7 PM | Inaccurate diagnosis, draconian remedy : On Black Money | 20th December 2019

Context: Black money and related laws.

Black Money:

  • There is no official definition of black money in economic theory, with several different terms such as parallel economy, black money, black incomes, unaccounted economy, illegal economy and irregular economy all being used more or less synonymously. The simplest definition of black money could possibly be money that is hidden from tax authorities.
  • Therefore, black money is money earned through any illegal activity controlled by country regulations.
  • Black money proceeds are usually received in cash from underground economic activity and as such are not taxed.
  • Recipients of black money must hide it, spend it only in the underground economy, or attempt to give it the appearance of legitimacy through money laundering.
  • According to the Standing Committee’s report, the sectors that see the highest incidence of black money include real estate, mining, pharmaceuticals, pan masala, the gutkha and tobacco industry, bullion and commodity markets, the film industry, and educational institutes and professionals.
Money Laundering: As per the Financial Action Task Force (FATF), Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardising their source.Illegal arms sales, smuggling, and the activities of organised crime, including for example drug trafficking and prostitution rings, can generate huge amounts of proceeds.The money from the criminal activity is considered dirty, and the process “launders” it to make it look clean. Money laundering is itself a crime.The process of laundering money typically involves three steps: placement, layering, and integration.Placement puts the “dirty money” into the legitimate financial system.Layering conceals the source of the money through a series of transactions and bookkeeping tricks.In the final step, integration, the now-laundered money is withdrawn from the legitimate account to be used for whatever purposes the criminals have in mind for it.    

Estimates of Black Money in India:

As black money is not accounted it is not easy to estimate it either. Different reports suggests different estimates. Some estimates are as below:

  • A former CBI Director of India has said that the total black money in India is around 500 billion US dollars.
  • Global Financial Integrity Report has mentioned that India lost around 120 billion US Dollars in the time frame of 2001-2010. It ranked India in 8th spot in black money generation.
  • Indians’ share in tax-havens across the world is estimated at $152-181 billion (Rs. 10 lakh crore), by one calculation of Bank of Italy.
  • Between 2008 and 2012, various reports quoted anywhere between $500 billion and $1.5 trillion, some relying on estimates of a Swiss Bankers Association (SBA) report.
  • In March 2019, National Institute of Financial Management reported to the Lok Sabha Standing Committee on Finance, that the estimate is about $216 billion-$490 billion. 

Some Institutions for combating black money:

  • Central Board of Direct Taxes (CBDT): Under Department of Revenue, Ministry of Finance
  • It oversees direct tax administration in India and is primarily responsible for combating black money.
  • A new post Director General of Income Tax (Investigation) was created for investigation of cases of evasion.
  • DGIT heads investigation wing of the Board.
  • Similarly, for indirect taxes ‘Central Board of Excise and Customs’ is in place and it has Directorate General of Central Excise Intelligence (DGCEI).
  • Enforcement Directorate:
  • The ED has currently been entrusted with the investigation and prosecution of money-laundering offences and attachment/confiscation of the proceeds of crime under the Prevention of Money Laundering Act.
  • It also enforces provisions of Foreign Exchange Management Act.
  • Financial Intelligence Unit: 
  • It was established in 2004 for coordinating and strengthening efforts for ‘national and international intelligence’ by investigation and enforcement agencies in ‘combating money laundering and terrorist financing’.
  • FIU is the national agency responsible for receiving, processing, analyzing, and disseminating information relating to suspect financial transactions.
  • It is an independent body reporting to the Economic Intelligence Council headed by the Finance Minister.
  • For administrative purposes, the FIU-IND is under the control of the Department of Revenue, Ministry of Finance. Its functions are defined under Prevention of money Laundering Act.

