Black Money: Nature & Causes|UPSC Notes

Black Money is one of the very frequently used terms regarding economic issues. Money that is earned either through illegal activities or is not disclosed to the authorities and thereby evades paying taxes can be referred to as Black Money. The shadow economy has significant harm on the financial health of the nation due to such hidden wealth. Thus, the concept of Black Money should first be understood before its impact can be grasped upon the economic stability of the country.

• Black Money does not necessarily arise from illegal earnings but is also generated due to legal earnings.
• It could send the economy into a balanced state that induces inflation and reduces government revenues but discriminates against a portion of the population.
• India has been in a struggle with Black Money for several decades now, but it still exists.

What is Black Money?

Black money is generally referred to as unreported income or unaccounted wealth that does not appear in the official tax records. There are ample reasons behind the generation of black money, such as corrupt activities like bribery, tax evasion, and smuggling. The people do not disclose the gains to the government to save themselves from paying taxes. As a result, it helps in building a parallel economy, thus sabotaging the government’s vision for efficient economic growth.

Nature of Black Money

It is in the form of cash and non-cash, making the nature of Black Money difficult to understand. What’s more, it can reside in offshore accounts, properties, gold, or investments in assets that are not easy to trace. 

Hidden Assets

Black Money is never exposed to any kind of government supervision, it stays anonymous through its existence outside the money economy. It is not accounted for in any legal financial books of accounts and, hence cannot be traced. This money mostly operates in informal markets, making the economy less stable and transparent.

Diversified Forms

This black money comes in the form of cash, gold, property, or even investment. It is not only illegal but legal income that is not reported for tax purposes. That is why this cannot be effectively monitored or controlled.

Parallel Economy

Black Money feeds parallel economies, which work entirely in a shadowed space, almost always outside legitimate financial frameworks. It creates unfair levels of competition among regular businesses. The shadow economy works as an opposition force against government policies, limiting economic planning and resource distribution.

Global Outreach

Black Money often finds its way into offshore accounts or foreign investments and is thus very difficult to recover. It exploits loopholes in international banking regulations where people and entities can hide assets beyond the reach of national laws.

Economic Disruption

Black Money has its origin in an inflationary way and decreases government revenue. It distorts the data of the economy to be so hard for the authorities to assess the real state of the economy. This concealed wealth will be a contributor to financial instability as well as social inequality.

Causes of Black Money

Several reasons make Black Money into existence in society. Proper understanding of these causes will ensure that root problems are dealt with effectively:

Major Sources of Black Money

• Tax Evasion: Tax is evaded by both individuals as well as organizations by not reporting the actual income and there is an increase in Black Money.
• Corruption: Wealth accumulation arises through the illegalities of public as well as private institutions.
• Illegal Trade: Smuggling, drugs, and counterfeit markets make large contributions to the Black Money pool.
• Real Estate: Property manipulation during transactions often results in the generation of black income.
• Hawala Transactions: Alternative money transfer systems do not take the formal banking route. Thus, these systems work to support the Black Money movement.

Indian Government Measures to Control Black Money

Numerous strategies, acts, and regulations have been followed by the Indian government to subdue the menace of Black Money. Some such measures are as follows:

Direct Actions

• Demonetization: In 2016, the Indian government undertook the demonetization of high-value currency notes as one of the methods to reduce Black Money.
• Income Declaration Schemes: This scheme would attract people to declare their unaccounted wealth by opening legal channels.
• Taxation Reforms: Simplification and transparency of tax structures can make it difficult for anyone to hide inside loopholes like evasion.

Indirect Measures

• Linking Aadhaar with PAN Numbers: Connect the PAN number of an individual in order to trace every financial transaction that he has undertaken.
• International Treaties: India has an international treaty with other countries where it has agreed that hidden Black Money in foreign accounts be traced.
• Vigilant Monitoring: Increasing more stringent organizations like the ED-Enforcement Directorate for tracing financial misappropriations.

Black Money Impact on the Indian Economy

It devastates the economy of India to a large extent through its erosion of tax revenues for the country, inflation of price levels, and even the creation of a relatively wider gap in income distribution. It develops money laundering, defeats market integrity, threatens sustainable development, and helps destroy economic growth and resource utilization over time.

Social Impact

• Growing Inequality: The concentration of wealth among a few leads to social unrest and inequality.
• Corruption: It feeds this money practices at public offices, eroding confidence in the system.

Economic Impact

• Decline of Investments: The genuine investors lose interest due to the unfair practices that this nurtures.
• Stunted Growth: It limits the power of the government to undertake growth-oriented policies by the existence of parallel economy.

The Measures Undertaken by the Indian Government against Black Money

Measures taken by the Indian government so far in respect of it are in the form of demonetization, stiffer tax laws, financial intelligence units, and international treaties. These measures lead to tax evasion being reduced and increased transparency with less unaccounted wealth within the economy. This fight against it involves preventive and corrective measures in the form of the following: 

Policy Initiatives

• GST: Most of the sectors have reduced the scope of tax evasion with the introduction of GST.
• Benami Transaction Act: It is the illegal holding of property not reflected in the name of the owner.

Technological steps

• Digital Payment Promotion: Cashless payment, for reducing cash-kept Money.
• Financial Intelligence Units: Data analytics helps track suspicious financial activities.

Conclusion

The problem of Money is a long-standing issue that hinders India’s economic stability and growth. Though several steps have been taken to combat this malady, the road ahead is pretty long. To remove the very roots of money from society, a three-way approach from the government, institutions, and people should be adopted.

Black Money UPSC Notes

1. Black money refers to undisclosed income, often generated through illegal means, leading to tax evasion. 2. It creates a parallel economy, destabilizing the formal economy and undermining government policies. 3. Black money is generated from activities like corruption, smuggling, drug trafficking, and under-invoicing of goods. 4. The real estate sector, gold trading, and shell companies are significant conduits for black money in India. 5. Offshore tax havens allow individuals to stash illicit wealth, avoiding domestic scrutiny and taxation. 6. Black money reduces government revenues, affecting public services and infrastructure development. 7. Initiatives like demonetization, the Benami Transactions Act, and income declaration schemes aim to curb black money. 8. Global cooperation through FATF and OECD frameworks helps combat black money at the international level.

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