As we know that in ancient times our country, INDIA, was popularly known as
because people of our country were more enlightened in terms of
coordination and co-operation, worked in a very enthusiastic & honest manner so
as to provide fruits of their work to everyone without any selfishness and/or
jealousy i.e., they were not concerned about their earnings as compared to
They focused on the welfare of the nation as a whole. So, it could be
predicted at that time that our country will become one of the greatest
economies in the world and be at the top as regards developed country very soon,
but sadly it didn't happen.
There were many reasons behind it but the basic reason was use of
to a large extent in our country. In Ancient times the ways to
generate money as well as its usage was very transparent i.e., everyone knew the
sources of money and its application, which may be referred as white money
So, in the past, White Money was in use but now the colour of Indian money has
changed to Black. Before discussing the use of black money, one must know what
Black Money is.
There is no definition for black money in economics because in the present time,
black money is used in our country up to a very large extent so it not possible
for us to define it properly or with an accurate definition. Different people
define it different ways with different terms such as unaccounted income,
underground income, black wealth, or at economy level it is known as parallel
economy, black economy, shadow economy and unofficial economy.
Broadly or in
layman's language we can define it as, money that has been acquired through
illegitimate means or money which is unaccounted for, that is, for which tax is
not paid to the government. Black money may be generated either by
illegitimately drug trade, terrorism, corruption, or legitimate failure to pay
the dues to the public exchequer yielding the generation of unaccounted wealth.
There are certain sectors and activities like land and real estate transactions,
bullion and jeweller dealings, complex financial market transactions, charitable
activities, informal sector and cash economy, self-employed professionals,
external trade and transfer pricing, which give birth to the generation of black
In addition to wealth earned through illegal means, the term black money would
also include legal income that is concealed from public authorities:
Nature and Sources of black money:
- to evade payment of taxes (income tax, excise duty, sales tax, stamp
- to evade payment of other statutory contributions
- to evade compliance with the provisions of industrial laws such as the
Industrial Dispute Act 1947, Minimum Wages Act 1948, Payment of Bonus Act
1936, Factories Act 1948, and Contract Labour (Regulation and Abolition) Act 1970
- to evade compliance with other laws and administrative procedures. The
portion of a country's income tied to black money affects the economic
growth of the country. Black money causes financial leakage, as unreported
income that is not taxed causes the government to lose revenue. In addition,
these funds rarely enter the banking system. As a result, it can be more
difficult for legitimate small businesses and entrepreneurs to obtain loans.
Furthermore, black money causes the financial health of a nation to be
underestimated. It is extremely difficult to estimate the amount of black
money in any economy. That is not surprising, given that participants in the
underground economy have strong incentives to conceal their activities.
These unreported earnings cannot be included in a country's gross national
product (GNP) or gross domestic product (GDP). Thus, a nation's estimates of
savings, consumption, and other macroeconomic variables would be misleading.
These inaccuracies adversely affect planning and policymaking.
and Black Money
came into light during Second World
War. At that time due to various control on distribution and prices of goods, a
secret market came into light where goods were available but at a higher price
than the controlled one. The term "black money" became current to describe the
money received or paid in "black market". With time black money
a wider area much wider than black market
Sources of black money can be divided into two broad categories, which
- Legal activities
- Illegal activities
Here the basic activity is to earn income legally but evade tax on that income
(which can be termed as tax envision). The evasion of tax be it direct tax on
income or indirect tax on commodities, results in unexplained income. The
factors or causes of tax evasion are the high level of tax rates, less respect
to the Government and its laws, lenient penal action, and nature of the economy.
High tax rates usually make tax evasion more tempting.
Tax evasion is more in
those countries where there is general apathy on the part of people towards the
Government and its laws. Tax evasion by politicians sends wrong signals to the
general public relating to noncompliance with rules and laws; lenient penal
action also sometimes encourages tax evasion. Usually, countries with relatively
poor implementation of regulations tend to have a high share of the unaccounted
economy than others performing due to the implementation of the same and sound
Increasing globalization and economic freedom is also contributing towards
black money. Country like ours which is still developing is losing a lot of
resources due transfer price manipulation, which largely due multi-national
company misusing transfer pricing.
It consists of criminal part of black money, it includes activities which are
of anti-social type like smuggling of goods, embezzlement, forgery, chit funds ,
production/ trade of contraband goods (i.e. narcotics, illicit liquor and arms),
illegal mining and falling of forests; hoarding and black marketing of
pricecontrolled materials and services, theft, robbery, kidnapping and
extortion, human trafficking, sexual exploitation and blackmailing, bribes to
public offices to secure favours such as altering land use, regularizing
authorized constructions, speed money to circumvent/fast-track procedures, and
commission to secure government purchase orders. These activities reflect
declining moral and social value and are punishable under the various Acts of
the Central and State Governments and also the schedule of Prevention of Money
Laundering Act, 2002.
