person who is resident in India is permitted to open a bank account in a foreign bank if he
or she has to engage in any current or capital account transaction, and must remit the money from
India as prescribed under the Foreign Exchange Management Act (Fema) of 1999.

There is a specific money-laundering law - the Prevention of Money Laundering Act, 2002. This
provides for punishment in the case of money laundering and for hoarding of black money.
Corporate lawyers say if any foreign account holder violates Indian laws regulating the flow of
foreign currency, tax authorities can enforce repatriation of such funds, including funds required to
recover the unpaid taxes, in addition to the penalty under Fema.
In addition, specific provisions under the Income Tax Act, 1961; Prevention of Corruption Act,
1988; and the Narcotic Drugs and Psychotropic Substances Act (NDPS) of 1985, could also be
applied if the case so demands.

Further, a non-resident Indian (NRI) is liable to be proceeded against under Fema if there has been
any concealment of income. Any non-payment or under-payment of tax is subject to interest and
penalty. The latter could go up to three times the amount of tax evaded.

The civil and criminal liabilities for holding black money range from rigorous imprisonment for not
less than three years and up to seven to 10 years, along with a fine.

By the Income Tax Act, any Indian citizen who holds money abroad on which tax was owed but not
paid becomes liable to pay tax, interest and penalty.

"The penalty could be as high as 300 per cent of the tax that was avoided. The interest would be 15
per cent per annum since the time the tax authorities believe the tax was evaded," says Rajarao.

If booked under NDPS, the maximum imprisonment could extend up to 20 years; the death penalty is
also attracted.India's efforts to bring back black money stacked abroad in foreign currency accounts
are hampered by bilateral Double taxation Avoidance Agreements (DTAAs) signed with various
countries.

Corporate tax experts say the confidentiality provisions of these DTAAs generally allow disclosure
or use of information only for tax purposes.

Most countries have generally refused to accept India's request to completely eliminate the
confidentiality provisions. A majority of countries feel the information should not be made public
until a tax case comes up before a court of law. Corporate tax lawyers feel there is bound to be a
step-up in scrutiny by tax authorities of any money held by Indians and NRIs in foreign bank
accounts. According to Milind S Kothari, managing partner & head - direct tax, BDO India LLP, the
new tax return form requires information to be provided in relation to various assets held by an
individual outside India, including bank accounts in which one is a signatory. However, there are no
such provisions applicable to NRIs. However, NRIs are required to report income that is sourced, and
therefore liable to be taxed, in India.
When such an NRI becomes a resident in India, he or she needs to ensure that global income is
offered to tax in India (subject to some exceptions), and also disclose information in relation to assets
held outside India, adds Kothari.

Black money and its estimation

There is no uniform definition of black money in the literature or economic theory. In fact, several
terms with similar connotations have been in vogue, including ‘unaccounted income’, ‘black
income’, ‘dirty money’, ‘black wealth’, ‘underground wealth’, ‘black economy’, ‘parallel economy’,
‘shadow economy’, and ‘underground’ or ‘unofficial’ economy. All these terms usually refer to any
income on which the taxes imposed by government or public authorities have not been paid. Such
wealth may consist of income generated from legitimate activities or activities which are illegitimate
per se, like smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking,
terrorism, and corruption. For the purpose of this document, ‘black money’ can be defined as assets
or resources that have neither been reported to the public authorities at the time of their generation
nor disclosed at any point of time during their possession.

Source of black money income

The root cause for the increasing rate of black money in the country is the lack of strict punishments
for the offenders. The criminals pay bribes to the tax authorities to hide their corrupt activities. Thus,
they are rarely punished by the judge. The criminals who conceal their accounts from the government
authorities include big politicians, film stars, cricketers, and businessmen. Some Indian corporations
practice transfer mispricing, by under-invoicing their exports and over-invoicing
their imports from tax haven countries such as Singapore, UAE, and Hong Kong. Thus the promoters
of the public limited companies who hold rarely more than 10% of share capital, earn black money
abroad at the cost of majority shareholders and tax income to the Indian government.[9] By the year
2008, the cumulative Illicit Financial Out flows from the country touched US$452 billions

Political organizations, corrupt politicians and government officials take bribes from foreign
companies then park or invest the money abroad in tax havens for transferring to India when needed.
In addition, locally earned bribes, funds and collections are often routed abroad
through hawala channels in order to evade Indian tax authorities and consequent legal implications.
In the Vodafone-Hutchison tax case, a foreign multinational company also evaded tax payments in
India by making transactions with shell companies registered in tax haven countries.

The use of Swiss bank for storing black money

In early 2011, several reports Indian media alleged Swiss Bankers Association officials to have said
that the largest depositors of illegal foreign money in Switzerland are Indians. These allegations were
later denied by Swiss Bankers Association as well as the central bank of Switzerland that tracks total
deposits held in Switzerland by Swiss and non-Swiss citizens, and by wealth managers
as fiduciaries of non-Swiss citizens.

James Nason of Swiss Bankers Association in an interview about allowed black money from India
suggests "The (black money) figures were rapidly picked up in the Indian media and in Indian
opposition circles, and circulated as gospel truth. However, this story was a complete fabrication.
The Swiss Bankers Association never said or published such a report. Anyone claiming to have such
figures (for India) should be forced to identify their source and explain the methodology used to
produce them."

In August 2010, the government revised the Double Taxation Avoidance Agreement to provide
means for investigations of black money in Swiss banks. This revision, expected to become active by
January 2012, will allow the government to make inquiries of Swiss banks in cases where they have
specific information about possible black money being stored in Switzerland.

