BLACK MONEY

Origin of the term black money The term black money is of a recent origin which first came to be used around the year
2000. It is another variation of advance fee fraud and is also called a 'wash wash scam'.
The scam came to be known as black money scam was originally handled by swindlers or
conmen who fraudulently obtained money from their victims by exploiting their
confidence. They convinced their victims that a trunk-full of real money had been dyed
black to avoid detection by customs. The trunk actually contained bank-note sized papers
dyed black. They would somehow persuade their victim to pay for the chemicals to wash
the money with a promise to give him / her share from the proceeds. In this way, the
conmen duped their customers telling them that the chemical required to remove the
black dye was very costly and fraudulently obtained a good sum of money from the
gullible and innocent

Term black money as used in modern times In the modern world, the term black money is used for the money which is unaccounted
and no statutory taxes are paid to the authorities since it is kept within the country of
abroad hidden from the eyes of the authorities. This underground, unrecorded and
irregular hoarding of wealth in any form is what is said to be running a shadow economy
or a parallel economy in a country. Black money can also be termed as production of
goods and services whether done legally or illegally but which is not taken into account
for the official estimation of the country's Gross Domestic Product (GDP) because it is
neither detected by the authorities nor is declared by its creators. India's stands at the 10th
position as far as the richest people in the country are concerned. This list is created by
taking into account the amount of white money which is available for investment and
does not include personal assets whether movable or immovable. Just consider what will
India's position among the richest people in the world if the amount of black money is
also take into consideration while compiling this list of the wealthy persons in the world.
The paradox is that it is happening in a country where more than 50 per cent of the
population is living below the poverty line (BPL).

Causes for the creation of black money-

Corrupt practices indulged into by corrupt people at all levels There are several causes due to which the black money is created in a country. Black
money is created by the corrupt practices indulged in by politicians, bureaucrats and other
high and low level civil servants. They take huge or small bribes which are kept hidden as
they illegal sources of earning money. The transactions in black money do take place in
the market due to which the term parallel economy comes into existence. Only very
rarely these transactions are caught and most of the offenders of creation of black money
are never known to the government. The second important reason that these transactions
remain hidden is that both the offenders and the executors of law collude with each other
and become the sharers in black money. People in all walks of life from the rich business
tycoons, the high level politicians, the senior bureaucrats, high ranking officers of the
government, big contractors to the low level government servants including class IV
employees are involved in this phenomenon of black money creation. Recently a racket
of fake certificates of OBCs and SCs has been found for admission into Delhi University.
It is reported that Rs.3 Rs.5 lakh were paid to obtain these bribe certificates.

Complex tax structure and corrupt tax officials Adding fuel to the fire, is the country's complex tax structure and corrupt tax officials
which is the cause of creation of black money. The honest and sincere people who may
otherwise be willing to pay taxes shy away from paying them before the complex
procedures, forms and returns involved in the payment of taxes. Only a few sincere
government employees whose income is paid from the government estimates are made to
compulsorily pay the taxes. But the majority of the business community, traders,
professionals and all incomes which do not come within the organised sector are left to
the sincerity of the earners to disclose their wealth. Complicated and lengthy rules and
regulations which are even beyond the comprehension of the common earners stand in
the way of taxes to be paid by them. There are no incentives to the raise the morale of the
honest taxpayers. The honest taxpayer grumbles when he or she sees that how his or her
hard earned money is is swindled by the corrupt officials of the government. The funds
allotted by the government for developmental projects are drained half way by the
corrupt officials before they finally reach the beneficiaries.

Foreign banks are havens for black money hoarders-

 Foreign banks especially the Swiss Banks which do not disclose the particulars of the
account holders have become a safe haven for the people who want to hide their income
without paying the taxes. There are different versions by different sources as to amount of
the black money stashed in Swiss Banks. As alleged by Baba Ramdev during his
agitations against black money, the amount of black money stashed in the Swiss banks
ranges between Rs.50- 75 lakh crores of rupees. Even if there is only half the truth in the
allegation, then also the money stashed in the Swiss banks is so high that it can make our
economy quite sound if this can be brought back to India and deposited in the
government treasury. According to one report the Swiss Banks have admitted that Indians
stand at the top in the list of the people who have deposited money in the Swiss banks.
The black money in Swiss banks became a hot debate in 2009 general elections when the
issue was raked up by the BJP prime ministerial candidate Mr L K Advani. He quoted
from Global Financial Integrity Study undertaken in 2006 which estimated Rs.43 Rs.51
lakh crores lost by developing countries over a period of five years due to illicit financial
outflows from these countries including India.

