Introduction
Black money, put simply, is money that is held by its owner but is not entirely lawful. Neither in literature nor in economic theory, has black money been defined consistently. Even though numerous phrases with comparable implications have been popular, all of these expressions often refer to any revenue for which the taxes levied by the government or public authority have not been paid.
According to the Ministry of Finance, black money includes “wealth earned through illegal means” and also includes legal income concealed from public authorities to:
evade payment of taxes (income tax, excise duty, sales tax, stamp duty, etc);
evade payment of other statutory contributions;
evade compliance with the provisions of industrial laws such as the Industrial Dispute Act 1947, Minimum Wages Act 1948, Payment of Bonus Act 1936, Factories Act 1948, and Contract Labour (Regulation and Abolition) Act 1970; and/or
evade compliance with other laws and administrative procedures
Black Income Generation in India
Research suggests that developing nations have higher levels of supervision in general, resulting in much higher effective taxes on legitimate operations, a wide discretionary regulatory framework, and, as a result, a bigger black economy. The black economies are often smaller in developed nations because of stronger law enforcement, balanced regulatory burdens, and superior tax-to-GDP ratios that result in significant revenue mobilisation. The most noticeable methods of black income generation are described below:
Suppression of receipts and inflation of expenditure
The suppression of receipts and exaggeration of expenditures continues to be the most prominent method of producing black money. The suppression may apply to various commercial and industrial operations handled by tax laws, like sale receipts, real output etc. Reduced tax incidence is the core and main purpose of suppressing revenues or values.
Corruption
According to recent reports, India has the highest rate of bribery (39%) amongst all Asian countries. At the most basic level, corruption occurs through the millions of transactions that regular people have with relatively low levels of administration as a means of delivering services from the government, such as applying for permits or purchasing goods. India has a dismal ranking of 85 out of 180 nations on Transparency International's Corruption Perception Index for 2021.
Cash economy and use of counterfeit currency
Cash has a demand of its own as an asset. However, counterfeit money poses a serious danger to the economy in huge cash economies like India. Countries have made efforts to stop the circulation of fake cash because it complicates business operations and has a cascading effect on the global economy. Further, money that is lawfully the carrier's and is taken from a bank can nonetheless be utilised for an illegitimate activity, such as funding terrorism or paying for criminal activity. It may also be used to perform a routinely unlawful function, such as paying part of the price for a property in cash so that the entire amount is not represented in the sale deed, evading the payment of capital gains taxes and stamp duty, and creating black money.
Forms of Storing Black Money
Hardly 2% of all the historical black income is likely still kept in cash; virtually most has been transformed into gold, real estate, and financial assets, some domestic and most foreign. No wise person keeps vast hoards of cash since it pays no interest and depreciates over time. The great majority were transformed into assets worldwide, with a significant portion being transferred back to India for investment in Indian securities and real estate.
Land and real estate transactions
The most apparent form of assets utilised to transfer black money would be land and real estate. Immovable property assessments vary since they are rarely similar. This leads to the increased flexibility of land valuation and makes it a good investment for black money. Both "black" and "white" savings are used to invest in assets such as land, which serves as both a profitable choice to invest black income and acts as a safeguard against inflation.
Bullion & jewellery transactions
Gold is favoured as an asset category for masking black revenues because of its high intrinsic worth, which holds true even during inflationary periods or economic uncertainty and although jewellery, gold, and bullion are subject to wealth tax. Investment in gold is ineffective because Indians keep onto such sterile investments for capital growth and financial stability rather than generating economic impetus. IT authorities claimed that the vast search for unreported cash throughout the nation after demonetisation has found that it was either converted into gold or channelled via shell firms to make it legal money.
Conclusion
The main repercussions of the development of a major black economy are the loss of policy control and failure, the unplanned globalisation of the economy, and rising criminality. Regardless, some argue that the black economy creates jobs and therefore its presence would not be a reason to worry for it is not entirely harmful. This school of thought claims that the black economy does not warrant alarm, to put it briefly.
The percentage of a country's income that is related to black money has an impact on its economic growth. Black money generates financial leakage because untaxed income leads the state to forfeit revenue. Furthermore, this money is seldom deposited in banks. As a result, respectable small firms and entrepreneurs may find it more difficult to secure financing. Moreover, black money causes a nation's financial soundness to be overestimated. Estimating the extent of black funds in any country is exceedingly difficult. These unreported revenues cannot be factored into a country's GDP. As a result, a country's estimations of macroeconomic indicators would be deceptive. These errors have a negative impact on planning and policymaking.
Twinkle Adhikari
