Black money and corruption have captured public discourse and imagination to an extent achieved by few other pressing issues. While they cannot be completely eradicated, the incumbent Union Government has been zealously pursuing policies to minimise them.

There is no accepted definition of “black” money. Several terms such as “black wealth”, “underground wealth”, “black economy”, “and shadow economy” are used. The wider meaning includes money derived from corruption and illegal means which is concealed to evade taxes and other statutory payment, drug or arms trafficking, counterfeiting currency, smuggling etc. There are three sources of black money – crime,corruption and business.

i. The “Criminal” component includes proceeds from a range of activities such as racketeering, trafficking in counterfeit currency and contraband, forgery, securities fraud, embezzlement, sexual exploitation, bank frauds, drug money and illegal arms trade.

ii. The “Corrupt” component stems from misuse of authority by those holding public office such as accepting bribes to alter land use, leakages from government social spending programmes, speed money to fast track procedures.

iii. The “Commercial” limb is evident in tax evasion.

The malaise in general is achieved by mispricing, collusion, fabricating records, sham transactions, benami entities etc.

The level of development affects the extent of black economy. Developing countries have huge parts of their economy in the informal sector. The cash constituent of the economy is higher and difficult to monitor. Low level of literacy reduces astuteness of the banking sector resulting in an enormous cash economy.

Rising tax burden, lack of tax morality or non-compliance of tax laws by citizens tends to increase the size of black economy. The critical elements in black money chain represent turning white money into black by aggregation and misrepresentation.

Some methods of generating black money are enumerated below:

i. Tax payers may manipulate income by inflating expenses, obtaining fake invoices. There are operators providing entries by accepting cash in lieu of cheque, thereby laundering large sums of money for commissions. Due to frequent migration such operators escape prosecution under the Income Tax Act.

ii. Trade-based money laundering is a process used to disguise the proceeds of crime by transferring money through trade transactions and legitimising their illegal origins. It includes over-invoicing, under-invoicing or multiple invoicing of goods and services, misrepresenting the quality and type of a good or service, forgery of export promotion scheme.

iii. Most bullion and jewellery is imported, and is open to misuse by unlawful transfers overseas. Gold intrinsically has high value hence is a preferred asset class for hiding black money.

iv. Some NGOs exist only on paper. Their model is collecting legitimate amounts from citizens, misrepresenting the number of orphan children or needy persons they work for, thereby creating a source of black money for the promoter.

v. Co-operative banks are also used to generate black money. Some have accepted deposits from individuals and lent that money to founders and directors. The process is illegal and escapes the law because it is not regulated by the RBI but by politicians who are directors in such banks.

vi. Schools, colleges and institutions use management quota to garner students’ money into black money pools for the founders.

vii. Smuggling of goods and contraband items, drug trafficking, arms deals and other illegal activities are facilitated by the use of black money and in turn generates more black money.

Measures to tackle black money by government

Action against black money is an ongoing process, and includes policy level initiates, effective enforcement on the ground, introduction of robust legislative and administrative frameworks, systems and processes with focus on capacity building and integration and mining of information through increasing use of information technology.

Major steps include:

i. Constitution of the Special Investigation Team 

a. Constitution of SIT on Black Money under Chairmanship and ViceChairmanship of two former Judges of Hon’ble Supreme Court.

b. Monitoring investigations into cases involving black money income, ensuring better coordination between enforcement agencies and review of legal and administrative framework to prevent generation of black income are the key functions of the SIT

ii. Constitution of Multi-Agency Group 

MAG consisting of officers of Central Board of Direct Taxes, Reserve Bank of India, Enforcement Directorate and Financial Intelligence Unit has been constituted for investigation of exposés in Panama paper.

iii. Engagement with Foreign Governments

Proactively engaging with foreign governments with a view to facilitate and enhance the exchange of information under Double Tax Avoidance Agreement/Tax Information Exchange Agreements/multilateral conventions.

