Black money refers to undeclared earnings that may have been legally or illegally made, but have been hidden from the government so as to avoid paying tax on them. In a bid to evade tax, Indians deposit a huge sum of money in the safe havens abroad. Among other nations, the most popular choice is Switzerland. However, even people without accounts in foreign banks do not disclose their complete income for tax payment.
One of the major sources of black money is transfer mispricing. This is done by big Indian companies having headquarters abroad. Transfer mispricing is charging a high price in tax haven countries while charging a low price in countries collecting high taxes to pay less taxes. Thus, the company earns a profit.
The other sources of black money include bribery, corruption, withholding cash, transfer mispricing, investment in tax haven countries. Even something like not asking for a bill/receipt after a purchase is a source of black money.
In Swiss Banks
As per several media reports published in 2011, Indians were the largest depositor of illegal money in Switzerland. The main reason why many Indians deposit their money in Swiss accounts is because it’s a tax haven and also the information of the depositors is fully confidential and is not revealed. But however, the allegations by the media reports were denied by the Swiss Bankers Association and the Central Bank of Switzerland. The association claimed that the story completely fabricated by the Indian media.
(Tax haven means a country or independent area where taxes are levied at a low rate.)
2015 HSBC paper leaks
In February 2015, The Indian Express released a document containing a list of 1195 account holders of HSBC banks. The document further revealed that HSBC was helping the depositors to escape taxes.
2016 Panama paper leaks
In the year 2016, the ‘Panama Papers’ leaks revealed names of people with huge sums of money stashed in off-shore accounts. The leaks contained documents of wealthy people’s bank accounts in tax haven countries, and investments in off-shore business entities. Although holding bank accounts and offshore business entities abroad is legal, it is often misused to avoid payment of taxes.
Domestic Black money
Indian companies which are accused of misusing public trusts for money laundering.
Special Investigation Team (SIT)
In 2009, the former Minister Ram Jethmalani filed a petition in the SC seeking the court’s direction to help bring back black money deposited in the foreign accounts.
The SC, therefore, appointed a SIT headed by Jeevan Reddy. The SIT had a responsibility to provide all reports on black money directly to the SC. Under the SIT, the Income Tax department managed to recover around 3,500 crore rupees. However, investigation is yet underway to find more black money holders and recover the remaining amount.
Double Taxation Agreements
The government refused to disclose the name of the black money holders to the court stating that it would violate the privacy of the holders. Double Taxation Avoidance Agreement had declared the white incomes but not the black incomes of the people. The black incomes have not been declared by India or other countries.
Criticism of the government
The government has been accused of obstructing investigators from disclosing the names of black money holders. The HSBC black money whistle blowers had information regarding the list of black money holders. However, the government did not allow it to be disclosed.
Hasan Ali case
Hasan Ali, an Indian businessman, was arrested for the involvement in tax evasion through deposits of black money amounting to Rs. 360 billion in foreign accounts (Swiss banks). As of October 2013, Ali is in jail with his bail petitions rejected several times by the Bombay High Court and the Supreme Court of India. Hasan Ali denies all allegations and has said that he has no Swiss bank accounts and his rivals are behind the charges.
Public Protests and Government response:
- MC Joshi committee
After the huge protests across India, the government had appointed a committee headed by MC Joshi to look in to the matter pertaining to black money and corruption in India. The committee drafted a report based on their observations and suggested a list of recommendations to curb black money in India.
- Tax Information Exchange Agreements
India is a signatory of “Tax Information Exchange agreement” with 13 countries. Through this agreement, India can receive information on deposits of its citizens in foreign accounts.
Demonetisation of 500 and 1000 rupee currency notes
In order to curb black money, Prime Minister Narendra Modi demonetised notes of Rs. 500 and 1000, assessing that large portions of black money held by Indians were in these denominations.
Proposals to prevent Indian Black money
The Government had made several proposals in white paper to tackle black money and the underground economy. The proposals are mentioned below.
- Reducing disincentives: High taxes encourage generation of black money in the economy. As a result, a reduction in taxes was suggested.
- Banking Transaction Tax: Suggestions were made to impose taxes on every banking transaction instead of direct and indirect taxes.
- Economic Liberalisation: The high cost of non-tariff barriers is probably one of the reasons for black money generation and underground economy. Therefore, economic liberalisation will help in the reducing generation of black money.
- Reforms in vulnerable sectors of Economy: Certain vulnerable sectors of economy are prone to generation of black money. For example, in the estate sector, people purchase houses through undisclosed incomes. Thus, reforms are required in the estate sector to curb this issue. Other sectors that are vulnerable include gold business, stock markets, mining markets, charitable trust and so on.
- Supportive measures: Apart from various measures mentioned above, the government must also pursue other methods like public awareness initiatives, effective solutions and accountability laws.
- Amnesty: Amnesty programmes have been introduced to encourage voluntary disclosure by black money holders. However, it was severely criticized for being supportive of black money holders.
- International Enforcement: India entered into a Double Tax Avoidance Agreement with 112 nations including tax haven countries. This will help ensure that Indian citizens do not have to pay double taxes, i.e. in India and in a foreign country. This also helps to keep a watch on the tax evaders.
- Modified currency notes: Notes of high denominations like Rs. 500 and 1000 must remain in the market only for two years. After two years, the money must be deposited in the bank accounts and then the notes will cease to exist as a legal tender. As a result, the undisclosed incomes will be disclosed for the payment of taxes.
- Corruption in education: Corruption exists in the education sector in India. It is being practiced in order to secure admission or to pass an examination. The government must be introduced reforms and pass stringent laws to prevent corruption in the education sector.