In 2011, the Indian government received the names of 782 Indians who had accounts with HSBC. As
of December 2011, the Finance Ministry has refused to reveal the names, for privacy reasons, though
they did confirm that no current Members of Parliament are on the list. In response to demands from
the Bharatiya Janata Party (BJP) opposition party for the release of the information, the government
announced on 15 December that, while it would not publish the names, it would publish a white
paper about the HSBC information.

According to White Paper on Black Money in India report, published in May 2012, Swiss National
Bank estimates that the total amount of deposits in all Swiss banks, at the end of 2010, by citizens of
India were CHF 1.95 billion (INR 92.95 billion, US$2.1 billion). The Swiss Ministry of External
Affairs has confirmed these figures upon request for information by the Indian Ministry of External
Affairs. This amount is about 700 fold less than the alleged $1.4 trillion in some media reports.[3]

In February 2012, Central Bureau of Investigation (CBI) director A P Singh speaking at the

inauguration of first Interpol global programme on anti-corruption and asset recovery said: "It is
estimated that around 500 billion dollars of illegal money belonging to Indians is deposited in tax
havens abroad. Largest depositors in Swiss Banks are also reported to be Indians". In a hint at scams
involving ministers, Singh said: "I am prompted to recall a famous verse from ancient Indian

scriptures, which says – यथा राजा तथा प्रजा. In other words, if the King is immoral so would be his
subjects" The CBI Director later clarified in India's parliament that the $500 billion of illegal money
was an estimate based on a statement made to India's Supreme Court in July 2011

After formal inquiries and tallying data provided by banking officials outside India, the government
of India claimed in May 2012 that the deposits of Indians in Swiss banks constitute only 0.13 per
cent of the total bank deposits of citizens of all countries. Further, the share of Indians in the total
bank deposits of citizens of all countries in Swiss banks has reduced from 0.29 per cent in 2006 to
0.13 per cent in 2010.

The through the Investigation Division of the Central Board of Direct Taxes released a White Paper
on Black Money giving the Income Tax Department increased

Black money has been a big issue in India for many decades. Time and again almost after every 10 to
15 years the Income Disclosure Scheme was announced. The last Demonetisation was done on 8th
November 2016 and also on an earlier occasion in the Seventies when Rs. 1000 Notes were banned.
However, the problem of black money is difficult to tackle fully in one go but can be controlled
gradually.
Adverse Effects of black money :
(a) Black money eats up a part of the tax and, thus, the government’s deficit increases. The
government has to balance this deficit by increasing taxes, decreasing subsidies and increasing
borrowings. Borrowing leads to a further increase in the government’s debt due to interest burden. If
the government is unable to balance the deficit, it has to decrease spending, which affects
development.
(b) Money Circulation – People generally tend to keep black money in the form of gold, immovable
property and other secret manners. Such money does not become part of the main economy and,
therefore, remains generally out of circulation. The black money keeps circulating among the
wealthy and creates more opportunities for them.
(c) The infusion of unaccounted black money in the economy leads to higher inflation, which
obviously hits the poor the most. It also increases the disparity between the rich and the poor.
More black money present within India than outside that’s the truth
(a) A secret study commissioned by the Finance Ministry concluded in 2014 that about 90 per cent of
unaccounted wealth, or black money, was lying within India and not outside. This report was among
the inputs that likely prompted the Narendra Modi government to go ahead with its November 2016
decision of invalidating, or ‘demonetising’, around 85 per cent the currency in circulation.
(b) On November 8, 2016, night when PM Modi delivered the demonetisation announcement, he had
said that the move would help weed out black money. The said “secret” government report, is
actually assimilation of studies conducted by three premier economic Institutions. This report on
black money was ready by December 2014 but its existence had been kept under wraps.
The three Institutes, which made the report on black money are:
(i) The National Institute for Public Finance and Policy (NIPFP) – concluded that between 1997 and
2009 the flow of illicit money out of the country was between 0.2 per cent to 7.4 per cent of India’s
Gross Domestic Product (GDP).
(ii) The National Council of Applied Economic Research (NCAER) – concluded that the total
amount of illicit wealth or black money, accumulated outside India between the years 1980 and 2010
was in the range of $384 billion (approximately Rs. 27 lakh crore at the exchange rate) to $490
billion. The NCAER also concluded that it would be about 2.8 per cent of the GDP.
(iii) National Institute of Financial Management (NIFM) — estimated that the total outflow of black
money between 1990 and 2008 was Rs 9,41,837 crore, or $217 billion. The NIFM’s estimation was
based on the then-current values. It said that the black money lying outside India amounted to 10 per
cent of the Indian economy.
In short, the three Institutes whose findings are part of the secret Government report on black money
arrived at different conclusions.
However, the Institutes were unanimous in concluding that the proportion of black money lying
within India was higher than what was present outside. The secret Government report estimated that
up to 90 per cent of the total black money was within India.
This secret report was the result of a study that was undertaken between 2011 and 2014.
Background for preparation of SECRET REPORT are
(a) The secret report was the result of a study that was undertaken between 2011 and 2014. In 2009,
the Parliamentary Standing Committee on Finance had observed that it had “become imperative that
the Ministry of Finance conducts a thorough assessment/survey of unaccounted income/wealth…
Particularly bringing out the nature of activities responsible for money laundering both inside and
outside India.”
(b) A year later, the then Finance Minister, Mr. Pranab Mukherjee gave in-principle approval for the
study on 28th October 2010. However, the issue dragged on until 2011.
(c) Finally, on 21st March 2011, the Finance Ministry roped in the National Institute for Public
Finance and Policy, the National Council for Applied Economic Research and the National Institute
of Financial Management and signed agreements with them to carry out the studies.
(d) The three Institutes submitted their findings in December 2013, July 2014 and August 2014,
respectively. The final report was prepared in December 2014.