UNIT – 2
BLACK MONEY AND BLACK ECONOMY BY C. RAMMANOHAR REDDY
About the Author
C. Rammanohar Reddy is an economist. He has been writing on economic policy since the later 1980s. He was an editor of the prestigious ‘Economic and Political Weekly’ between 2004 and 2016 now he is Readers’ Editor for Scroll.in.
Black Money: Black money is funds earned on the black market, on which income and other taxes have not been paid. It also includes the unaccounted money that is concealed from the tax administrator is called black money.
Black Economy: The black economy is all economic activities in a given economy that occurs outside or in violation of the prevailing laws and regulations of society.
Summary
This is a chapter from ‘Demonetisation and Black Money’. This a book which focuses on India’s decision to demonetise its Rs. 500 and Rs. 1000 currency notes. It is an attempt to eliminate counterfeit notes, stop terror funding and fight corruption and black money. This chapter introduces the terms ‘Black Money’ and ‘Black Economy’ and their relation with a ‘White’ or ‘Legal Economy’. The term ‘white’ here means the taxes and the money we earn which is legal. However, the Black Money is the amount earned illegally.
Black money is an income earned through two different processes.
1. A kind of income generated from illegal activities such as extortion, trafficking, drugs, and corruption.
2. A kind of income where it is being earned in legal activities, but on which taxes and other dues are not paid to the government authorities at the central, state or local levels.
Both set of activities are prevalent (widespread/common) in India. Illegitimate activities in the form of corruption among government official are also observable. It results in ‘Tax avoidance’ at the central and the state level in the form of ‘Direct Taxes’ and ‘Indirect Taxes’. It is difficult to estimate the black money/black income. The illegal or unaccounted income that is accumulated over time is held as wealth in different kinds of assets – Real estate that is land, etc. gold, jewellery, benami bank deposits, bank accounts hidden from the tax authorities or plain cash. These assets can be held at home or abroad – it is always in hidden form. These hidden taxes are not intimated to the tax authorities and it is accumulated over time.
Do not misunderstand the terms- ‘Black Money’ and ‘Wealth’ and ‘Assets’. All these can be interchangeable in certain situation. Black money can be used to generate wealth and to even purchase assets and to create assets. That’s why it can be interchangeable; it is possible according to the situations. ‘Black Money’ in the income earned and assets created with the help of black money.
Black Economy and Black Money both exist in the market, all over the world. Black Economy comprises the set of activities which generate black money or the activities into which the legal-turned-illegal money flows. In ‘black economy’ black money is used in its illegal activities. No one can stop this.
‘Black Money’ generated in trafficking may be used or invested in illegal activities like smuggling or used to bribe public officials to look away from the crimes. ‘Black money’ creates ‘Black economy’. Black money is the crux of the black economy. To destroy black economy, black money must be removed by creating such conditions/policies. Therefore, demonetization was done by the Indian Government.
Interchange ability of the Black and the White money, i.e., black money means illegal income and white money means legal income. For instance, if you are doing some service or business and if you are paying the tax to the Government then it is the white money. If the money is concealed, if fake accounts are shown, if fake account books are shown then you are trying to generate the black income or money. Now let us see how black money can be changed into white money and white money can be changed into black money.
Reddy states that there is a constant flow of money between white and black streams.
For instance, a real estate developer is paid partly for his sales. If you purchase a flat and you pay him partly in cash, another partial payment through cheque. Hence, the cheque will be considered as the legal payment system and the cash will be considered as illegal one. Because the cash part is unknown to the tax authorities so the real estate developer is creating black money with the help of cash and cash is unaccounted fund. Now, the real estate developer also needs to pay to the cement seller who also wants to hide from tax authorities and cement is used to build flats which is the most important thing. Hence, the black money is converted into asset. This is how the real estate developers generate black money in the market.
This is another example of black and white money. This shows the conversion of black money into white money. Thus, we can conclude from the above diagram that:
1. Constant back and forth movement of money in both forms and it shows intermingling of legal and illegal activities. Black money can be the part of white money.
2. This conversion of ‘black money’ to ‘white money’ is a constant process. It is difficult to track.
3. Accumulated ‘black money’ can be invested abroad. It means it can cross national borders too. It can also be brought back to India with the help of offshore financial services.
4. In an asset the illegal can be fixed firmly along with the legal.
5. Price of flat may include legal and illegal expenditure. But the buyer is unknown to it. The book of account may tell a fake story (fake entries).
6. Buyer pays it in the form of cash but the asset is the combination of both.
7. Thus it shows how intermingling of ‘black money’ and ‘white money’ takes place.
8. Even buyer can ask the builder that to accept some in cash and some in the form of cheque. This cash can be unknown to the tax authorities. It also denotes back and forth conversion (intermingling) of ‘black money’ to ‘white money’ and vice versa.
9. Construction- ‘Black money’ and ‘white money’.
10. First sale – Turning into white.
11. Second sale – ‘White money’ and ‘Black money’.
Forms of generation of Black money
The 2012 ‘White paper’- A government report giving information or proposals on issue (UK).
1. ‘Crude way’- Income generated from illegal activities is hidden from the law, i.e., not ready to pay the tax. This income is used in the sophisticated way.
2. Sophisticated Way- Income generated from legal activities but not reported to the tax authorities. It is done by manipulating the accounts.
These ways of sophistication generation generate ‘Black Money’ in the financial practices that cross the national borders. Financial practices include-
1. Transfer Pricing in Trade.
2. Laundering (hiding/concealing) through trade.
3. Use of tax havens/offshore financial centres.
4. Stock market.
The White Paper also identifies some sectors as more vulnerable (unprotected) to the generation of black money including:
1. Land and real estate transactions.
2. Bullion (Gold Trade) and jewellery transactions.
3. Financial market transactions.
4. Public procurement.
5. The non-financial market transactions.
6. The informal sectors with its cash economy.
Sectors used nowadays (presently) for generating black money-
1. Real estate.
2. Financial market transactions.
3. Corruption in public procurement- Civil contracts and defence imports.
4. Practices in the non-profit sector- Educational institutions, and hospitals run by trusts.
Conclusion
The 2012 White Paper contained the definition of ‘Black Money’ – ‘It is not fully legitimate in the hands of the owner for two possible reasons’. Generated from the illegal activities like crime, drug trade, terrorism and corruption. Generated by failing to pay the dues to the exchequer in one form of the other. The word ‘Benami’ literally means ‘Without a name’. In tax related usage- it means that an asset may be purchased by one person, but it is held in another (real or fake). Black money is also used to generate assets and these assets are hidden from the authorities. Internationally the black economy is also referred to the ‘underground economy’. ‘shadow economy’, ‘illegal economy’. Participatory Notes – PNs- Foreign Institutional Investors (FIIs) to individual investors. Owners of PNs are not disclosed and the owner of these are the Indians who are investing there. This is round-tripping money in the black economy.