REGULATION TO CURB BLACK MONEY – STEP IN THE RIGHT DIRECTION

In Ancient times our country, INDIA, was popularly known as “Golden Bird” because people of our country

were more civilised 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 others. 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 to be called a developed country very soon, but sadly it didn’t

happen. There may be many reasons behind it but the basic reason is the “Use of BLACK MONEY” to a

large extent in our country.

Black Money??

Indian tax laws don’t define the term black money (BM). The general perception is that it is income on

which tax is owed but has not been paid.

In popular parlance, the unofficial economy goes by the name of BM and the official, of white money.

There are two possible sources of BM. Firstly it may originate from illegitimate source of income arising

out of illegal gratification such as payment of ‘Selami or Pagri’ or income from smuggling, bribery etc.

Secondly, it may originate from legitimate and legal sources of income but concealed from tax authorities

out of tax evasion.

Historical reasons for the built up of BM in India:

Though generation and circulation of BM is a continuous process, there have been quite a few historical

reasons for built up of BM in Indian economy. They are as following:

Shortages during World War

Faulty Taxation

Redundant Control Measures

Large Public Expenditure

Conduits for Black Money:

Hawala: Hawala is a traditional system of transferring money used in Arab countries and South

Asia whereby the money is paid to an agent who then instructs an associate in the relevant

BlackMoney

Illegitimate Sources Smuggling, Bribery, Drugs, etc.

Legitimate Sources Tax Evasion

country or area to pay the final recipient. The Hawala is simply understood as manual

transportation of huge amounts of money at once.

Economics of Gold: In the early 90s, import and export of gold was restricted due to deficit of

foreign exchange reserves. This was also because privately held gold did not help India’s balance

of payment situation. As a result, gold smuggling became a huge racket.

Rising share of services: BM has also played a big role in the development of the services sector

mainly due to the fact that valuation of the activity is difficult. So, due to surge in service sector

growth, the BM economy is also experiencing explosive growth.

Some sources of Black Money:

Under-invoiced inventories

Over-invoiced plant and equipment

Informal sector activities including trade, films, production etc.

Illegal holding of precious metals, gem and jewellery

Flight of capital for investments abroad

Transfer activities (like secondary share market and real estate) and buying of influence (bribe for

work), Illegal activities like smuggling, drugs, prostitution, and crime

Some Interesting Stats!!

According to a report by Global Financial Integrity, the cumulative illicit outflows from India from 2004-

2013 amounted to USD 510.29 Billion, securing the fourth position after China, Russia and Mexico

amongst the Developing Nations.

Indian Institute of Public Finance and Policy (IIPFP) finds that out of the total amount of BM, 48 per cent

is generated from evasion of personal income tax alone, 28 per cent from under-reporting of production

178.04

180.71

191.77

209.22

226.67

418.54

510.29

528.44

1049.77

1392.28

0 200 400 600 800 1000 1200 1400 1600

Nigeria

Indonesia

Thailand

South Africa

Brazil

Malaysia

India

Mexico

Russian Federation

China

(In USD Billions)Source: Global Financial Integrity

Cumulative Illicit Flows from Developing Countries, 2004-2013

and 18 per cent from under- registration of immovable property so that these three main components

exhaust about 94 per cent illegal income generation.

The existence of such huge quantum of BM in India results in not only revenue losses, but also availability

of less resources for investment in priority areas, increased inequality, and illegal transfer of funds to

foreign countries underestimated national income money supply and liquidity quantum per capita income

and employment.

Black Money in India- A Saviour from Sub-Prime Crisis!!!

In most of the world the price you pay for a property is pretty much the price listed in the window of the

local realtor or estate agent. But in India, a significant part of almost all house purchases are made in cash.

Let's say you like the look of a house that is for sale worth - for argument's sake - 100 rupees. The chances

are the seller will tell you he will only take, say, 50 rupees as a formal payment and demand the rest in

cash which is "black money". It means the seller can avoid a hefty capital gains tax bill. Buyers benefit too

because the lower the declared value of the property, the lower the property tax they will be obliged to

pay. This also means is that Indians tend to have much smaller mortgages compared to the real value of

their properties than elsewhere in the world.

When the housing bubble burst, banks’ balance sheets have crashed due to fall in the housing prices.