Lot of black money is transacted during election campaigns The election process of our country is also a big generator of black money. Election
campaigns run by the candidates for parliamentary or assembly elections or for any local
bodies generated crores and crores of black money during the period of election. A study
by the Mumbai-based Centre for Monitoring Indian Economics (CMIE) found in 2006
that each parliamentary poll generates between $10.19 billion and $11.33 billion of black
money. It will become a shocking and mind boggling figure and the black money so
created will run into several crores of rupees if we also include the elections to the
legislative assemblies of the states and union territories and the local bodies.

Black money laundering financial companies and chit funds Money laundering financial companies and chit funds are another source of creating
black money. Instances have come to notice that several financial companies had been
running and might still be running without paying any income tax paid for their
transactions which are not brought to the knowledge of the government. We know that
there are several lakhs of unauthorised chit funds which are running by individuals in the
colonies of the towns and cities and even in villages including certain government offices
and industrial complexes where the money is collected and circulated among small time
individual earners. The operation of non-banking financial companies (NBFCs) had
become so uncontrolled that the government had to bring in a legislation on the NonBanking Financial Companies in 1997 and a separate Department of Non-Banking

Financial Companies was opened in all offices of the Reserve Bank of India in March
1997 to make these companies to follow the regulations laid down under the Act.
Consequently several hundreds of those NBFCs which could not comply with the rules
and regulations of the government went out of operation.

Unscrupulous charitable trusts and societies create black money Unscrupulous charitable trusts and societies including religious institutions manipulate
the funds of the institutions run and managed by them and create black money. A stark
example of this has come to light when crores of rupees in hard cash and several more
crores of rupees worth jewellery, diamonds and other valuables have been taken over
when the personal chambers of the late Satya Sai Baba were opened recently at
Puttaparthy in Andhra Pradesh. There are a lot of discussions going on in the matter
whether the money found at Satya Sai Baba's Ashram at Puttaparthy is accounted or
unaccounted money. Only sincere investigations undertaken by the government in this
matter can find out the exact truth. This is one example which has come to light and
many more are still likely to exist running this fraudulent business simply because such
institutions had been exempted to submit the reports of their income and expenditure. It is
feared that a lot of black money is being generated by the religious, social and
educational trusts throughout the length and breadth of the country.

Hawala business is a great source of black money transactions The transactions of cash made through the hawala route are also one of the greatest
sources of creation and use of black money. Several hawala rackets were busted by the
police on many occasions but the hawala operations are still going on. Transactions
through hawala route are thought to be the south Asia's biggest money transactions
system. The hawala transactions are common across our national and international
borders where money changes hands through non-banking channels and thus goes
unrecorded and becomes black money. The individuals running hawala rackets have
developed their own codes to transact this illegal business. Such tax evading scams have
been found several times especially in Maharashtra and Gujarat, two of India's rich states.
Daily hawala transactions are reported to be running transacting in foreign exchange thus
robbing the government of the taxes which should otherwise have gone to the
government' treasury.

