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The true colours of a black economy

A lowdown on how deals thrive in a bustling cash economy outside the ‘legitimate’ financial system, through a web of transactions, Gaurav Choudhury reports.

business Updated: May 23, 2012 01:28 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times

What is black money?

Black money is the 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 white paper on black money?
Finance minister Pranab Mukherjee on Monday tabled a white paper on black money, detailing steps taken and plans to curb black money in India.

What are the most common areas where black money is generated and used?

Property deals, bullion and jewellery purchases, financial market transactions, rigging of markets through foreign entities using instruments such as participatory notes, manipulations through entities constituted for nonprofit motive, varying 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 through 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 on Rs.60,000 and receive the balance in cash, keeping it outside the tax net.

What is money laundering and how does it work?
Money laundering is the process of concealing the source of illegally gotten money. The money is first separated from the source and placed in the financial system, for example, through small cash deposits in a bank account. This is followed by creating layers of transactions to disguise the origin and obscure the audit trail such as rapidly-moving funds across different accounts. These funds are then reintroduced in the legitimate financial system to enable further use such as setting up front companies and using false invoicing.

What about investment in unlisted firms?
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.

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 at a later date, making them legitimate shareholders of the company. Since these are unlisted firms and do not come under the scanner of the Securities and Exchange Board of India, disclosure norms aren't as stringent.

What has the white paper said on money stashed away by Indians in overseas secret bank accounts?
The white paper did not disclose any names of persons suspected to have stowed away money in secret overseas bank accounts. The paper said that deposits of Indians in Swiss banks have decreased from Rs.23,373 crore in 2006 to Rs.9,295 crore in 2010.

Are there any real instances of money laundering and black money transactions that authorities have detected?
Yes. For example, more than Rs. 700 crore was transferred among 30 bank accounts in an inter-account transfer in a single day by an individual. In another instance, an individual deposited a cheque of more than Rs. 14 crore in his dormant bank account claiming it to be proceeds of sale of property. Part of this amount was withdrawn in cash and request placed before the bank for a demand draft of a huge amount to purchase gold for business purposes. In another case, a husband and wife paid insurance premium of over R2.5 crore for 15 life insurance policies, out of which Rs.80 lakh was paid in cash in multiple installments of less than Rs. 50,000.

What has the white paper said on the size of India's black economy?
There are no clear estimates on the size of India's black economy. The last official study for estimating black money was conducted at the behest of the finance ministry by the National Institute of Public Finance and Policy (NIPFP) in 1985. The NIPFP study concluded a total black income generation of Rs.36,784 crore out of a total GDP at factor cost of R1,73,420 crore. The Centre has formed a multi-disciplinary committee involving think-tanks - NIPFP, National Institute of Financial Management and National Council for Applied Economic Research - to estimate the quantum of black money.

First Published: May 22, 2012 21:06 IST