In India, by contrast, mortgage loans can only be raised on the formal house price which is well lower than

the market price. So, most bank loans were still comfortably within the value of the property even after

the bubble burst. That's why India managed to avoid the subprime crisis that did so much damage

elsewhere.

With this one cannot approve the petty corruption. But it is one of sweet positive side effects of BM.

48%

28%

18%6%

Components of Illegal Income

Evasion of Personal IncomeTax

Under-reporting ofProduction

Under-registration ofImmovable Property

Other Factors

Steps in the Right Direction-“Connecting the Dots”:

The importance of dealing with the problem of BM has been visible in the Government's agenda, with the

issue being mentioned during the presentation of the Union Budget too.

A two-pronged approach to curb BM is on the cards-the first deals with BM stashed overseas. While some

ground work has already been executed in this regard, there are promises of more to follow. The second

is on tackling domestic BM.

Curbing Black money stashed Overseas:

The admirable acts governing the provisions for curbing the BM stashed overseas are Foreign

Exchange Management Act, 1999 (FEMA) and the Prevention of Money Laundering Act, 2002

(PMLA). It is also important to note that transfer pricing provisions have also been included in the

Income Tax Act to plug the revenue leakage.

And in the recent developments, The Black Money (Undisclosed Foreign Income and Assets) and

Imposition of Tax Act, 2015 popularly called as the Black Money Act (BMA) has been introduced.

FEMA and PMLA-

Curbing Black money stashed

overseas

Curbing Domestic Black

Money

960.77

325.98

1395.4

2150.8

0

500

1000

1500

2000

2500

Upto 31.03.2012 2012-13 2013-14 2014-15

Value of Assets confirmed by AA under PMLA,2002 (Rs. in Crore)

Amount

The Directorate General of Economic Enforcement is a law enforcement agency and economic

intelligence agency responsible for enforcing economic laws and fighting economic crime in India.

The prime objective of the Enforcement Directorate is the enforcement of two key Acts of the

GOI namely the FEMA and the PMLA.

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015

(BMA)-

The said legislation is applicable to any person (as defined under Income-tax Act, 1961)

qualifying as Residents and Ordinary Residents (RORs). For instance, if you are an ROR and

have acquired assets outside India out of income, which was chargeable to tax in India but

not offered to tax will attract tax along with penal consequences and imprisonment.

In case of ROR tax payers, overseas assets are required to be disclosed in tax returns even if

acquired from income not chargeable to tax in India. Failing this compliance, applicable

penalty will be levied under BMA.

Considering the stringent provisions introduced in BMA, the GOI had given a last chance by

providing three month-compliance window to voluntarily disclose overseas undisclosed

assets relating to the financial year prior to 2015–16. A total of 644 declarations were made

under the compliance window resulting in income/asset disclosure of INR41.64 billion and tax

and penalty collection of INR24.28 billion.

The Bill has the following safeguards to ensure that the innocent are not harassed:

1. Mandatory to issue notice and grant an opportunity of being heard;

2. Appeal to the income tax Appellate Tribunal and to the jurisdictional High Court;

3. Taxpayer can also move Supreme Court on substantial question of law; and

4. Foreign accounts with minor balances not covered by law.

International Treaties like Inter-Governmental Agreement (IGA) between India and the US

and Multilateral Competent Authority Agreement (MCAA)-

Signing of FATCA with US; Amendment of Mauritius Treaty; Initiative for signing of Automatic

Exchange of Information Treaty with all major countries including Switzerland, Initiatives

under BEPS (Based Erosion and Profit Sharing) such as country by country reporting, PoEM (

Place of Effective Management), etc.

The old 1983 tax treaty with Mauritius allowed foreign investors to enter India without paying

any tax on sale of shares if they route their money through tax havens such as Mauritius. But

they had to still pay taxes in Mauritius on sale of securities but that wasn’t difficult since tax

rates in that country is too low. This was an easy route also for BM holders in India to bring

out their unaccounted wealth back to the country by first taking out the money to one of the

tax havens such as Mauritius using a web of transactions not easy to identify for the taxmen.

That route would be fully closed by 2019 with the amendment to the India Mauritius-treaty.

