how can we reduce black money in india?

HOW can we REDUCE Black Money in India?

cvBlack Money, some basic examples

Sher Singh is a Goonda. He makes money from kidnapping, drugs, prostitution, extortion, murder, etc, that is from criminal activities.

The money he makes cannot be declared to the tax authorities, and is Black Income.

Money that evades tax is Black Money. Since Sher Singh is paid in cash, his income can be hidden easily.

EXAMPLE 1: Sher Singh

** Names used are fictional and the numbers are only for broad indicative value **


Swati Sharma is an employee in a town’s water department. Swati approves water connections only when she is paid a bribe.

The money she makes from bribes cannot be declared to the tax authorities, and is Black Income.

Money that evades tax is Black Money

Both Sher Singh and Swati Sharma make money from illegal activities in addition to illegally evading taxes.

EXAMPLE 2: Swati Sharma



Dr Swami has a good private practice. He consults 50 patients/day, charges Rs 200/patient and works 300 days/year.

Dr Swami is not happy with this 14 lakhs, and wants to make more.

EXAMPLE 3: Dr Swami

Gross Income: 50 x 200 x 300 30,00,000(Assumed) Expenses and Deductions 10,00,000

NET INCOME 20,00,000Income Tax @ 30% -6,00,000

Post Tax Income 14,00,000



So Dr Swami declares only half his patients to tax authorities.

Dr Swami: 15 lakhs undeclared + 3.5 declared income (UP~32%) Dr Swami’s undeclared Rs 15 lakhs is Black Income. NOTE: If Dr Swami is paid in cash, his income can be hidden easily.

EXAMPLE 3: Dr Swami

Declared Gross Income: 25 x 200 x 300 1,50,0000(Assumed) Expenses and Deductions - 1,00,0000

NET INCOME 5,00,000Income Tax @ 30% -1,50,000

Declared Post Tax Income 3,50,000


Mr Reddy buys steel and makes ball bearings to sell to Automobile companies.

Mr Reddy is not happy with this 1.3 Crores, and wants to make more.

EXAMPLE 4: Mr Reddy

Gross Income 10 crExpenses -8 cr

NET INCOME 2 crIncome Tax @ 34.6% 0.69 cr

Declared Post Tax Income 1.3 cr



Mr Reddy asks his Steel Supplier to invoice him an extra 1 Crore, pays him by cheque and gets 95 Lakh back in cash.

Mr Reddy now has an income of, 0.95 + 0.65 : 1.6 crore (UP~23%) Mr Reddy’s 0.95 crores is Black Income,

so is the supplier’s 5 lakhs commission for ‘Inflated expenses’ NOTE: Both Dr. Swami and Mr. Reddy make money from legal activities but illegally evade taxes.

EXAMPLE 4: Mr Reddy

Gross Income 10 crExpenses - 9 cr

NET INCOME 1 crIncome Tax @ 34.6% - 0.35cr

- crDeclared Post Tax Income 0.65 cr

Money is used to trade goods, services and assets.

So … What is Black Money?

Governments get resources by taxing money flows. Taxes like service tax and excise are called indirect taxes. Tax on income is a direct tax.

Money flow that evades these taxes is Black Money.

cvIndirect tax evasion and money laundering

Mr Shah runs a Gutkha factory and the Excise duty on his products is effectively 60%.

EXAMPLE 5: Mr Shah

Gross Sales 100 crExcise duties - 60 cr

Net Revenues 40 crCosts 18 cr

Income 22 cr


Indirect tax evasion and money laundering

EXAMPLE 5: Mr ShahWith the help of corrupt Excise and IT officers, Mr. Shah declares only half his production to the Excise department. He sells this Gutkha for cash. After paying Rs. 10 Crore in bribes, he has Rs. 40 Crore in cash. Mr Shah ‘launders’ this cash by showing it as receipts from his theater.

This works for Mr Shah because: • Taxes on the theater business are lower than on tobacco • Both theater tickets and gutkha are mainly bought in cash

cvIndirect tax evasion and money laundering

All customers pay the full price of Gutkha including the Excise duty. Mr. Shah never pays the Excise on undeclared Gutkha to the government.