Methods to Generate Black Money:
Black money may be generated through the crude approach of not declaring or
reporting the income or the activities leading to it. This is the likely
approach in all cases of criminal, illegal, and impermissible activities.
Another approach can be by not declaring or reporting activities and the income
generated there from may also be followed in cases of failure to comply with
regulatory obligations or tax evasion on income from legitimate activities.
However, complete evasion or non-compliance may make such incomes vulnerable to
detection by authorities and lead to consequent adverse outcomes for the
generator. Thus, a more sophisticated approach for generation of this kind of
black money is often preferred, involving manipulation of financial records and
Tax evasion involves misreporting or non-reporting of the transactions
in the books of account.
Different kinds of manipulations of financial statements resulting in tax
evasion and generation of black money are summarized below:
Some can be explained as follows:
- Out of Book Transactions
- Parallel Books of Accounts
- Manipulation of Books of Account
- Manipulation of Sales / Receipts
- Under-reporting of Production
- Manipulation of Expenses
- Manipulation by Way of International Transactions through Associate
- Manipulation of Capital
- Manipulation of Closing Stock
- Manipulation of Capital Expenses
Black money in India:
- Out of Book Transactions:
This method is one of the simplest methods and that is why it is widely used.
This mode is most prevalent among small grocery shops, unskilled or semi-skilled
service providers, etc. Here, Transactions that may result in taxation of
receipts or income are not entered in the books of account by the taxpayer. The
taxpayer either does not maintain books of account or maintains two sets or
records partial receipts only.
- Manipulation of Books of Account:
Books of accounts are required to be maintained under Companies Act, Banking
Regulation Act and Income Tax Act. Due this it becomes difficult for tax payers
to do out book transaction or to maintain parallel books of account. Such people
take help by manipulating books of accounts to evade taxes.
- Manipulation of Capital:
Manipulation of capital is possible either by laundering black money or
introducing it in the books of accounts. Manipulation can also take place
through shares at a high premium, bogus gifts, and capital gains, purchase of
false losses, etc.
Every sector in our country generates and uses black money for its survival in
the market, society, etc. It includes Real estate, financial market, bullion &
jewellery market, non-profit organisations, external trade and so on.
In India black money persists due to the existence of Demonstration Effect
i.e., the way to live a life in terms of other points of view or we say live a
life by looking at others livelihood. People of India are very much affected by
the lifestyles of other people of the society who are maintaining considerable
high status, and in turn want to be like them. For this, they want to generate
money by any means. Therefore, to fulfil these desires or to maintain their
status in society they force themselves to generate and use black money.
Corruption in India is a major issue that adversely affects every field of
economy. Spirituality is another thing that is responsible for generation of
black money especially in India, as people here are very emotional towards it.
Many such person misuse these emotions and sentiments and generate a good amount
of black money. Manipulation of accounts also helps in generation of black
money. Many a times Government of India has failed to collect the estimated
amount of tax from the people of country and this is due to the black money
driven by underground economy.
To estimate black money in India there is no accepted methodology for making
such estimation. Even if an estimate is made it would be and assumption only. As
by the definition of black money, it is unaccounted money, thus all attempts to
estimate it will fail.
Impact of black money on Indian economy:
The existence of black money or parallel economy has disrupted the planning of
the economy of the country. And its flow is seriously affecting the entire
economic system of India. Some important are as follows:
- Mass poverty:
The distribution of wealth and income in our country has been severely affected
by the growth of underground economy. The common people get affected indirectly
in so many ways. The tax evaders are keeping the money away from the deserved.
If all the black money in the tax havens is recovered and used by the Indian
government, all the outstanding liabilities of the country could be paid off and
money would still be left for investment and development.
- Uncontrollable inflation:
When black money is out in the market, the amount of money in the system is
higher than the one Government expects. This causes the prices of commodities to
increase to a level beyond normal. This is a direct result of people having more
money and offering more money on specific items. Even if the Government tries to
control the credit flow in the market by taking necessary measures, the amount
of black money present upsets the move, resulting in some sort of pressure on
- Loss of revenue to the state exchequer:
Many times, the Indian Government has failed to collect the estimated amount of
tax439 from the people and for this, credit has to go to the black money driven
underground economy. A report was submitted to the Finance Ministry of India
that depicts the spread of black money in different sectors like real estate,
mining, telecom etc. The study, headed by NIPFP chief P.Kavita Rao, explains how
illicit wealth is likely to exceed 10 per cent of GDP.
- Inflated real estate:
When people with deep pockets are ready to pay more for a piece of land, the
price of surrounding land also tends to increase; thus, artificially inflating
the prices of an entire area. Generally, people involved in black money market
are always ready to pay more for a piece of land as this helps in converting
their coloured money to legal money.
