This article is written by Amandeep Kaur, a student of Symbiosis Law School, Pune. The author in this article has discussed the increasing rate of black money, its impact on Indian Economy and the initiatives taken by the government to curb it.

Introduction & Background

Black money is one of the serious issues in many countries and when talking about a country like India it is one of the biggest issues. This issue is not a new issue for India but an issue which has been in continuation since long back. Before understanding the core of this issue one needs to understand its actual meaning. “Black money is money earned through any illegal activity controlled by country regulations” Such money is earned usually in cash from various activities and is not declared for paying tax. The term black money came into existence in the early 20s’.  After the country started developing i.e. in the post-independence period black money came under the limelight but now in the modern times, black money has become a dominative issue in moulding the national policies, determining new economic activities and sometimes determining the law of the country.

Causes for the creation of black money

Corruption

There are many reasons because of which black money is created in our country and corruption is one of them. Corrupt practices such as taking or giving bribes, transactions in black money done by bureaucrats, politicians, civil servants and high profile businessman leads to the creation of black money. The transactions in black money are rarely caught because of the high profile back-ups because of which the culprits are never caught by the government. Every person from every class such as from a B grade employee to a high ranking officer of the government is involved in the creation of black money. Hundreds of cases were registered regarding admission through forged certificates and documents in Delhi University because of which the University came up with an idea of hiring forensic experts for verifying the certificates and documents produced by the students during admissions.

High Taxes

This is another root cause of black money. Higher rate of taxes has forced the earning part of the population for not paying taxes and keeping that part of income illegally with them which is later termed as black money. Tax evasion has led to the generation of a huge amount of black money in India. A middle-class person cannot survive under high rate tax laws because of which tax evasion is quite common.

Foreign Banks

Foreign banks are safety lockers for the hoarders of black money. Especially the Swiss Banks which do not disclose any information of their customers having an account in their banks have become the safest place for those who don’t want to pay taxes and hide their income from the government. Moreover, such banks have encouraged more and more people to generate black money.

According to Baba Ramdev who during agitations against black money alleged that the total amount of black money stored in the Swiss banks ranges between Rs.50-70 lakh crores. If there lays even 50% of truth in this allegation, even then the money stored in Swiss bank is so high that when brought to India it can make huge benefits to the Indian economy.

One of the other reports says that the Indians are at the top of the list among those who have accounts in Swiss banks. The recent cases such as Nirav Modi and Vijay Mallya who are apparently bank corrupts but actually have crores of rupees in the different banks of the world including the popular bank known for Indian Black money i.e. Swiss Bank.

Election Campaigns

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

Donations or Funds

The huge amount of donations given to educational institutions for admissions are another big generator of black money. Such donations are never paid by cheques, even the institutions don’t write such transactions in their official accounts, neither any proper receipt is issued for the made transactions. Nowadays almost all the educational institutions have fixed seats for admission in quota management.

During the exams the leaking of question papers at the examination centres and unfair ways of cheating for helping the students passing in the exams circulation of black money takes place. This unfair means and donations are not only the generator of black money but also the generator of weak educated youth. In the 2019 CBSE Board examination, CBSE used various measures such as live web-streaming from test centres, accountability of centre superintendents and encrypted question papers in some of the subjects for checking paper leaks before the examination.

There are many other factors including the mentioned above which are the reason for the generation of black money such as corrupt tax officials, chit funds, money laundering financial companies, corrupt charitable trusts and societies, smuggling and commissions etc. It is not always the government organizations which are corrupt and are the banks for black money but Non-Governmental Organizations (NGOs) are also reported to be corrupt and fraud.

Impact of Black Money on Indian Economy

Consequences of black money will have an adverse impact on the Indian economy. Along with the economic effects, black money also has social consequences. Some of them are mentioned below:-

