Black Money, Meaning, Sources, Impacts, Government Measures

Black money is a serious issue in many countries, and it is one of the most serious issues in India. Black money is money earned through any illegal activity that is prohibited by local laws. Such money is typically earned in cash from various activities and is not declared for tax purposes. 

In modern times, black money has become a dominant issue in shaping national policies, determining new economic activities, and sometimes determining the country's laws.

Black Money Meaning

Black money is money earned through illegal activity or that has not been reported to the government for tax purposes. All funds earned through illegal activity and otherwise legal income that is not recorded for tax purposes are considered black money. This could be for one of two reasons. 

• Funds can stem from illegal activities like crime, drug trafficking, terrorism, or corruption, all of which are punishable by law. Alternatively, wealth may be legally earned but unreported to avoid taxes, creating black money. 
• For instance, if 40% of a land sale is paid in cash and not declared, it's illegal. Many small shops also deal in cash without receipts, contributing to black money.

Black Money Sources

Black money sources include underreported earnings, use of tax havens, corruption, unaccounted cash transactions, illegal trades, and informal money transfer systems like Hawala.

• Underreporting Income: Individuals or businesses might conceal or understate their actual income to evade taxes. For instance, a business owner might underreport sales or revenues to reduce tax liabilities.
• Tax Havens: Tax havens are countries or jurisdictions with low or no taxes and lax regulations. Individuals and businesses may use tax havens to store or invest black money, avoiding taxes in their home countries.
• Illegal Activities: Proceeds from illegal trades such as drug trafficking, human trafficking, arms dealing, and organised crime contribute significantly to black money. The profits earned from these activities are often kept hidden to avoid detection by authorities.
• Hawala: Hawala is an informal and low-cost method of transferring money from one location to another without using banks or other financial institutions. It is based on codes and contacts, and no paperwork or disclosure is required.

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Black Money in India

​Black money in India refers to unaccounted income not declared to tax authorities, often generated through corruption, tax evasion, and illicit activities. It is estimated to constitute 28% of India's GDP, amounting to approximately $900 billion.

• Although demonetisation was introduced in 2016 to curb black money, the challenge remains, as cash circulation has almost doubled—from ₹17 lakh crore in 2016 to ₹34 lakh crore by 2024.
• A 2024 survey revealed that 90% of citizens believe black money remains prevalent in the real estate sector, with many transactions conducted in cash to avoid taxes.
• The Financial Action Task Force (FATF) has urged India to expedite prosecutions related to financial fraud, highlighting challenges like court backlogs.

Black Money Impacts on India

Black money has significant and multifaceted impacts on the Indian economy and society. It accounts for a substantial portion of the country's economy, and this illicit wealth has far-reaching consequences for the nation's economic and social well-being.

• Loss of revenue: Its main impact is a loss in revenue collection because the tax that would have been collected if such transactions had been done openly and duly accounted for is lost.
• Erosion of Tax Fairness: Black money creates an unfair advantage for those who engage in tax evasion, allowing them to accumulate wealth at the expense of honest taxpayers. This undermines the integrity of the tax system and erodes public trust in government institutions.
• Income Inequality: Black money exacerbates income inequality as it allows a section of society to accumulate wealth without contributing their fair share to public funds. 
• Money Laundering: Black money often gets funnelled into money laundering operations, enabling illegal activities. Moreover, it can lead to terror financing, posing a threat to national security.
• Market distortion: Black money undermines government economic policies by offering alternative credit sources at 'free market' rates, causing inflation, price hikes, shortages, and risky commodity speculation.

Government Measures to Curb Black Money

The Indian government has implemented several measures to combat black money, including enacting the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, Demonetisation in 2016, and the Benami Transactions (Prohibition) Amendment Act, 2016. 

Demonetisation (2016)

Demonetisation is the act of withdrawing currency from circulation to curb black market currency and unaccounted money. On 8 November 2016, the government of India demonetised the Rs 500 and Rs 1000 old notes series to curb the menace of black money.

Benami Transactions (Prohibition) Amendment Act, 2016

Benami Transactions (Prohibition) Amendment Act, 2016 prohibits Benami transactions and provides for the confiscation of Benami property. Offenders may face one to seven years of imprisonment and fines up to 25% of the property's market value.

Prevention of Money Laundering Act of 2002 (PMLA)

PMLA Act of 2002 was enacted to prevent money laundering and to provide for the confiscation of property derived from or involved in money laundering, as well as for matters related to or incidental to money laundering.

Black Money Declaration Scheme 2017

Black Money Declaration Scheme 2017 allowed black money hoarders to declare their entire illegal income and gave them until March 31, 2017, to do so. Under this scheme, everyone was allowed to disclose their illegal income through the bank or the post office.

Fugitive Economic Offenders Act, 2018

Fugitive Economic Offenders Act, 2018, empowers the government to confiscate the assets of fugitive economic offenders and streamline the extradition process.

Foreign Exchange Management Act (FEMA), 1999

Foreign Exchange Management Act (FEMA), 1999 regulates foreign exchange transactions, allowing penalties up to three times the amount involved for contraventions, and facilitates the confiscation and repatriation of illicit funds held abroad.

Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 aims to curb the concealment of foreign income and assets by Indian residents. It provides for taxation of undisclosed foreign income and assets at 30%, along with stringent penalties and prosecution provisions. The Act strengthens India’s efforts against black money, tax evasion and illicit financial flows.

International Collaboration

India has signed Double Taxation Avoidance Agreements (DTAA) with over 80 countries worldwide to prevent double taxation. India has also been a key player in the Automatic Exchange of Information, enhancing efforts to combat tax evasion. Additionally, India joined the FATF to combat black money and money laundering.

Black Money Way Forward

While India has taken several steps to curb black money, there is still a long way to go to address this issue effectively. Some further measures could be considered:

• Strengthen Legislative Framework: Review and amend laws related to black money, including the PMLA and the Benami Transactions (Prohibition) Act, to enhance their effectiveness.
• Empowering Tax Authorities: Provide tax authorities with adequate resources, manpower, and technology. This could include specialised training, advanced investigative tools, and increased funding.
• Inter-Agency Coordination: Foster collaboration among different agencies, such as the ED, Income Tax Department, and Financial Intelligence Unit (FIU)—to share information and streamline investigations.
• Promoting Financial Inclusion: Encourage financial inclusion through initiatives that make it easier for individuals to open bank accounts and participate in the formal financial system. 
• Streamlining Tax Laws: Simplify and rationalise tax laws to reduce the scope for tax evasion by eliminating unnecessary exemptions, reducing tax rates, and improving the clarity of tax regulations.

Black Money UPSC PYQs

Q1: Which one of the following effects of the creation of black money in India has been the main cause of worry for the Government of India? (UPSC Prelims 2021)

(a) Diversion of resources to the purchase of real estate and investment in luxury housing.

(b) Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.

(c) Large donations to political parties and growth of regionalism.

(d) Loss of revenue to the State Exchequer due to tax evasion.

Ans: (d)