All about the Black Money.

Recently, when the government demonetized the notes of Rs. 500 and Rs.1000, it was seen as a step to curb the menace of black money.

Let us first understand what it this black money, how its is generated, how it affects the economy among others.

  • What is black money?:
    • Black money is illegally accumulated wealth. This may include the wealth:
      • Accumulated by non-payment of taxes.
      • Through illegal activities like smuggling, trafficking etc.
  • What are the various sources of accumulating the black money?:
    • Real estate: due to a number of irrational taxes and duties like capital gains tax, stamp duty etc.
    • Bullion and Jewelry: stashed/ unaccounted money can be used to buy gold ornaments, bars etc.
    • Financial operations: IPO(Initial Public Offering) manipulations, rigging of the market such as the use of shell companies.
    • Public procurement: there are enough cases of leakage and pilferage and consequent black marketing in PDS chain by intermediaries.
    • Non-profit organizations: taxation laws allow for tax exemptions in promoting charitable organizations –>this provision is highly misused.
    • External trade and transfer pricing: transfer profit/income to no or low tax jurisdictions–>developing countries like India with a complex tax structure are prone to this due to the tool of transfer pricing.
    • Informal sector and cash economy: cash transactions, large unbanked and underbanked areas contribute to a large cash economy in India.
    • Trade-based money laundering: legitimizing illegal trade like that of drugs or illicit organs.
    • Transfer Pricing to the Tax havens:
      •  they are typically the countries which impose no or pity taxes on foreigners who come to live there .
      • an entity can be setup with minimal commercial procedures and still be classified as a business entity.
      • strong confidentiality or secrecy regarding wealth or accounts
      • highly liberal regulatory environment
      • allows opaque existence.
      • Transfer pricing is a mechanism through which a company virtually shifts its profit to tax havens in order to evade stringent taxation of a country where it is originally based.
  • How does the black money impact the economy?:
    • huge loss of taxation
    • such a loss in turn affect the quality of the policies of the government.
    • leads to high prices, especially in real estate sector.
    • distortion in investment pattern–>more in high end and luxury goods.
    • national security is threatened as black money is used in funding criminal activities.
  • What are the various steps being taken by the government to tackle this?:
    • declaring old currency or larger denominations to be invalid so that it either becomes useless or comes out for replacement after which it can be seized post scrutiny–>called demonetisation(recently done).
    • Income Declaration Scheme: Voluntary disclosure of income
    • for checking leakages and black marketing in PDS —>Direct Benefit Transfer scheme was implemented.
    • Tax reforms:
      • rationalising of tax structure–reduction in taxes.
      • changes in income tax slabs–inc.the range of exemption etc.
      • GST, which is a uniform taxation regime could be introduced to reduce the multiplicity of taxes leading to tax evasion.
      • Tax Deduction at Source(TDS) where the salary is given after reducing the taxes.
    • Encouraging cashless transactions–>will make the transactions transparent.
    • Legislative framework:
      • Benami Transactions act(Benami properties are those which are registered on the name of some person while its cost is paid by some other person).
      • Prevention of Money Laundering, 2002–>Money Laundering is the concealment of origins of the illegally obtained money through transfers including legitimate business and foreign banks—>Hawala transactions is one of the most common methods to transfer such money–>money laundering helps in converting “black to white”.
      • Lokpal and Lokayukta –>to bring in transparency and accountability.
      • Prevention of corruption act: to check the corruption in the government system.
      • Undisclosed Foreign Income and Assets(Imposition of Tax) Bill, 2015
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