• Loss of revenue to the government and running of parallel economy in the country– The increase and spread of black money has a serious impact on the economy as it results in the reduction if government revenues. The black money is in such amount that it is said that a separate economy including only black money is running parallel to the current Indian economy. If only some part of the black money which has been in circulation in the economy could have been paid as taxes to the government, it would have benefitted the Indian economy to a large extent.
• Vicious circle as a result of black money and corruption– As a known fact India already has a number of corrupt practices going on. Black money has added to this corruption by the illegal transactions which are made to hide the black money. The bribes are given by the people to the bureaucrats, government officials, etc. for getting their work done go to the unaccounted books and is never shown as income which adds more black money to the society. Therefore black money is the result of corruption and the already existing corruption is the result of black money which forms a vicious circle which is never going to end unless some serious step is taken by the government.
• Effects on national income and real capita income– Black money is a result of revealing low income to the government while paying tax by the people which also results in low national income of the country. The national income of the country will take a big jump if the amount of black money in circulation is backed up to the national economy of the country. This will also increase the quality of life for the whole country.
• Decrease in the quality of public goods & services– This is somewhat related to the existing corruption in the country. The people who give bribe to the producers and marketing staff or the services provider will naturally get good quality products and services in comparison to the general public who will not be provided with the same products and quality of services has to suffer. The real-life example which is experienced by almost every person that if one goes to any government official for getting some work done, the one who will pay him some bribe will get his work done faster when compared to the one who did not pay anything and will have to wait. This wait can be in days, weeks, months and sometimes even in years. Bribing the government official is quite popular and is popularly known as “the easy way out”.
• Higher taxation and inflation– The main reason behind the taxation is to earn revenues for the expenditures done by the government in order to make a balanced budget. Therefore it is obvious that if the amount of black money which the people are hiding from the government is revealed and included in the budget of the government then the tax rate will surely come down as the revenues which the government wants to earn from the people by imposing high taxes will already be with the government. Similarly, rising prices are the result of too much money in circulation for some particular goods in the market. The Reserve Bank of India itself has admitted that the amount of money in circulation in the Indian economy is quite more than the money inflow on papers.   According to the accounts, there is a particular amount circulating in the market but apparently, the market also includes black money which has not been included as a fact of being black money which leads to more money than the calculated amount. Therefore the amount of goods and services which were there in the market according to the accounted money gets a hike in their prices which results in inflation.
• Difficulty in the formation of monetary and fiscal policy– This is an obvious impact as the government while making these policies is not able to count the exact national income because of the hidden black money which makes such policies unrealistic. Such policies can only have some impact on the Indian economy if these are made with exact calculation keeping in mind the consequences and needs of the people.
• Increased criminal activities in the society– The illegally earned or the black usually gives rise to various illegal activities in society and corruption is one of them. The duration of elections is also the time when the illegal use of black money can be seen. Various terrorist activities have backup power of hoarders of black money which is even harmful to the whole country. The illegal weapons with various groups of unsocial elements are usually bought up by the use of black money. Drugs are the biggest enemy for the youth of the country. The smuggling of drugs in various colleges, hostels, hotels, clubs and bars is done with the help of black money which further leads to various criminal activities. Various murders are the result of black money which are done for political revenge and are done by the contractors engaged by the various political leaders. It is usually said money corrupts the life of even a normal person, and money in excess corrupts excessively. The situation is worse when that money is black money. This black money is a type of excessive money which is spent carelessly and lavishly by the owners of this money. The law sometimes has no effect at a situation which involves black money as money shuts off even the high ranked government officials.