Mrs. Shah’s New Income 40 Cr + 2 = 42 Cr (UP~100%) Mr Shah’s 40 crores is Black Income.

EXAMPLE 5: Mr Shah

Declared Gross Sales 50cr

Excise duties - 30cr

Net Revenues 20 cr

Costs 18 cr

Income 2 cr

PAAN2) Through Wholesaler the Paanwalla routes cash back to Gutkha Mfr

GUTKHA

1) Ramesh withdraws money from an ATM, then buys Gutkha and pays cash

ATM

3) Gutkha Mfr pays

cash to Tobacco farmer for tobacco

5) Gutkha Mfr pays cash to Govt Officer

as bribe

GOVT

6) Officer uses cash to buy a fancy watch. Seller declares income

4) Tobacco farmer uses cash to pay a Doctor who does not declare it

+ Doctor +

Not all cash transactions …are black

BLACK

WHITE

Money can be received in cash or by electronic means

If the money flow is not declared to tax

authorities and applicable tax is not

paid it becomes black

Cash transactions are easier to hide from tax authorities

Not all cash transactions …are black

Why is Black Money a Problem?

1) Taxes are used for nation-building - transport, schools, hospitals and law and order. Tax evaders steal nation building money.Existing taxes need to be used more effectively. However, this cannot be an excuse to cheat on taxes.

3) Black money cannot be easily used for legal activities and hence funds illegal activities. This is a vicious cycle.

2) Black Money funds bribes and political activity. This gives tax evaders a lot of power.

How is Black Income used?Do people with Black Income stash it, or use it? Of course they use it, and a very large chunk goes into these 5 areas:

Buy Cars, Land, Jewellery, etc in cash for consumption.

Pay Bribes to Govt officials and make donations to political parties.

Use for legitimate business expenses like buying material.

Launder part of it by showing it as being income from other businesses.

Stash it in Benami property or companies or land or jewellery.

Black Income ModelLet us summarize the earlier information diagrammatically … 1. The Tax Thief makes his Black Income by evading taxes. This is usually in cash.

Tax evadedINCOME

Black Income Model2. The Tax Thief uses a large part of the cash for Benami purchase of companies, properties and gold. (Benami holdings estimates = multiples of cash stash)

Tax evadedINCOME

Money stashed in BENAMI companies, property, gold, etc.


Black Income Model3. Where does Black Money go?

Tax evadedINCOME

CORRUPTIONBribes and

Political Donations

BUSINESS USE Expenses to make more Black Income

PERSONAL useLand, Jewelry, Luxe

LAUNDERED and re-routed to business


Businessmen

There are multiple uses for Black Income, so the cash stash is smaller proportion of Black Income

NOTE: We believe that majority of Black Income is generated by Businesses.

Businessmen Vs Professionals/Bureaucrats

Professionals / Bureaucrats

Personal use and benami investments are only major uses, so their ‘stash’ is larger proportion of Black Income

Tackling Black Money…

Prong 1. Detect and stop Black Money generation

Prong 2. Neutralise Benami assets

Prong 3. Make Use of Black Money difficult

…using the Black Money Model

Tackling Black Money

Challenges • Limitations of Tax Officers: Tax thieves have

more weapons on their side than Tax Officers. • Government Silos: Different Government

departments do not share information with each other to detect tax evasion.

• Justice System: Tax thieves use the slow speed of justice system to their advantage.

• Cash usage: Cash payments are easier to hide than non cash payments.

Prong 1. Detect and stop Black Money generation

Challenge 1 Tax Officer LimitationsReferring to our example of Mr. Reddy,

• A Tax Officer (TO) cannot know all industries well. X tonnes of raw steel makes how many tonnes of ball bearings? Without this knowledge the TO finds it difficult to judge correctness of expenses claimed by Mr. Reddy.

• Mr Reddy would not inflate expenses from just one Supplier, but would spread it across many suppliers.

• Mr Reddy is not bound to share information with the TO in an analysis-friendly electronic form. He gives a physical ledger that is difficult to analyze.

• While one TO scrutinises more than a 100 companies, each company can hire a dozen+ CAs to confuse him.

• The TO may be corrupt.

