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In the field of economics, there is no universally accepted definition of “black money.” It is money that has been obtained through unethical means or money that is unaccounted for, which means that tax on it has not been paid to the government. In simpler terms, it is money that has been stolen.
In most cases, spurious notes or money that has been counterfeited are not considered to be black money. Notes that are considered to be counterfeit are those that have been illegally printed by individuals who are not authorised to do so.
Black Money
Black money is money that is kept secret from the authorities of the government and does not show up in official statistics such as India’s GDP, national income, etc.
White money is defined as cash that is obtained through lawful means, is properly recorded, and on which appropriate taxes (whether income or otherwise) are paid.
In a perfect economy, every single dollar that changes hands would be properly recorded and categorised. The government’s ability to collect taxes would be aided by this.
Black money refers to monetary transactions that are not properly recorded or accounted for.
Check out the article that I linked to for more information about how the Central Vigilance Commission monitors black money.
How is it that illegal money is created?
Any one of the following three activities can result in the creation of illegal funds:
Illegitimate activities
The following are examples of illegal activities that can result in the creation of black money:
Corruption- A violation of the regulations governing taxes
Complicated rules and regulations for the process
Money laundering
Smuggling
Tax evasion- This refers to the situation in which a person or organisation willfully avoids paying taxes that are owed to the government.
Tax avoidance- This is the process by which a person or organisation avoids paying taxes by exploiting one or more of the system’s inherent flaws. However, doing so is not against the law.
The Origins of India’s Illicit Financial System
Following are some of the most common places where illegal funds can be obtained:
Black money is created when vendors or traders do not give bills or receipts to their customers.
A common strategy utilised by many individuals who wish to conceal the true nature of their income is to purchase precious metals and jewellery.
Many people in the real estate industry deliberately undervalue their properties in order to avoid paying the tax that is due on those assets. They avoid paying the appropriate amount of property tax to the central government.
Some trusts and Self-Help Groups (SHGs) do not provide adequate citations for the sources of the funds and donations they have received.
Tax havens: Tax havens are typically very small countries that do not require citizens of other countries to pay taxes. These nations, on the whole, have regulatory environments that are extremely lax, which is something that large corporations make the most of. They do this by establishing front companies in those jurisdictions and then channelling all of their profits through those front companies. This allows them to significantly cut their overall tax burden.
Hawala: Hawala is a form of informal money transfer that does not involve the use of banks or financial institutions. Without using any paperwork at all, this is accomplished through the use of codes, contacts, and trust.
Investing in innovative derivative instruments like participatory notes can also be a way to conceal illegally obtained funds.
The magnitude of the issue
According to a calculation done by the Bank of Italy, India’s share in the global tax haven industry is between $152-181 billion, which is equivalent to Rs. 10 lakh crore.
According to the Global Financial Integrity Report, India is ranked eighth in the world in terms of the generation of black money.
According to a statement made by a former director of the Central Bureau of Investigations, the total amount unaccounted for cash in India is approximately USD 500 billion.
Money Laundering
The process of converting illegal or “black” money into legal or “white” money is referred to as “money laundering.”
People who are in possession of black money are unable to spend it openly. They have two options: either conceal it or use it to participate in the black market. Through the process of money laundering, they transform the black money into white money. It is a means by which criminals conceal the wealth that they have amassed over time.
Conclusion
People engage in the practice of money laundering when they remove money that was earned (illegally) from its source, combine it with “white money,” and then return it to its original location. Another term that is frequently used in this context is round-tripping. In this scenario, people avoid paying taxes by first transferring money to a tax haven such as Mauritius or the Cayman Islands. After that, the money is invested in India, making it a foreign investment.