Government initiatives to curb black money

• Black Money Declaration Scheme 2017– This scheme was recently launched by the government headed by Mr Modi. This scheme enabled the black money hoarders to declare their whole illegal income and gave them the time limit to declare it till 31st March 2017. In this scheme, everyone was allowed to disclose their illegal income either with the bank or the post office. It was also said that one has to pay tax, surcharge and penalty which will amount a total of 49.90% of the total unaccounted income. From the unaccounted income, 25% of it was to be deposited in Pradhan Mantri Garib Kalyan Yojna. The deposits made in this scheme were interest-free and were deposited for a fixed period of 4 years without any allowance of withdrawal. Even the person against whom a search or survey operation was initiated was allowed for a declaration under this scheme.
• Demonetization– This was one of the biggest step taken by the Modi’s government to curb black money from the country. 8 November 2016 was the day when the central government declared the demonetization of Rs 500 and Rs 1000 and introduced new notes of Rs 500 and Rs 2000. This initiative was taken by the government because of lacking the economy behind the other economies of the world and to curb various terrorist activities which were generated in the country. Simultaneously to this scheme exchange of old notes was also initiated. RBI declared that old notes were allowed to be deposited till 30 December 2016. A particular limit was set up for exchanging of old notes. Even the withdrawal limit was set up for withdrawing new currency from the ATMs and banks.
• Linking bank accounts with Aadhaar & Pan- The linking of Aadhaar card and Pan card was initiated by the government so that it can keep a track of accounts of each and every citizen and even their bank statements so that the government could have a source to know what a citizen is earning and how much he is paying tax for. This linkage is still in continuation as the government has extended the last date of linking aadhaar and pan with the bank accounts many times. Though this scheme has a huge hand in taking off the fake bank accounts or the ghost accounts. This scheme is also really helpful in tracking suspicious transactions involving huge amounts.
• Benami Transactions (Prohibition) Amendment Act, 2016– The word itself means without any name. This Act prevents Benami transactions and has provision for confiscation of the benami property. Though this act is in existence since 1988 the amendment bill introduced in Lok Sabha on May 13, 2016, seeks to amend this act. The amended law provides that if a person is found guilty of offence under benami transactions by the court, he will be punished with imprisonment for a term not less than 1 year but this can be extended to a maximum of 7 years along with that person will be liable to pay fine which can be maximum up to 25% of the exact market value of the property. The Benami Transactions (Prohibition) Amendment Act, 2016 came into effect on 1st November 2016. This amendment act has been stricter in the confiscation of various benami properties. As many as 140 cases involving property value of more than Rs. 200 crore. These cases involve huge amounts of deposits in bank accounts and immovable properties.
• Double Tax Avoidance Agreement (DTAA)- The DTAA is a treaty in relation to tax signed by India with other countries to prevent the taxpayers from paying the taxes of their earned income twice i.e. prevention from paying both at the resident country as well as the source country. Currently, India has signed this treaty of prevention of double taxation with more than 80 countries of the world. The problem arises when the government has to calculate the total tax of a particular person and there arises imbalance in tax collection on account of global income of individuals. To understand this better there is a real-life example, A is an Indian and he has his business running both in India and in some foreign country, so the income will be earned both in India and in that foreign country. To prevent the person from paying taxes in both the countries government of India signed this treaty with other countries. DTAA is one of the most beneficial agreements signed by India which is helpful for both the taxpayer and the tax collecting authority. It is beneficiary for the tax collecting authority in the sense that the authorities will not face any problem or issues in calculating the tax of an individual and not even the taxpayer has to pay the tax twice in different countries.
• Action against Shell Companies- Basically a shell company is a company which does not have any active business or any major assets. It can also be said as a non-trading company. The government of India in January 2018 decided to cancel the registration of lakh of companies who were suspected of being involved in money laundering activities. Almost 2.26 lakh companies have been stroked off by the government and around 3.09 lakh directors who were in association with these companies. Currently, the government has decided to cancel the registration of more 1.20 lakh companies. State Minister for Corporate Affairs P P Chaudhary, the chairman of the reviewed meeting, has ordered the officials to take strict and immediate actions against the companies which are to be struck off from the official records. Considering much reason more than 1.20 lakh companies have been found for striking-off. Indian Securities Regulator, SEBI otherwise called Securities Exchange Board of India has forced exchanging confinements on 331 recorded substances which it recognized as shell organizations. An unexpected move that was pronounced by the controllers as the piece of a wide crackdown on illicit seaward exchanges and tax avoidance.  
• New Benami Transactions Informants Reward Scheme, 2018– This scheme is recently launched by the Income Tax Department to encourage large participation by the people for evading black money from the economy. Under this scheme, the informant will be rewarded an amount up to Rs one crore if he provides the Joint or Additional Commissioners of Benami Prohibition Units (BPUs) in Investigation Directorates of Income Tax Department the specific information about any benami transactions and properties in a prescribed manner.     

Suggestions

The government has already taken various steps to finish the issue of black money. The biggest and the most recent step taken by the Modi’s government was demonetization. Many people were against this step especially the ones whom this step affected the most. Leaving all the complaints behind demonetization has helped to eliminate black money but to only some extent. Though this step was really difficult to impose still a lot more needs to be done in relation to this issue. Billions and trillions go out of the country as a part of black money. The black money has caused the Indian economy to lack behind in comparison to other countries in relation to the total GDP. This is also called the opportunity cost of not having as a developed and among the largest economies of the world but a developing economy. The money which has been sent out of the country could have been used for various purposes in the country such as for providing enhanced social infrastructure with technologically advanced health care services, more educational facilities and employment opportunities. The country could have resources to feed almost 90-95% of the poor and hungry beings. It implies each family could have had a home, and we most likely wouldn’t need to witness the troubling sight of a half-dressed humans catching a cold in the rain and winters.

According to my opinion, the problem of black money is now to be solved in a real sense and in a very intelligent manner. Since this problem is hitting the poor’s of the country the following steps are helpful. First of all the problem is to be dealt morally. The moral of the people in the society must be raised. In the society senior civil servants, politicians can play a major role. They are role models for the society so by paying proper taxes they can set an example to the society.

• The tax system should be realistic in nature. High rates of taxes will only force the people to evade their income from taxes whether it is income tax, wealth tax, capital gains tax or any other tax which will further lead to a generation of black money.
• The authority which is responsible for the collection of taxes should be honest, without any corruption. All the officials should be more focused and more efficient in their work.
• Various different incentives should be given so that people voluntarily agree to disclose their real income.
• Economic Intelligence unit must be maintained thoroughly and should be looked after. Honest officials and staff must be rewarded to encourage honest staff in the department.
• Corruption in the administration at all levels must be stopped at any cost.

Conclusion

The government alone cannot curb this issue completely from society. Making different policies, laws, acts and legislation will not work alone. For the implementation of these laws, policies each and every citizen has to work on this. People should understand why it is important to pay tax and should stop evading their income and should not lead to the generation of black income. Each and every citizen should make some contribution to the development of the country in the form of paying taxes.

References

1. www.investopedia.com
2. www.freepressjournal.in
3. www.pib.nic.in
4. www.bankbazaar.com
5. www.timesofindia.com