Investments in property, jewellery, luxury cars, rare pieces of art etc-

 Investments in property, jewellery, diamonds, costly and rare paintings, luxury cars, rare
pieces of art etc. are some of the other sources where black money is transacted. It was
reported sometime back that when the officials raided a few builders in Mumbai a few
years back, it was revealed that the chartered accountants had advised their clients to hide
their black money in rare art collections. It was found that a businessman had in invested
$4,50,000 in a painting. The authorities found that builders had invested over a crore of
rupees of their undeclared income in paintings bought from local art galleries of Mumbai.
Investment of unaccounted income is done at a large scale in gold and diamond jewellery.
It is pertinent to note that India is one of the largest consumers of gold. Stock market is
another channel to invest black money. One can earn big profits after one pays a small
amount of capital gains tax @ 10%. Past cases of stock scams have shown that brokers,
banks, industrial houses have all colluded to trigger the stock markets. A few years back a
woman from Gujarat named Roopal ben Panchal reportedly opened 10,669 fake
accounts. In a circular dated December 2, 2005 the Reserve Bank of India had alerted the
banks with regarding to the black-money laundering activities going on and wanted them
to have watch on any suspicious banking activity. But what when the banks themselves
start colluding with the stock brokers to effect the prices in the stock market.

Donations to educational institutions transacted in black money The heavy donations paid for admissions in institutions of higher learning and even
large corporate schools and colleges are another big source of creation and circulating
black money. Are these donations received and paid by cheques? Are the proper receipts
issued for the transactions? Are the transactions written in the official accounts of the
institutions as they are done? The answer to all these questions is perhaps is a big 'No'.
This is not done because many of these private institutions are run by the bureaucrats,
politicians and industrial houses that are either do it in collusion with the law enforcing
authorities or bribe them the black money they create. Black money transactions take
place in the setting and leaking of questions papers and help rendered in examination
centres to get certain students pass through unfair means or to get some of them the top
ranks in the examination. This not only involves black money transactions but is also
making the mockery of our educational system and examinations.

Issue of licences, contracts to Indian and foreign companies Large industrial houses, big contractors, bureaucrats and politicians all collude with
each other in very heavy transactions and underhand dealings are indulged when issuing
licences and entering into contracts even with the foreign firms. The agents are brokers
are involved in the transactions on heavy fees. All these transactions among these people

are not routed through normal banking channels. The great scams like the Bofors, 2 G
Scam, the Commonwealth Games Scam, Adarash Society Scam, etc have already come
to the light of the public. Many such scams may be lying hidden and might not be
brought out at all. There have been cashes where hard cash had been discovered in the
possessions of politicians like Sukhram and others.

The Mauritius Route to use black money Taking advantages of loopholes in the Double Taxation Avoidance Convention (DTAC)
concluded two decades ago, certain people claiming themselves to be the Mauritian
residents set up paper companies in Mauritius. These companies then masqueraded at
Mauritian companies. These companies then invested in India. Thus they avoided paying
taxes in India amounting to crores of rupees under the cover of double taxation avoidance
agreement between India and Mauritius.

Consequences or the impact of black money

Loss of revenue to the government and running of parallel economy in country
The circulation of black money has a deep impact on the economy resulting in a
decrease in government revenues. A part of the black money which circulates in the
economy could have gone into the hands of the government in the form of taxes. Such is
the volume of the black money in the country that a parallel economy is said to be
running in the country with the black money alone. According to some estimates the
amount of black money in the country equals 40 per cent of our gross domestic product.
(GDP)

Black money and corruption form a vicious circle

Since most of the transactions done in black money are illegal, it adds to already
existing high levels of corruption. All bribes for whatever reason they are paid goes
unaccounted creasing more black money in the society. This vicious circle of corruption
generating black money and black money generating corruption will never come to an
end, unless some serious steps are taken by the government to curb this evil practice.

Black money effects real capita income and national income of country

 Since the black money circulating in the country is not recorded in the government's
books of accounts, the real per capita income of the people and the national income of the
country are shown as low. If all the black money circulating in the economy is flowed
back into the national economy of the country, there will a substantial rise in the real
incomes of the people and the national income of the country. For example, although the
incomes earned by the immigrant labour of our country help to improve the standard of
living of the people earning them, yet they don't get added into the tax net of the country
if transacted through hawala. So they cannot be taken into account in computing the
national income and per capita income of the country.

