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How can we reduce Black Money in India?

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How can India tackle the challenge of Black Money. A very easy to understand and yet comprehensive look at the topic.

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How can we reduce Black Money in India?

  1. 1. HOW can we REDUCE Black Money in India?
  2. 2. 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 **
  3. 3. cvBlack Money, some basic examples 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 ** Names used are fictional and the numbers are only for broad indicative value **
  4. 4. cvBlack Money, some basic examples 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 20,00,000 Income Tax @ 30% -6,00,000 Post Tax Income 14,00,000 ** Names used are fictional and the numbers are only for broad indicative value **
  5. 5. cvBlack Money, some basic examples 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 5,00,000 Income Tax @ 30% -1,50,000 Declared Post Tax Income 3,50,000
  6. 6. cvBlack Money, some basic examples 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 cr Expenses -8 cr NET INCOME 2 cr Income Tax @ 34.6% 0.69 cr Declared Post Tax Income 1.3 cr ** Names used are fictional and the numbers are only for broad indicative value **
  7. 7. cvBlack Money, some basic examples 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 cr Expenses - 9 cr NET INCOME 1 cr Income Tax @ 34.6% - 0.35cr - crDeclared Post Tax Income 0.65 cr
  8. 8. 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.
  9. 9. 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 cr Excise duties - 60 cr Net Revenues 40 cr Costs 18 cr Income 22 cr ** Names used are fictional and the numbers are only for broad indicative value **
  10. 10. Indirect tax evasion and money laundering EXAMPLE 5: Mr Shah With 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
  11. 11. 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
  12. 12. PAAN 2) 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
  13. 13. 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
  14. 14. 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.
  15. 15. 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.
  16. 16. Black Income Model Let us summarize the earlier information diagrammatically … 1. The Tax Thief makes his Black Income by evading taxes. This is usually in cash. Tax evaded INCOME
  17. 17. Black Income Model 2. 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 evaded INCOME Money stashed in BENAMI companies, property, gold, etc. Money stashed in BENAMI companies, property, gold, etc.
  18. 18. Black Income Model 3. Where does Black Money go? Tax evaded INCOME CORRUPTION Bribes and Political Donations BUSINESS USE Expenses to make more Black Income PERSONAL use Land, Jewelry, Luxe LAUNDERED and re-routed to business Money stashed in BENAMI companies, property, gold, etc.
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. Challenge 1 Tax Officer Limitations Referring 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
  23. 23. Tackling Black Money - Prong 1 Challenge 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
  24. 24. Tackling Black Money - Prong 1 Challenge 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
  25. 25. 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.
  26. 26. Tackling Black Money 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
  27. 27. Tackling Black Money 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
  28. 28. Funding Politics … legitimately Political 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.
  29. 29. 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.
  30. 30. 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.
  31. 31. Mr Gupta owns ABC Corporation and also anonymously owns an international firm, XYZ Consultants. EXAMPLE 6: Mr Gupta ABC Corp XYZ Cons Anonymously ownsOfficially owns Offshore Black Money Examples ** Names used are fictional and the numbers are only for broad indicative value **
  32. 32. 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: $0 Invoice: $1M Black Income $ 1 M ABC Corp XYZ Cons Offshore Black Money
  33. 33. 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 PROBLEM Offshore Black Money ABC Corp XYZ Cons Anonymously ownsOfficially owns
  34. 34. 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 M Invoice: $80 M Black Income $ 18 M Offshore Black Money
  35. 35. 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
  36. 36. 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
  37. 37. THE CHALLENGES Challenge 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. Offshore Black Money
  38. 38. 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 Usage STASH STASH
  39. 39. 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
  40. 40. • 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.
  41. 41. Political Challenge of Black Money The 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
  42. 42. w w w .A skH ow India.org Creative Partner MeriMaaCineMAA M ore? Please follow A skH ow India on How will you dispose tax cases faster in courts? IN CONCLUSION, Please ask your Political Representatives How 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?

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