This amendment would also effect India- Singapore Treaty.

Curbing Domestic Black Money:

Quoting of Permanent Account Number (PAN)-

The GOI’s objective to curb BM is not just confined to what has been kept outside India, the

focus even lies on the income in India but unaccounted for in the tax returns. The GOI has

amended the income-tax rules for improved reporting and widening the tax base. The

amendments have been brought in for mandatory quoting of PAN and annual reporting for

certain specified transactions.

The rules for mandatory quoting of PAN and other compliances are provided through Rules

114B, 114C & 114D. And specified persons under Sec 285A has to submit an annual report

known as Statement of Financial Transaction or Reportable Account (SFTRA) in accordance

with Rule 114E.

Cashless Transactions- In a bid to curb the flow of BM, the government is looking at a slew of

measures to promote cashless economy, including creating an ecosystem to incentivise

cashless transactions. The measures suggested include encouraging installation of point of

sale (POS) machines by rationalising merchant discount rate (MDR) and allowing first five

interbank transactions free of cost to promote online money transfer

According to the Reserve Bank of India the growth in acceptance infrastructure has not kept

pace with the growth in cards .

64%

43%

28%

0%

10%

20%

30%

40%

50%

60%

70%

Debit Cards ATMs POS Machines

Growth

Income Declaration Scheme, 2016- In the largest-ever declaration of BM, Rs.65,250 crore was

declared as unaccounted income and assets under the government’s four-month-long Income

Declaration Scheme (IDS) 2016. A total of 64,275 persons declared their unaccounted wealth

under the window, translating into an average of Rs.1 crore of declaration per person.

Financial Inclusion- Financial inclusion is expected to make significant changes in the

economy, especially the rural economy, which is expected to witness a revolution in

availability of financial instruments mainly because of —Pradhan Mantri Jan Dhan Yojana

(PMJDY), Gold monetization scheme, MUDRA, Direct Benefit Transfer (DBT).

Demonetisation of old currency- In a shocking move, PM Narendra Modi ji have declared old

Rs.500 and Rs.1,000 notes non-negotiable from 8th Nov 2016 (Midnight) terming it a

'mahayagna', ‘Imandaari ka Utsav’, ‘Pramanikta ka Parv’, ‘ Festival of credibility’ inviting us

to make contribution to this grand sacrifice for cleansing our country, just as we cleaned up

our surroundings during Diwali. The Indian Statistical Institute, Kolkata study, done on behalf

of the National Investigation Agency (NIA), said that Rs. 70 crore fake notes were pumped

into the economy every year. This process of demonetisation will definitely address the

problem areas of terror financing and fake currency. There is illegal money behind terrorist

funding, the channel through which the adversary sends in militants and arms. It is a big blow

to the main sponsors of fake currency.

BM holders, these people have had always the minds that they will find a route around these

kind of actions like purchasing gold with back dated invoices, hawala, converting through

binamis, etc. The government should also tackle to prevent such cases and it is evident from

the measures taken such as scrutiny of excess cash deposits, simultaneous raids on alleged

BM hoarders, etc.

64,275 Declarants

Rs.65,250 Crore Average Rs. 1 Crore

Per Declarant

Benami Transaction (Prohibition) (Amendment) Bill- This Bill is pending in the Parliament

thanks to the logjam created by the opposition. The toothless Benami Transactions

(Prohibition) Bill, 1988 was rendered ineffective because Rules were never framed by the

Central Government to effectively bring the same into action. The proposed new Bill also

contains various provisions for Investigations, Penalty and Prosecution of Benami transactions

which will add more fighting capability to the enforcement agencies.

Conclusion:

There is no doubt that existence of black money has a significant impact on social, economic and political

levels of our lives which has a significant effect on the institutions of governance and conduct of public

policy in the country. The above discussed measures by the government are in the right direction, which

aim for reduction of circulation of black money through widening of tax base. These measures are likely

to provide increased benefits to genuine taxpayers.

Although it might cause short term inconvenience to common people, we should know that “There is no

long term gain without short term pain”.

But the main cause of the black money is the attitude. They say “A bad attitude is like a flat tire, you

can’t get very far until you change it”. Without the change in the attitude of the people, the impact of

any regulation to curb the Black Money is only limited.