Black money causes decrease in quality of public goods and services

When bribes which are to paid as black money to the producers of goods and provider
of services, it is but natural that they will provide the quality of goods and services only
to the people who pay bribes whereas the general public has to suffer as the same quality
and service is not provided to everyone. For example, if you have to get a job done in
office, your work will be done without any delay if you pay bribes to the officials who
have to do your job. But for the same kind of job, another person who does not bribe the
officials has to wait for several days, weeks or even months.

Black money results in higher taxation and inflation

The government taxes the people to earn revenue for its expenses in order to balance the
budget. It is but natural that if the black money circulating in the economy is brought
back to the government's treasury, the government will have more money in its hand for
its expenses and thereby the tax burden on the people can be reduced. Similarly the
inflation results with too much money chase too few goods available in the market. The
accounted money in the market is hyped by the figure of unaccounted money in the
market and the actual money in circulation becomes much more to chase the goods
produced in the country leading to higher inflationary trends.

Black money causes difficulty in the formation of monetary and fiscal policy
Since the government cannot take into account the black money in circulation in the
economy while forming its monetary and fiscal policies, the policies so formed by the
government cannot be realistic. It is difficult to form these policies in the absence of the
exact calculation of the black money and without bringing it in the accounting procedures
of the government.

Black money results in increased criminal activities

The ill-gotten money in the market results in all sorts of criminal activities that go on in
the society including corruption of all sorts in the society. It encourages its illegal use
especially during elections. The black money is used to support terrorist activities which
undermine even the security of the country. It is used to get illegal weapons in the hands
of the groups of unsocial elements. The illegal money is squandered on large scale in
clubs and hotels on all types of illegal activities including drug trafficking. Even murders
are got done for political revenges where black money changes hands among the
murderers and the people who engage these murderers to engage in these crime. It is said
that money corrupts and the excess of it corrupts extremely. And it is more so when such
excess money is in the form of black money. The lavish and ostentatious way the
hoarders of black money live in India and the wasteful expenditure they indulge in
celebrating their social, political and even religious functions is a social crime even
though the law does not take cognisance of it.

How to control the black money

Usually, the government has to take two courses to control the black money. The first is
to convert the existing black money into white money through various measures. The
second is to take appropriate measures to prevent the creation of black money. So, the
controlling of black money can be discussed under these two heads.

Controlling black by money by its conversion into white money

First of all, the government should plug loopholes in its two decades old Double
Taxation Avoidance Convention entered into with Mauritius to check inflow of black
money into India by bogus companies of Mauritius which evade paying taxes in India
under the cover of this bilateral agreement between India and Mauritius.

Voluntary disclosure of income scheme (VDIS)

Though such measures were initiated by the government earlier including gold bond
schemes, but this was resorted on a large scale when the government launched a
Voluntary Disclosure of Income Scheme (VDIS) on June 18, 1997 whereby the taxdefaulters were given an opportunity to disclose their hidden incomes at the prevailing
tax rates by giving them immunity from major laws relating to economic offences from

01 July 1997. The then Finance Minister P. Chidambaram said that the VDIS collections
amounted to collection about Rs.8,000 crores from about two lakh declarents when the
scheme closed down on December 31, 1997. The government may once again announce
such a scheme with proper guidelines to enable the people hiding their black money to
declare the scheme. The government at the same must show its political will to enact a
bill with stringent punishments against the people who were found with undisclosed
income after certain specified date.

How to bring back money from the Swiss banks

A similar option must also be given to the people hiding their money in the Swiss banks
giving them a one time opportunity to voluntarily bring back their money from the Swiss
banks and deposit it in the Indian banks by paying the taxes as per the Indian laws. At the
same time a severe punishment may be threatened for the people who were found with
black money in the Swiss banks after a specified date.

Entering into bilateral agreements with the foreign governments

The government should take all possible measures to enter into bilateral agreements
with the foreign countries to disclose the names of the account holders and the money
deposited in foreign banks. The government has already initiated some steps in this
direction by revising the Double Taxation Avoidance Agreement to provide means for
investigations of black money in Swiss banks in August 2010. This revision is likely to
take effect in January 2012. To curb black money, the Indian government has also signed
Tax Information Exchange Agreement (TIEA) with 10 countries, namely - Bahamas,
Bermuda, the British Virgin islands, the Isle of Man, the Cayman Island, the British
island of Jersey, Monaco,St. Kitts and Nevis, Argentina and the Marshal Islands. The
government should take immediate steps to sign more such agreements with other
countries as well.