iv. General Anti-Avoidance Rules

To enable authorities to neutralise the tax edge obtained through shell companies/companies in tax havens, GAAR was introduced in Finance Act, 2013. GAAR will be implemented from Assessment Year 2018-2019

v. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“BMA”) Enactment of BMA to specifically deal with black money stashed abroad. GoI provided a window for one-time compliance – between July 1 and September 30 in 2015 for taxpayers to declare their undisclosed foreign assets.

vi. The Benami Transactions (Prohibition) Amendment Act, 2016 Enactment of The Benami Transactions (Prohibition) Amendment Act, 2016 to amend The Benami Transactions (Prohibition) Act of 1988 with the aim of striking at benami transactions and inter alia confiscate Benami property and prosecute benamidar and the beneficial owner.

vii. Project Insight Initiation of Project Insight by the Income Tax Department to enforce better tax compliance through effective use of available information.

viii. Constitution of Task force Constituting TF on shell companies under the joint chairmanship of Revenue Secretary and Secretary (Ministry of Corporate Affairs).

ix. Pradhan Mantri Garib Kalyan Yojana 

The Taxation Laws (Second Amendment) Act was enacted, which enabled levy of tax at a higher rate on the undisclosed income under which a person could declare his undisclosed cash by paying tax, surcharge and penalty totalling to 50 per cent of the undisclosed income. He would also be required to deposit 25 per cent of the undisclosed income in Pradhan Mantri Garib Kalyan Deposit Scheme interest free for 4 years.

x. Income Declaration Scheme, 2016  

IDS came into effect from 1 June 2015. It provided opportunity to persons who had not paid full taxes in the past to come forward and declare their domestic undisclosed income and assets.

xi. Demonetisation and notices under section 142 (1) of the ITA 

a. Demonetisation of high-value currency (86 per cent of existing money in circulation) in November 2016 was taken for bringing back money back to the banking system.

b. This was followed up by issuing notices under section 142 (1) of the ITA to non-filers who deposited Rs 25 lakh or more in cash during demonetisation but failed to file return of income by due date.

xii. Operation Clean Money 

Operation Clean Money was launched on 31 January 2017 for collection, collation and analysis of information on cash transactions, extensive use of information technology and data analytics, tools for identification of high risk cases, expeditious e-verification of suspect cases and enforcement actions in appropriate cases,including searches, surveys, enquiries, assessment of income, levy of taxes, penalties etc.and filing of prosecution complaints in criminal courts wherever applicable.

Black money clean-up is underway on many fronts. Many of the pieces of the puzzle have been put in place. Prevention and control of black money is a pre-requisite for establishing an equitable, transparent and efficient economy. In addition to the measures adopted by the GoI, set out below are our recommendations for regulating and eventual eradication of black money.

* One of the most important factors in ensuring tax compliance is reducing tax rates.This can increase tax revenue in two ways, first by increasing tax base and second by increasing compliance with IT Rules.

* It is imperative that citizens are kept in the loop about government strategies and made to understand the merits of tax compliance and the perils of black money and how it can be possibly controlled.

* The fight against the menace of black money needs to be fought simultaneously at ethical, socio-economic and administrative levels. At ethical level, we require reinforcing value/moral education in school and highlighting the evils of tax evasion and black money. At socio economic level, the thrust of public policy should be to encourage savings, simplicity and reduce the gap between the rich and the poor.

* The information and intelligence gathering mechanism of various economic agencies must be broader based so that the entire scope of economic activity is seized in an electronic manner, mined and analysed.

* All agencies require continuous technological upgradation and exposure to global best practices to effectively tackle the hazard of black money.

* A common platform for sharing intelligence/information between Central and State agencies should be established for expeditious and fast track investigation process of unearthing black money transactions and effective law enforcement.

A comprehensive analysis of the factors leading to generation of black money in India along with various measures attempted to counter it till date makes it apparent that there is no single magic bullet that can rid society of this menace.

The fight against generation and accumulation of black money is likely to be far more complex and prolonged requiring a comprehensive mix of well-defined strategies is pursued with patience and perseverance by the central and state governments and put into practice by all agencies in a coordinated manner.

(Ashoo Gupta is a partner of Shardul Amarchand Mangaldas. Views expressed are personal)