1

Tackling Black Money - Prong 1

Tackling Black Money - Prong 1Challenge 2 Government Silos• Business like Mr Reddy’s are separately assessed

by different Tax Authorities such as Excise / Sales Tax / VAT / IT etc.

• These authorities do not share information with each other about Mr. Reddy.

• If Mr. Reddy’s steel supplier is investigated for non payment of VAT, that information should be given to Mr. Reddy’s IT officer.

2

Tackling Black Money - Prong 1Challenge 3 Justice System• Mr Reddy / Businessmen invariably dispute the

claims of the IT Officer and the prosecution could take a lot of time because of the slow justice system.

• Though the Steel Supply company directors from Mr Reddy’s example can be prosecuted for generation of inflated bills - often such companies have benami Directors who are faraway villagers, while the real people responsible remain hidden.

(NOTE: Daksh reports the pendency of IT appeal in Karnataka HC as 1408 days - much higher than most other cases)

3

What can be done?1. Continuous and

high-quality training of IT Officers.

2. Complete automation of tax filing and accounting information, facilitating accurate analysis.

3. Ongoing monitoring of corruption allegations

6. Specialised Tax Courts with time-bound targets for case disposal, and stiff penalties for tax departments and plaintiffs for frivolous appeals.

4. Exchange of information between government departments - with adequate safeguards.

Tackling Black Money - Prong 1

5. Reduce use of cash in the economy, making it

more difficult for people to hide their income.

�


The largest part of black money wealth is parked in assets viz. immovable property. These assets are not held in the name of their real owners. The paper owners of these assets are menial employees of the real owners, private companies or fictitious persons. To prevent this:• Benami ownership of immovable property and companies must

be discouraged.• Ownership data of immovable properties must be digitised and

put into independent NSDL like land-record depository institutions

• The task of tracking ownership data of private companies in India must also be given to NSDL/CDSL- as is already the case for publicly listed companies

Prong 2. Neutralise Benami assets


Making use of Black Money difficult reduces the incentives to create it in first place Measure 1. Eliminate Cash from Property and other high value transactions

Buying property is the most popular use of black money. Cash was necessary earlier due to low bank account penetration, but we now need to prohibit the use of cash in property transactions.

Luxury goods like cars, jewellery and watches also need to go the non cash route.Measure 2. Reduce Corruption

If corruption is reduced, the incentive to generate Black Money reduces.

Prong 3. Make Usage of Black Money difficult

Funding Politics … legitimatelyPolitical activity in a democracy is legitimate. If not funded legitimately, it will find illegitimate sources. How much money is needed? Here are 2 basic back-of-the-envelope calculations:

• India has 4120 assembly constituencies. At 2 Lakh / year, 5 employees / constituency, even just 3 political parties would need 1,236 Cr / year.

• There are 545 parliamentary constituencies. At 4 Cr / candidate and 3 major candidates only Rs. 6,540 Cr would be required for every national election. Political funding needs are a very small part of BM generated!

NOTE: These are basic estimates to start a discussion. What do you think is India’s cost of democracy?

RECOMMENDATION: Make realistic estimates of the cost of democracy and provide for it.

Why Black Money? GREED!

Society does not always look down on the Tax Evaders. In fact, they may be lionized.

Being wealthy is cool. Paying full taxes should be cooler.

Money is used to trade goods, services and assets between two parties.

What is Offshore Black Money?

Governments get resources by taxing money flows.

Money flow that evades these taxes is Black Money.

When one party is outside India Offshore Black Money is generated.

Mr Gupta owns ABC Corporation and also anonymously owns an international firm, XYZ Consultants.

EXAMPLE 6: Mr Gupta

ABCCorp

XYZCons

Anonymously ownsOfficially owns

Offshore Black Money Examples


Mr Gupta generates offshore Black Money by 1) Funds siphoning

ABC Corp shows an expense of $1 M for consulting fees paid to Mr Gupta’s own firm XYZ Consultants. XYZ then deposits this $1M in a Swiss Bank and invests it in global markets. Mr Gupta’s gains: Tax evaded by reducing profits in India by $1M

EXAMPLE 6: Mr Gupta

Swiss Bank

Expense $ 1 M

VALUE: $0Invoice: $1M

Black Income $ 1 M

ABCCorp

XYZCons

Offshore Black Money

THEORY: 180 countries are signatories to the Financial Action Task Force (FATF) and have agreed that the the identities of Owners of Companies registered in their countries should be known.

