Black Money [UPSC Notes for Indian Economy]

An income which is not declared by a person or a group of persons in a nation is termed as black money. It is also termed as ‘illegitimate’ as it goes unrecognized for the tax declaration. It is a huge social and economic issue for India, hence important for the IAS Exam. The topic, ‘Black Money’ will come under UPSC GS-III (Indian Economy.)

In this article, you can read all about the important issues related to black money and also download the black money notes PDF. 

For more topics related to the economy visit our UPSC Economics and Indian Economy page now!!!

In addition, the following links will help candidates further in their exam preparation:

Table of Contents:

What is called Black Money?

There is no one definition for black money in economics. In layman’s language, it is 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.

Spurious notes or counterfeit money is generally not counted as black money. Counterfeit notes are currency notes that are illegally printed by unauthorised agents.

Black money is hidden from government authorities and is not reflected in the GDP of India, national income, etc.

  • White money is money that is earned through legitimate means and is accounted for, for which income or other tax is paid.
  • In an ideal economy, all money that is transacted should be accounted for. This would help the government to collect taxes.
  • Cash transactions without proper accounting are known as black money.

To know how the Central Vigilance Commission keeps track of black money, visit the linked article.

How is black money generated?

Black money is generated by any of the following three ways:

Illegitimate activities The illegal activities that can lead to black money generation are:

    1. Crime
    2. Corruption
    3. Non-compliance with tax requirements
    4. Complex procedural regulations
    5. Money laundering
    6. Smuggling
Tax evasion This is where an entity wilfully does not pay taxes that are due to the government. 
Tax avoidance This is where an entity takes advantage of the existing loopholes in the system and avoids paying taxes. This is not illegal though

Sources of Black Money in India

Some of the chief sources of black money are described below.

  • Sellers or traders who do not give bills or receipt creates black money.
  • Many people invest in bullion or jewellery to hide their actual income from the authorities.
  • In the real estate sector, many people undervalue their real assets to refrain from paying the rightful tax. They cheat the government of the correct amount of property tax.
  • Some Self-Help Groups (SHGs) and trusts do not provide proper sources for their funds and donations received.
  • Tax havens: Tax havens are generally small countries where foreigners don’t have to pay taxes. These countries generally have very liberal regulatory frameworks, which big corporations take advantage of. They set up shell companies there and redirect all their profits to this entity, by which they can reduce their tax liabilities by a huge margin.
  • Hawala: Hawala is an informal method by which money can change hands without the use of banks. This works through codes, contacts and trust with no paperwork at all.
  • Investments through innovative derivative instruments like participatory notes also is a means to hide black money.

Size of the problem

  • A Bank of Italy calculation reveals India’s share in tax havens globally to be $152-181 billion or Rs. 10 lakh crore.
  • India is ranked eighth in the world in black money generation by the Global Financial Integrity Report.
  • A former director of the Central Bureau of Investigations has said that the total black money in India is around USD 500 billion.

Money Laundering

Money laundering is the process by which black money is converted into white money.

People who possess black money cannot spend it publicly. They should either hide it or spend it on the underground economy. Through money laundering, they convert it into white money. It is a method by which criminals mask their accumulated wealth. 

Through money laundering, people separate the money earned (illegally) from its source, mix it with white money, and then funnel it back into the source.

Another commonly heard related term is round-tripping. Here, people send money to a tax haven like Mauritius or Cayman Islands (to avoid paying tax) and then invest that money into India, thus becoming a foreign investment.

To know more in detail about the taxation system in India, visit the linked article 

Effects of Black Money in India

Black money has some serious consequences on the economy of a country. Some of them are discussed below.

  • It affects the financial system of the country. The central bank is not able to control money supply in the economy causing higher inflation. This will lead to a fall in the value of the currency.
  • Black money affects the credibility of a country negatively.
  • Black money is most often used for illegal activities such as drugs and narcotics dealing, terrorism, etc. which is detrimental to the heath of the country.
  • The government suffers a big loss in the form of taxes because of black money.
  • Black money creates a parallel economy in the country, which is completely underground. For example, in Mexico, there is a thriving parallel economy because of the illegal trafficking of drugs. This leads to governance problems.
  • Black money can also cause real estate prices to go up, which may lead to an asset bubble.

Measures were taken by the Government to Curb Black Money

The government has undertaken many measures to curb black money. They are discussed below.

  1. Tax reforms have been initiated with a view to resisting black money. The tax base has been increased and rates have been slashed. Reforms are being made to incorporate tax deduction at the source itself.
  2. Through the Black Money Bill, the government has allowed the reporting of black money generated through tax evasion in a given time frame.
  3. Demonetisation of Rs.500 and Rs.1000 was carried out in 2016 with the primary view of making black money useless. To know more about demonetisation, click on the linked article.
  4. The government is encouraging cashless/digital transactions with a view to making things more transparent.
  5. Electoral reforms are also intended to curb black money as much of the black money generated in India is used in elections.

Legislative Framework to deal with Black Money

  1. Prevention of Corruption Act, 1988
  2. Benami Transactions Prohibition Act, 1988
  3. Prevention of Money Laundering Act, 2002
  4. The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015
  5. Lokpal and Lokayukta Act

Black Money – Indian Economy:- Download PDF Here

Aspirants can also refer to articles similar to the topic like Black Money. Some of those topics are linked below:

For more UPSC related preparation materials and other related articles, visit the links given in the table below:

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