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HindustanTimes Fri,26 Dec 2014

Many shades of black money

Gaurav Choudhury, Hindustan Times  New Delhi, February 05, 2013
First Published: 22:25 IST(5/2/2013) | Last Updated: 01:43 IST(6/2/2013)

A lowdown on how India’s black economy deals thrive outside the financial system by creating a web of transactions that obscure the sources of slush funds.

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What is black money?
Black money is income on which tax is evaded. It represents a large part of a bustling economy where transactions are carried out in cash circumventing banking channels.

What is the size of India’s black economy?
Finance minister P Chidambaram is likely to reveal a new estimate of India’s unaccounted “black money”, most of it stashed abroad, in this year’s budget session and follow it up with a plan to hold it to account.

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Which agency has worked out the estimates of India’s black economy?
The new estimates, the first since 1985, have been compiled at the government’s behest by three think-tanks, the National Council for Applied Economic Research (NCAER), National Institute of Public Finance and Policy (NIPFP), and National Institute of Financial Management (NIFM).

This report, which was submitted to the government in December, is speculated to have pegged the size of black economy at about 30% of India’s gross domestic product (GDP) or about Rs.25 lakh crore.

Which are the most common areas to generate and use black money?
About a third of India’s black money transactions are believed to be in real estate, followed by manufacturing and shopping for gold and consumer goods.

Property deals, bullion and jewellery purchases, financial market transactions, rigging of markets through foreign entities using instruments such as participatory notes, manipulations through entities claimed to be constituted for nonprofit motive, differing tax rates in different tax jurisdictions, under-invoicing and money laundering using the hawala or the informal banking route are among the common methods used for generating black money.

How is black money generated using accounting manipulations?
Under-invoicing is a common accounting trick used by firms to evade taxes. Suppose Firm X buys goods worth Rs.1 lakh from a vendor. The vendor will issue bills or invoice worth Rs.60,000 and receive the balance in cash keeping it outside the tax net.

What about investment in unlisted companies?
Investment in hundreds of unlisted companies are under the government’s scanner for funneling thousands of crores of rupees of black money into the legitimate financial system through instruments such as convertible debentures.

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How are convertible debentures used to hide slush funds?
Convertible debentures are instruments through which an investor exchanges the funds, which he had lent, into equity at a later date, thus making them legitimate shareholders of the company.

For instance Person X lends Rs.10 crore in cash to a real estate company through a convertible debenture.

The real estate firm uses the money to pay vendors for the ongoing projects. Under the deal, person X “converts” Rs. 10 crore into equity shares at a later date and becomes a legitimate shareholder of the real estate firm.

Since these are unlisted companies, disclosure norms aren’t as stringent as these do not come under the scanner of the market regulator Securities Exchange Board of India (SEBI).

What measures has the government taken to track transactions in black money?
The government has tracked undisclosed incomes of more than Rs.50,000 crore over the last three years, while tax evasion worth more than Rs.1,000 crore has been detected from inputs from foreign countries.

The revenue department is pursuing more than 50,000 pieces of information regarding suspicious transactions received from overseas and domestic agencies.

Nearly 12,500 inputs on assets and payments received by Indian citizens in several countries have been obtained, “which are now under different stages of processing and investigation”.

The government has introduced compulsory reporting in case assets are held abroad and also started tax collection at source in case of purchases in cash of gold or jewellery in certain cases.

Viewed as going hand-in-hand with corruption, “black money” had been at the top of the agenda of widespread public protests last year. These sums, compared to India’s total annual welfare spending of about R3 lakh crore, are staggering.

How can the black money be put productive use by the government?
If hidden incomes of R25 lakh crore were to be disclosed and taxed at 30%, it would generate R8.5 lakh crore, enough to build a 2000-bed super-specialty hospital in each of India’s 626 districts. 

Alternately, it could offer a “zero-tax” year for all individuals and companies, and still enable a sufficient budget that funds all expenses, including salaries and welfare schemes.

How can the curbing of transactions in cash address curbing black money circulation?
It is imperative to develop systems such as incentivising the use of credit and debit cards for small purchases to plug the loopholes in India’s bustling cash economy that remains a major area in the proliferation of black economy.

A government white paper on black money tabled in Parliament last year observed that given the primary importance of cash in relation to both generation and use of black money, there is no alternative but to target cash transactions in a way that will not affect those complying with the law, while making it difficult for those intending to generate and utilise black money.

This will require keeping fairly high transaction limits and exempting those with a reasonable audit trail at both ends of the transactions.

Payments by debit and credit cards through Indian e-service intermediaries can further bring down the costs of using such cards, improve their acceptability, and encourage payments in these modes and reduce the cash economy.

The government can also deliberate providing tax incentives for use of credit/debit cards as practised in countries such as Korea.


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