Shades of black

  • Gaurav Choudhury, Hindustan Times
  • Updated: Nov 05, 2014 00:46 IST

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?
The government has commissioned a study to estimate India’s “black money”, most of which is stashed abroad, and follow it up with a plan to retrieve it.

Which agency has worked out estimates of the black economy?
The new estimates, the first since 1985, have been compiled at the government’s behest by three think-tanks — National Council for Applied Economic Research, National Institute of Public Finance and Policy and National Institute of Financial Management. The report, which was submitted to the government in December, is speculated to have pegged the size of the black economy at about 30% of India’s gross domestic product (GDP) or about `30 lakh crore.

Which are the 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 deals, rigging of markets through foreign entities through instruments such as participatory notes, manipulations through entities claimed to be constituted for non-profit motive, differing tax rates in various tax jurisdictions, under-invoicing and money laundering using the hawala, or the informal banking route, are among 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 investments in unlisted companies?
Investments 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.

How are convertible debentures used to hide slush funds?
Convertible debentures are instruments through which an investor exchanges funds, which he had lent, into equity later, thereby making them legitimate shareholders of the company. Since these are unlisted companies, disclosure norms are not stringent as these do not come under scanner of the Securities and Exchange Board of India.

What have the government done to track such transactions?
The government has tracked undisclosed incomes of more than Rs 50,000 crore over the last three years, while tax evasion worth over `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 held abroad and has also begun tax collection at source in case of purchases in cash or gold or jewellery in certain cases.

How can black money be put to productive use by thegovernment?
If hidden incomes of Rs 30 lakh crore were to be disclosed and taxed at 30%, it would generate about Rs 9 lakh crore, enough to build a 2,000-bed super-speciality 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.

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