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Debugging Indian Black Money Circle

There has been a massive debate around the vicious circle of black money with people hoping big from the Narender Modi led government to bring back the money to nation from banks overseas. In the first place for starters let’s discuss the black money before we get down to core. Black money is money earned to which no tax is paid. Black money can be earned in two ways by lawful activities however not able to declare the dubious income and others way by acts like smuggling, drug trafficking, human trafficking and all.

We buy a real estate property on paper worth Rs. 2 Crore and in reality pay rupees 6 Crore so we have added a sum of 4 Crore to the black money which is going to run in the economy to which beneficiary cannot pay tax as that is not legal. Goods and services which are not legitimate and cannot be disclosed contribute major part to the vicious black money circle. Major beneficiaries from these are politicians, Bureaucrats, government employees and private corporate. Black money runs like fluid in the real estate sector. Corruption in offices contributes a lot to the black money circle as it cannot be disclosed.

Second way around is people who do illegal acts like drugs and smuggling sell these products in return the money they get they push into the market and form black money. So illegally earned money might flow overseas and deflate the local currency or the money might run like black money in the market.

Major sectors which run the black money menace are the real estate, jewellery and the entertainment industry. Majority transactions in this industry is illegally funded or billed at undervalue. I will not go into the depth of the relation between politics and these industries you all are allowed to draw your own opinions. FYI: 2014 Lok sabha polls in India were the second most expensive elections after the 2012 US polls.

Involvement of Government and Corporate sectors has been long seen in the Indian markets. One classic example of such involvement was seen during the reign of congress led UPA Government between 2004-2014 where scarce resources like 2G spectrum and coal block were allocated with improper means. One of  the biggest agenda of BJP-led NDA government was it would bring back the Indian black money deposited in banks overseas and will also take measured to curtail production of black money in the Indian market. Black Money deposited in foreign banks is assumed to be equivalent to 7% of national GDP.

Black money earned can be parked in different ways. Earning at smaller level done by local people in form of bribes and over billing is generally placed with the real estate sector or saved with investments in metals like gold and diamond.  India since start has been a tax heavy country. Till the 19th century highest taxation slabs could go up to 90%, so the rich class generally used to keep their monies outside the country. With recent developments in FDI it has been observed Indian money sent outside in being re routed in the nation in the form of Foreign Direct Investment from tax heaven nations like Mauritius.  In round tripping capital which has evaded taxation goes out to countries like Mauritius and comes back to the nation via round tripping to earn profits and getting tax benefits. So rather than having foreign monies coming in to the market we only get local money via a round trip.

With a treaty signed by the Indian government with Mauritius it has become a gateway country for sending the money back to the nation. Investment in the form of FDI from shell companies based overseas generally taxation laws and get privileges as they are coming in the form of FDI. According to sources more than 40% of FDI in India is coming from Mauritius which according to authorities is only local money re routed. This is presumptions we cannot be sure all money coming via the Singapore –Mauritius route is black money and money flowing in from European market is clean as Ganges. The gateway countries being so small in economic size cannot be such heavy investors so it’s evident all the money is not FDI the ownership might be local Indian.

There can be different opinions for ways to tackle the menace of black money which I will discuss in the upcoming article tackling the black money menace.  But one easy way is the government should pass a law foreign account tax compliance Act (as passed in US). It states Indians living overseas and still holding the Indian citizenship will have to declare their assets and the financial accounts to the governments


By: Anchal Goswami

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