Block loopholes in the Mauritius route

The government should block loopholes in the Double Taxation Avoidance Convention
(DTAC) entered into about two decades ago to prevent unscrupulous investors to escape
from paying taxes in India.

Court cases and severe punishments for economic offences

 The courts in India should give due importance to the cases involving black money and
must give the severest of the punishments to the persons involved in the cases. The
Supreme Court of India is doing a commendable job in this respect. The Supreme Court
asked the government in January 2011 as to why the names of those have stashed money
in the Liechtenstein Bank have not been disclosed. In April 2011, Hasan Ali Khan was
arrested on charges of stashing over Rs.36,000 crores in foreign banks. This is one
instance where a person has been arrested for stashing black money in the foreign banks,
but there may be many more against which the government can take action only with a
strong political will and conviction. Baba Ramdev had even gone to the extent of
suggesting that black money offender should be treated as traitors of the country and
should be given the severest of the punishments.

Demonetization of currency notes of high value like Rs.500 & Rs.1000

Another measure suggested to dig out black money is to demonetise the currency of
higher denominations like bank notes of Rs.500 and Rs.1000. But the government has
already rejected this suggestions as it is not economically viable suggestion.

Issue of Special bonds by the government

Special bonds may be issued by the government asking the black money hoarders to
invest in them by providing them immunity from criminal proceeding existing under the
existing law.

Controlling black by money by preventive measures

Restructuring tax system & severe punishment to errant tax officials The government should restructure its tax system including GST and VAT making it
more convenient and easy for the income earner to pay the taxes. All the cumbersome
procedures in submission of forms and returns should be done away with. The
government has become aware of this and have done a lot of work to improve the system.
It has recently come out with an announcement that salaried employees with salary
income up to Rs.5 lakh and saving bank interest up to Rs.10,000 need not to file income
tax returns for the year 2011-12. Much more needed to be done by simplifying the rules
and regulations in this respect. The government should broaden the tax base and should
bring all people in whatever is the source of income including agricultural income if the
income exceeds Rs.5 lakh a year. All people above this limit should be taxed with no

exemptions. No return needs to be filed by any person if the income is below Rs. 5 lakhs.
Similar tax reforms should be made in the corporate direct tax and all other indirect taxes.

Severe punishment should be mooted out to the tax personnel who are found to be
involved in the corrupt practices including the persons who are found to have paid bribes
to the tax officials to avoid taxes. These should include tax consultants and chartered
accountants who guide the tax payers with tips to avoid tax taking advantage of loopholes
in the tax laws.

Use of electronic media and banks for money transfers Maximum use of electronic media should be made for money transfers. Most of the
money transactions should be encouraged to be made through the banking channels.
Limitation should be laid down for cash transactions in any deal. Use of PAN and identity
card should be made mandatory for all transactions amounting huge amounts. There
should be a powerful Income Tax and Vigilance department. People should be
continuously made aware of the benefits of paying taxes.

People should be made aware of the evil of black money on a continual basis
People should be made aware of the consequences of black money. The recent
movements run by certain reputed personalities like Baba Ramdev and Anna Hazare
whether successful or not has brought about a social revolution in the society to make the
people aware of this great evil. It has alerted the government at all levels to take
cognisance of the matter and the government is said to have constituted a high level
committee to go into this aspect.

Conclusion
It may be pointed out that many more measures be taken which might have been left out
in writing this article. There are many genius and intelligent persons in our country
including economists of eminence who can suggest measures to the government to do
away with the menace of black money afflicting our country. Conversion of black money
into white money is only a short term measure, but it is the preventive measures which
can root out this evil permanently. The most important aspect of nationality and love for
once nation in all aspects must be taught to our children from their basic educational
system. It should start from their earlier school education because whatever the child

learns in his / her formative years is carried forward towards the later stages in his or her
life.