What is Black Money?

Black money is a term used in common parlance to refer to money that is not fully legitimate in the hands of the owner. This could be for two possible reasons.
First is that the money may have been generated through illegitimate activities not permissible under the law, like crime, drug trade, terrorism, and corruption, all of which are punishable under the legal framework of the state.
Second and perhaps more likely reason is that the wealth may have been generated and accumulated by failing to comply with the tax requirements.

There have been several estimates regarding the extent of black money economy also called as parallel economy. Some of the estimates suggest it to be as high as up to fifty to hundred percent. Although black money in India is decades old problem, it has become real threat post liberalization. Illegal activities such as crime and corruption, noncompliance with taxation requirements, complex procedural regulations, cultural and social practices, globalization along with weak institutional, policy, legal and
implementation structures have further augmented the black money economy.

How it is detrimental to economic health?

• There is a distortion in investment in economy. With black money the investment is made in high end and luxury goods.
• Huge loss of taxes amounting to billions.
• Black money leads to further corruption by creating a vicious cycle.
• Generating black money means that quality is compromised in public sector projects where black money is used to manipulate tenders and offer kickbacks.
• Investments that must have been made in the country giving the necessary boost to economy are invested elsewhere.
• Since, RBI cannot control the black money cash flow in economy, it dilutes its policies targeting inflation.
• High prices of real estate especially in big cities are due to deep pockets filled with black money.
• Forward trading of goods by cash rich speculators cause fluctuation in prices due to hoarding.
• National security is threatened because black money is used to finance criminal activities. Black money generated from drugs and smuggling is being used to operate terror networks.

Steps taken by government to curb black money generation and flow:

Tax Reforms

• Rationalization of income tax with greater tax base and lower taxes.
• Tax deduction at source in which the tax is deducted from the payment itself by the payee.

Voluntary Disclosure Schemes:

The government allows reporting black money generated through tax evasion in a given time frame, as government has given in the Black Money Bill passed this year.

• Removing currency after certain time: So that unaccounted wealth is either brought into economy or becomes useless.
• Encouraging Cashless transactions: Government has recently announced tax benefits for making online payments for amount greater than twenty thousand rupees.

Legislative Framework:

• Prevention of Money Laundering Act, 2002
• Benami Transactions Prohibition Act, 1988
• Lokpal and Lokayukta Act
• Prevention of Corruption Act, 1988
• The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015

International Cooperation:

• Multilateral Convention on Mutual Administrative Assistance in Tax Matters
• Financial Action Task Force
• United Nations Convention against Corruption

Black money is a menace to the society and in addition to government efforts, needs public awareness. This will lead to realisation of the Directive principles of equality in the society being realized.