Laws to combat menace of black money:

  • The Income Tax Act, 1961:
  • The Income Tax Act was enacted in the year 1961 and is the statute under which everything related to taxation is listed. This includes levy, collection, administration and recovery of income tax. The act basically aims to consolidate and amend the rules related to taxation in the country.
  • The Income Tax Act has, since 1989, provided for up to three times penalty on escaped tax. Similarly, wilful attempts to evade taxes have, since 1975, been punishable with imprisonment of up to seven years. 
  • Protocol With Switzerland: A protocol for automatic exchange tax information, under which India is now receiving data from Switzerland, was signed in 2011, as was the amendment requiring all citizens to disclose foreign assets with their domestic tax returns.
  • Black Money Act:
  • The Black Money (Undisclosed Foreign Incomeand Assets) and Imposition of Tax Act, 2015 is more commonly called as Black Money Act.
  • It came into force on 1 April 2016 and will cover Indian residents.
  • It applies to undisclosed foreign income and assets, including financial interest in any entity.
  • The Act does not distinguish between the owner of the asset and beneficial owner of the asset.
  • Respite from penalty and prosecution has been given to bank accounts with up to INR 500,000
  • Undisclosed foreign income and fair value of undisclosed foreign assets will be taxed in India at a flat rate of 30%, with no deductions, exemptions or set-off of carried forward losses available under the existing Indian direct tax laws.
  • Flaws in the act:
  • Lawmakers overestimated the writ of international laws and made no economically persuasive case.
  • Resultantly, as of May 2019, the total untaxed foreign assets mined was ₹12,500 crore.
  • Wholly recovered, this wouldn’t even pay Prasar Bharati’s bills for four years. 
  • Fugitive Economic Offenders Act, 2018
  • It has been enacted for effective action against economic offenders fleeing Indian jurisdiction.
  • An FEO is a person against whom an arrest warrant has been issued for committing any offence listed in the Schedule to the Bill, and the value of the offence is at least Rs 100 crore. 
  • Further, the person has left the country and refuses to return, in order to avoid facing prosecution. 
  • The Bill lists 55 economic offences in the Schedule, which include:

(i) counterfeiting government stamps or currency,

(ii) dishonouring cheques,

(iii) benami transactions,

(iv) transactions defrauding creditors,

(v) tax evasion, and

(vi) money-laundering. 

  • It provides for attachment and confiscation of property of fugitive economic offenders and disentitles them from defending any civil claim.
  • Flaws in the act:
  • Under the Act, any court or tribunal may bar an FEO or an associated company from filing or defending civil claims before it.  Barring these persons from filing or defending civil claims may violate Article 21 of the Constitution i.e. the right to life.  Article 21 has been interpreted to include the right to access justice.
  • Under the Act, an FEO’s property may be confiscated and vested in the central government.  It allows the Special Court to exempt properties where certain persons may have an interest in such property (e.g., secured creditors).  However, it does not specify whether the central government will share sale proceeds with any other claimants who do not have such an interest (e.g., unsecured creditors). 

Issues with the existing laws:

  • The laws made post 2014 to curb black money have many flaws. Some of the them listed below:
    • The retrospective application of tax and penal laws that are so confiscatory and discriminatory that they walk all over a citizen’s right to life, carry on business and own property.
    • These laws also shift the burden of proof onto the citizen to establish that he is not an offender.
    • Citizens can be subjected to criminal trial, without the taxman first proving that there has been tax evasion. The results of giving such unbridled powers to agencies have been disastrous.


  • India needs a rationalized tax structure. Prof. Kaldor, Wanchoo Committee and many others including the authors of the National Institute of Public Finance and Policy (NIPFP) Report have recommended a reduction in marginal tax rates, simplification of tax structure, taxation laws and improvements in tax administration.
  • The Wanchoo Committee also recommended that the department should completely reorient itself to a more vigorous prosecution policy in order to instill a wholesome respect for the tax-laws in the minds of the taxpayers.
  • Arousing Public Conscience: A special drive should be undertaken to arouse public conscience by enhancing the co-operation of the leaders in various walks of life.
  • Increased international cooperation, technological advances and banking penetration implodes black money more than any law or sermon on patriotism.
  • India’s war on black money can only be won through democratic, persuasive and economically-sound means.

Source: https://www.thehindu.com/opinion/op-ed/inaccurate-diagnosis-draconian-remedy/article30351692.ece

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