The Union Minister of State for Finance recently reported to Lok Sabha that due to the government’s black money law, several instances of Indians stashing undisclosed income overseas have been successfully detected. This forms part of the ongoing battle against ‘black money’, a term used in economic theory to describe money hidden from tax authorities.
Understanding Black Money
While there is no official definition of ‘black money’, it is often used interchangeably with terms such as ‘parallel economy’, ‘unaccounted economy’, ‘illegal economy’ and ‘irregular economy’. Primarily, it refers to money derived from two broad categories:
1. Illegal Activity: This involves money gained through illicit practices, which is not reported to tax authorities, thereby evading taxation.
2. Legal but Unreported Activity: This includes income generated from legal conduct but kept hidden from the tax department.
The Negative Impact of Black Money
Although hidden from direct view, black money circulates in the economy, causing several detrimental impacts:
– Loss of Revenue: When black money is not taxed, it increases the government’s deficit. The government then has to balance this deficit by increasing taxes, decreasing subsidies, or increasing borrowings which can lead to accruing interest burden and rising debt.
– Decreased Money Circulation: Black money is often stored as gold, immovable property, or other off-the-record manners, keeping it out of the country’s main economy. This results in reduced money circulation, hampering overall economic growth and development.
– Higher Inflation: Black money feeds inflation, increasing the cost of living and negatively affecting the poor most significantly. It also amplifies the wealth disparity between the rich and the poor.
Government Measures to Tackle Black Money
To counter this issue, the government has initiated various legislative and international actions:
1. Legislative Action: The government has enacted several laws like the Fugitive Economic Offenders Act (2018), the Central Goods and Services Tax Act (2017), The Benami Transactions (Prohibition) Amendment Act (2016), The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act (2015), and the Prevention of Money Laundering Act (2002).
2. International Cooperation: India has been proactive in engaging with foreign governments to facilitate the exchange of information under Double Taxation Avoidance Agreements (DTAAs), Tax Information Exchange Agreements (TIEAs) and Multilateral Conventions. Since 2017, India has also been actively involved in the Automatic Exchange of Information based on Common Reporting Standards, which enhances global efforts to combat tax evasion. Additionally, India has agreed to an information-sharing pact with the USA under the Foreign Account Tax Compliance Act.
Recommended Strategies Moving Forward
Despite current efforts, black money still persists as a significant issue for India’s economy, steering the need for strengthening initiatives that include:
– Developing an appropriate legislative framework around Public Procurement, Foreign Official Bribery Prevention, Citizen Grievance Redressal, Whistleblower Protection, and UID Aadhar.
– Establishing stronger institutions to combat illicit money: Institutions dealing with illegal money, such as the Directorate of Criminal Investigation Cell for Exchange of Information and Income Tax Overseas Units, can be reinforced.
– Implementing Electoral Reforms: Elections often serve as major channels for the utilization of black money. Therefore, reforms are needed to minimize the influence of money power in elections.
– Improving Training Programs: Personnel should receive both domestic and international training related to anti-money laundering, terrorist financing, and related economic issues to effectively counter black money.
