Taxation and Black Money – Chinmaya IAS Academy

A dive into the taxation system in India and its impact on the black money market.

Definition: Also known as illicit wealth, black money refers to assets and income not declared to the government for taxation.
Sources: Includes income from illegal activities like drug trafficking and money laundering.
Impacts: Contributes to income inequality, distorts financial markets, and undermines the rule of law.

Global Ranking: India ranks eighth globally in generating illicit funds (Global Financial Integrity Report).
Tax Haven Holdings: According to the Bank of Italy, India’s global tax haven holdings are estimated to be between $152-181 billion (approximately Rs. 10 lakh crore).
Total Illicit Funds: A former CBI director estimated India’s total illicit funds to be around $500 billion.

Definition: Legally obtained income that is declared for tax purposes.
Sources: Includes income from employment, business, investments, and other reported sources.

Reduced Disposable Income and Spending: For example, Greece’s economic crisis saw decreased household spending, affecting businesses reliant on consumer demand.
Disincentive to Work and Invest: France’s high payroll taxes discourage hiring, leading to unemployment and slow economic growth.
Increased Complexity and Administrative Burden: The US tax code is complex, leading to errors and higher costs for taxpayers.
Encouragement of Tax Evasion: Italy’s high taxes contribute to a significant black market economy.
Reduced Business Competitiveness: Companies relocate to low-tax countries like Ireland or Singapore, reducing the domestic tax base and impacting job creation.

Incentivize Underreporting: High taxes may lead individuals to underreport income, especially in cash-based businesses, fostering black money circulation.
Fuel Corruption: Discrepancies between income and taxes owed can prompt bribery of tax officials, creating a black market for manipulating tax assessments.
Encourage Cash Transactions: High taxes push towards cash-only transactions to avoid scrutiny, complicating income tracking and enabling black money operations.
Discourage Formalization: Tax burdens can deter formal business registration, promoting informal sector activities where black money thrives.
Reduce Transparency: Complex tax systems can be seen as opaque, fostering distrust and reducing compliance, potentially driving individuals towards black money activities.

Definition: An illegal financial market practice involving off-exchange trades through unregistered intermediaries, avoiding regulatory oversight and tax reporting.
Risks: Exposes investors to significant risks like financial fraud and capital loss due to a lack of legal protections.
Regulation: Authorities like SEBI enforce measures to curb dabba trading, safeguard market integrity, and protect investors.

Structure: India’s taxation system comprises direct and indirect taxes levied by the central, state, and local governments.
Direct Taxes: Includes personal income tax, corporate tax, and capital gains tax.
Indirect Taxes: Comprises the Goods and Services Tax (GST), excise, and customs duties.

Vodafone-Hutchison Tax Case: A multinational company avoided taxes in India using shell companies in tax havens.
Hasan Ali Khan Case: Accused of illegal wealth accumulation abroad, illustrating challenges in repatriating black money.
Panama and Paradise Papers Leaks: Exposed offshore networks used by Indians to conceal assets and evade taxes.
Nirav Modi Case (2018): Involved a jeweller in a ₹13,500 crore loan fraud, revealing shell companies and complex transactions to move black money abroad.
ITAT Case (2021): A Bollywood actress received ₹5 crore in cash but declared only a fraction, highlighting challenges in taxing cash transactions.

Definition: Also known as supply-side economics, it advocates for lower taxes, reduced government regulation, and decreased government spending to stimulate economic growth.
Origins: Developed in the 1970s by economist Arthur Laffer and implemented by President Ronald Reagan in the 1980s.
Proponents’ Views: Argue that these measures incentivize investment, job creation, and higher wages.
Critics’ Views: Contend that Reaganomics exacerbates income inequality, contributes to environmental degradation, and reduces public services and safety nets.

Black Money (Undisclosed Foreign Income and Assets) Act, 2015: Allows individuals to declare undisclosed foreign income/assets with penalties.
Benami Transactions (Prohibition) Amendment Act, 2016: Strengthens laws against holding property in others’ names to hide wealth.
Fugitive Economic Offenders Act, 2018: Facilitates confiscation of assets of economic offenders who flee to evade prosecution.
Prevention of Money Laundering Act (PMLA).
Demonetization of High-Value Currency Notes, 2016: Aimed to eliminate black money by invalidating high-denomination currency notes.
Digital Transactions: Incentivizes cashless payments to reduce reliance on untraceable cash, e.g., UPI.

Cash-Based Economy: Many transactions in India, especially in rural areas and small businesses, are cash-based, making it difficult to track income and detect tax evasion.
Weak Tax Administration: Inadequate resources and manpower in tax departments hinder effective audits and investigations.
Cross-Border Transactions and Tax Havens: Black money can be moved to countries with lenient tax laws, complicating efforts to trace and recover funds.
Corruption: Corruption within government agencies can facilitate bribery, undermining efforts to combat tax evasion.
Public Perception and Lack of Trust: Mistrust in the tax system due to inefficiencies or perceived unfairness discourages compliance.
Complexity of Tax Laws and Loopholes: Complicated tax codes with numerous exemptions and deductions provide manipulation opportunities.

Simplification of Tax Laws: Simplifying the tax system, reducing exemptions, and lowering rates can make it easier for people to comply and discourage tax evasion.
Encouraging Digital Transactions: Incentivizing digital payments through tax breaks, as cash transactions are hard to track and easier to hide income.
Tax Deduction at Source (TDS): Collecting tax at the source of income ensures a portion of the tax is collected upfront, reducing opportunities for hiding income.
Presumptive Taxation: Simplifying tax filing for small businesses by estimating their income reduces the burden of complex record-keeping and discourages underreporting.