REALITY: Rules that prevent hiding identities of company owners are ineffective.

Source: Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies

THE ANONYMOUS OWNERSHIP PROBLEMOffshore Black Money

ABCCorp

XYZCons Anonymously ownsOfficially owns

Mr Gupta also generates offshore Black Money by 2) Under-invoicing of Exports

Showing an Invoice of $80M for goods worth $100M, Mr Gupta gets $18 M in his Swiss Bank Account (after paying a small commission to the Buyer). He also reduces his profits in India and hence his taxes.

EXAMPLE 7: Mr Gupta

Swiss Bank

Buyers cut$ 2 M

White Income $ 80 M

VALUE: $100 MInvoice: $80 M

Black Income $ 18 M


Mr Gupta also generates offshore Black Money by 3) Over-invoicing of Imports

Showing an Invoice of $120 M for goods worth a value of $100 M, Mr Gupta gets $18 M in his Swiss Bank Account (after paying a small commission to the Seller). By doing this, Mr. Gupta evades some import duty and also reduces profits in his Indian company.

EXAMPLE 8: Mr Gupta

Swiss Bank

Sellers cut$ 2 M

Gross Payment $ 120 M

Invoice: $120 M VALUE: $100 M

Black Income $ 18 M


Offshore Black Money Problems

Plus, Offshore Black Money could also give foreign powers influence over policy in India - through the money of powerful politicians, bureaucrats and businessmen.

Offshore Black money has all the problems as domestic black money:• Less money for nation building activities• Disproportionate Power in the hands of a few• Possible escalation of criminality in society

THE CHALLENGESChallenge 1. Indian investigative agencies do not have jurisdiction over foreign entities

Challenge 2. The skill required to investigate international transactions is much higher.

Challenge 3. Sovereignty Trading: Some countries design their laws to encourage inflow of foreign black money. They deny foreign agencies access to data unless wrongdoing is proven - though that very data is required to investigate and prove wrong doing.


Going back to our fundamental Black Money model … Indian Government has some control

Indian Government has very, very limited control

The focus has to be on reducing the Offshore Black Money generation, rather than bringing it back.

Offshore Black Money challenges

Black Income Generation

Usage UsageSTASH

STASH

Discussion on offshore Black Money focuses on bringing back ‘Indian money from foreign banks’ rather than tax loss.

GFI estimates that in period 2004-13, $506 Billion was taken out from the the country illicitly. However, we don’t know how much of this came back through trade mis-invoicing, capital flow or hawala. It could be 100% or 0% or most likely somewhere in between. More important, getting money back is much more difficult. Real issue is not 'money taken from the country' but the tax loss!Source: http://www.gfintegrity.org/

Offshore Black Money challenges

• Enter into agreements with major trade partners to exchange trade data to reduce export under-invoicing and import over-invoicing.

• Customs officers should be trained on global prices so that they can verify value of traded goods like coal.

When wrongdoing is detected - fast investigation and prosecution is essential!

Tackling Offshore Black Money STOP THE GENERATION OF OFFSHORE BLACK MONEY

• Make use of own databases to check trade values. E.g, export proceeds in banks can be cross- checked agains quantity and market price of exports.

Political Challenge of Black MoneyThe issue of Black Money is tough to understand.Effective solutions are not understood by most people

Easily understood but ineffective solutions dominate social discussions. Political rhetoric also focuses on easily understood though ineffective solutions. Experts have a special role to steer the discussion towards effective solutions.

SOLUTION: Non partisan experts to develop simple objective measures such as Tax / GDP ratio and popularize them.

िस्वस बैंक का पैसा ले आएंगे

www.AskHowIndia.

org

Creative PartnerMeriMaaCineMAAMore

? Plea

se fo

llow

AskHowIndia o

n

How will you dispose tax cases faster in courts?

IN CONCLUSION, Please ask your Political RepresentativesHow will you reduce

Cash / GDP?

How will you reduce cash use in property deals?

How will you reduce benami ownership?

How will you increase Tax / GDP?

How will you reduce cash use in political funding?

how can we reduce black money in india?

News & Politics