Status of Black Money

In News

• Recently, the government has said in the Parliament that Rs 2,476 crore has been collected as tax and penalty under the one-time three months compliance window during 2015.

Black Money

• Definition: 
  • Black money includes all funds earned through illegal activity and otherwise legal income that is not recorded for tax purposes. 
  • Black money proceeds are usually received in cash from underground economic activity and, as such, are not taxed. 
• 2 Broad Sources: 
  • Illegal activity: 
    • Money that is earned through illegal activity is obviously not reported to the tax authorities, and so is black.
  • Legal but unreported activity:
    • It comprises income from legal activity that is not reported to the tax authorities. 
    • A large number of small shops around the country almost exclusively do business in cash without receipts. All of this could potentially be black money.
• Another major source: 
  • The income earned by companies that is routed through shell companies abroad, thereby evading tax authorities.
• Why difficult to measure:
  • The very definition of black money makes it extremely difficult to quantify. 
  • According to the Standing Committee’s report, the sectors that see the highest incidence of black money include real estate, mining, pharmaceuticals, pan masala, the gutkha and tobacco industry, bullion and commodity markets, the film industry, and educational institutes and professionals.
  • As the report also notes, neither are there reliable estimates of black money generation or accumulation and nor is there an accurate well-accepted methodology to make such an estimation. 
• Methods of Estimation used:
  • Monetary method: 
    • This method assumes that the existence of and changes in the share of unaccounted income is reflected in the stock or flow of money in the system. 
  • Input based method: 
    • In this method, unaccounted income is modelled using a single universal variable with which it is assumed to be highly correlated, therefore these estimates are also called input-based estimates. 
    • One common input used in this method is the quantity of land freight transport. 
  • Survey: 
    • A third method to measure black money is a straightforward survey. 
    • This one, however, requires voluntary information from people and businesses concealing their incomes and so is prone to inaccuracies.

Criticism of Black Money

• More illegal activities: In addition to some of the clearly immoral activities, such as human trafficking, that are pursued to obtain black money, black money itself creates issues. 
• Corruption: Most notably, higher amounts of black money in the economy often lead to increased corruption. 
• Revenue loss: Businesses that make substantial profits in the underground economy almost necessarily have to pay law enforcement to look the other way from time to time. 
• Higher Inflation: The infusion of unaccounted black money in the economy leads to higher inflation, which obviously hits the poor the most.

Benefits of Black Money

• Black money produces the most benefits in societies with the most oppressive laws. 
• Regimes imposed price controls that made goods unobtainable or sales taxes that made them unaffordable. Black money provided a way to decrease the damage.
• Black money can also help to reduce the impact of systematic racism. 

Way Ahead

• Government has taken various steps against the black money stashed abroad which have led to positive results.
• Legislative Action: 
  • The government has already enacted several laws that seek to formalise the economy and make it necessary to report economic transactions. 
  • These include the Central Goods and Services Tax Act, the various GST Acts at the State levels, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, the Benami Transactions (Prohibition) Amendment Act, and the Fugitive Economic Offenders Act to name a few.
• Reporting of PAN card with transactions:
  • Another method employed by the government to make it harder for transactions to be hidden is to mandate the reporting of PAN for transactions of more than ?2.5 lakh, and the prohibition of cash receipts of ?2 lakh or more and a penalty equal to the amount of such receipts if a person contravenes the provision.
• Non filers of income tax: 
  • The Income Tax Department has also started monitoring non-filers of income tax returns using third-party information to identify persons who have undertaken high value financial transactions but not filed their returns.
• Real time data & Information exchange: 
  • The availability of real-time data on overseas investments by Indians has improved as the country emerges into a leading force in efforts to forge a multilateral regime for proactive sharing of financial information, known as Automatic Exchange of Information (ATI). 
  • The Automatic Exchange of Information based on Common Reporting Standard started in 2017, enabling the country to monitor the financial account information of Indian residents in other countries.

Source: IE