- Underestimation of GDP:
Black income has been causing underestimation of GDP in India as enormous volume
of income is diverted to this unaccounted sector resulting in growing
continuation of parallel economy of the country.
Measures taken to tackle black money:
In order to curb the menace of black money the Central Government has been
taking Hercules efforts through introduction of various laws and amendment of
the existing laws. Some of the measures taken by the Government are discussed
Demonetization is the act of stripping a currency unit of its status as legal
tender. Demonetization refers to the withdrawal of currency from circulation
which is done to ambush black market currency and unaccounted money.
Demonetization undertaken twice in the past miserably failed, with less than 15
per cent of high currency notes being exchanged, leaving more than 85 per cent
of high value currencies untouched as the owners suspected penal action by the
Quite apart from the relatively paltry results obtained on
the two occasions on which it has been tried, there are other good reasons to
doubt the efficacy of this measure in combating black income generation. First,
the measure is limited to inflicting penalties on those who hold their black
wealth in the form of cash at the moment of demonetization. Second, even for
holders of cash, there exist avenues for converting high denomination notes into
lower valued ones, at a discount, through intermediaries.
Third, and perhaps
most importantly, the measure does not address the underlying causes of black
income generation. Hence, subsequent generation of such incomes can continue
unabated with due precautions for the form in which unspent black incomes are
held. The once-andfor-all penalty exacted by demonetization simply puts everyone
on their guard for the future, but does nothing to alter the incentives which
spawn the black incomes. Of course, since cash is the principal vehicle for
conducting black transactions, there is undoubtedly a temporary dislocation in
such activities. The point is that the dislocation is temporary.
Income tax department's powers have to be considerably enlarged and it should be
empowered to conduct raids on the premises and properties of the taxpayers or
any other individuals and can seize the unaccounted income and wealth and take
necessary legal actions against the tax evaders.
- Linking Aadaar to Pan for income tax returns and to bank accounts:
The Aadhaar Card is now a necessity in various fields - to register for a SIM
card, for opening bank accounts and to file income tax returns. The recent step
taken by the government to link Aadhaar to PAN for filing income tax returns is
mandatory as it would help the authorities to keep track of tax evaders.
The Aadhaar and the PAN details would help officials keep track whether the
taxpayer is fulfilling the requirement of filing for ITR. On the same note,
linking Aadhaar to bank accounts is also compulsory. This will help officials to
keep track of the digital transactions, transfers, etc.
- Prevention of Money Laundering Act, 2002:
The Prevention of Money Laundering Act 2002 (PMLA) was enacted to prevent money
laundering and provide for confiscation of property derived from, or involved
in, money laundering and for matters connected therewith or incidental thereto.
The Act also addressed international obligations under the Political Declaration
and Global Programme of Action adopted by the General Assembly of the United
Nations to prevent money laundering. The Act prescribes that any person found
guilty of money-laundering shall be punishable with rigorous imprisonment from
three years to seven years. He could also be liable to fine of up to Rupees five
- Benami Transaction (Prohibition) Act, 1988:
Benami is a Persian language word that means "without name" or "no name". In
this Act, the word is used to define a transaction in which the real beneficiary
is not the one in whose name the property is purchased. As a result, the person
in whose name the property is purchased is just a mask of the real beneficiary.
Benami Transactions (Prohibition) Act, 1988 prohibits holding of property that
is "benami" or not in the name of the person who purchased the property.
Prevention and control of black money is pre-requisite for establishing an
equitable, transparent and efficient economy. As economy is the backbone of a
country, black money will paralyze the economy and the country will be in
doldrums. It becomes a hurdle in the development of the economy and will
definitely destroy the same.
After an uproar in Parliament, the Government of
India came out with a White Paper on Black Money in May 2012 (Ministry of
Finance, 2012), presenting the different facets of black money and its complex
relationship with policy and administrative regime in the country which also
reflected upon the policy options and strategies, the Government has been
following to address the issue of black money and corruption in public life.
The fight against generation and accumulation of black money and curbing black
money is far more complex and prolonged requiring new strategies and stronger
intervention of the state, which, in turn, needs a hardy legal framework,
coextensive administrative setup and a very strong determination to fight the
threat. Effective implementation of the tax laws can arrest tax evasion.
Relaxation in tax laws, simplification of tax laws, removal of drawbacks in the
tax system, proper processing of information available can be the best tool for
the betterment of Indian tax compliance. Educating the people about the tax laws
is vital as it will create an atmosphere to perform their duties to the nation.
A multi-pronged strategy is essential to deal with the issue of generation of
black money and its illicit transfer outside the country and for bringing back
to India. The factors leading to a generation of black money in India along with
the various may exist due to lack of adequate and reliable data.
student at Faculty of Law, Univeristy of Lucknow