Black Money: Key Points, Impact on the Economy and Steps Taken to Counter This

Black Money: Key Points, Impact on the Economy and Steps Taken to Counter This

Q. “ Black money has a negative impact on the Indian economy.” Discuss in the context of steps taken by the Indian government to bring back black money.

A. About Black Money

1. A total of 1,195 Indian Swiss bank accountholders have been estimated to have stashed black money to the tune of INR 25,420
2. Renewed efforts have been taken to trace black money stashed abroad
3. Evidence is the need of the hour, as names alone cannot prove the existence of black money
4. So far, from a list of 628, around 428 cases were actionable and there were 128 orders of assessment
5. Prosecution has been launched for 60 cases of known and intentional tax evasion
6. Special Investigation Team/SIT has suggested treaties with other nations be renegotiated on account of existing evidence

Estimates of Black Money

1. Black Money Abroad

• World Bank report indicates shadow economy is at one-fifth of the economic output
• Study on illicit financial flows by Global Financial Integrity has placed these at 3% of the economic output for India between the years 2002-2011
• Black money is generated through complex criminal activities such as tax evasion and corruption
• Certain studies have not included many sources of black money, for example, corporate tax evasion is responsible for 60% of total black income while criminal activities account for 35% and corruption only 5% as per the GIF study
• Much of the black money has not been stashed in Swiss banks, according to investigators
• 2011 study by Rao and Dhar found black money has returned as white through a process called round tripping: Money held by Indians as percentage of total money in Switzerland banks was 0.29% in 2006 and it fell to 0.13% in 2010 showing less Indians in Swiss banks
• PMLA (Prevention of Money Laundering Act) introduced on July 1st 2005 and 1,437 such cases have been registered since
• FEMA (Foreign Exchange Management Act) and penalties worth INR 1678 crore levied but more needs to be done
• Black money has economic as well as political ramifications
• Remittances from abroad if not bonafide and illegal or parallel transactions to these also a source of black money
• Global Financial Integrity has indicated that India had illicit outflows of USD 95 billion in the year 2012
• Combined total of FDI and foreign aid flowing into India this year was USD 26 billion; 2012 illicit flows are 9 times higher than country’s outflow in the year 2003
• For 10 year period ending 2012, nation lost close to USD 440 billion cash flow due to black money

2. Domestic Black Money

Aside from black money abroad, domestic black money is also a big problem. This includes:

• Election expenses
• Real Estate
• Gold
• Hawala

Union Budget 2015-2016 a possible indicator if steps will be taken to encourage savings and curb black money via tax administration channels

B. Impact of Black Money on the Indian Economy

1. Government loses tax revenue on account of black money generation and tax evasion
2. RBI will not frame effective policies because estimates of black money in the system will be hard to arrive at and adjust for
3. Governmental policies will also suffer in formulation and implementation in the absence of correct estimates of black money in the system
4. Black money will impact national security as terrorists and criminals will use these channels to fund their activities and ventures
5. Black money is also the root of corruption and politicians are the biggest beneficiary of the system
6. Black money is a curse for the economy and it can create counterfeit money in the system leading to illegal activities
7. Black money will also impact the cost of assets such as homes and cars. It can inflate real estate prices to unbelievable extent
8. Lack of research is another problem associated with black money. Econometricians and statisticians will not be able to assess the health of the economy if there is plenty of black money floating in the system
9. Flight of capital to foreign shores also deprives the Indian economy

C. Steps Taken To Counter Black Money

1. IT department will probe new cases
2. SIT will study and make recommendations; constituted within 2 and a half days
3. Around 500 persons have accepted that they have stashed money abroad in foreign banks
4. Clear delineation between black money and money stashed away in foreign banks that does not fall under this category
5. Disclosing names of account holders in foreign banks a violation of confidentiality clauses in treaties with other nations; steps being taken to circumvent this
6. SIT considering old as well as new cases and making efforts to complete probe by 31st March
7. Delegation led by Revenue Secretary visited Switzerland to facilitate exchange of information
8. Whistleblower has indicated willingness to facilitate process of recovering black money, further aiding the government
9. Swiss Federal Tax Administration indicates competent authority would help India to obtain information about black money in the nation
10. Talks will also commence with India for AEOI/Automatic Exchange of Information by Swiss Authorities marking the first time Swiss nation has agreed to start discussions on bilateral agreement on AEOI
11. Cases are in advanced stages of investigation and all names will be publicly revealed
12. Government has also provided the SC with names of 627 persons who have committed mass tax evasion

Conclusion

Black money is an evil that has a far reaching impact on the economy. Government needs to work towards recovery of black money from international shores as well as take steps to curb the accumulation of domestic black money. On both scores, much has been accomplished yet perseverance is needed to facilitate a final resolution.