A complete idea of Black money and demonetization plus the ways to curb the black money.

1. MENACE OF BLACK MONEY AND
DEMONETIZATION

2. BLACK MONEY
• It refers to all the money earned through illegal means and through tax evasion
• Also called “Shadow economy “ or “Parallel Economy” as this is hidden from the
government and not accounted.
• Tax Evasion= illegal. i.e. deliberately avoiding paying taxes
• Tax avoidance= legal i.e. using the exemptions or deduction provision to pay lower taxes.

3. GENERATION OF BLACK MONEY
• Illegal means : racketeering ,counterfeit currency, drug pedaling ,
kidnapping prostitution and human trafficking , bank fraud , illegal arms
trade
• Corrupt means : bribery , theft from public funds , leakages in govt.
spending , black marketing of controlled products .
• Commercial means : tax evasion.
• Other means : land/ real estate , under invoicing and over invoicing ,
multiple invoicing , financial market irregularities like P-notes , gold bullions
collusion between Medical rep. and doctors etc.

4. DIFFERENCE IN BLACK MONEY PROFILE:
Developed Economies Developing Economies
• Predominance of organised sector • Predominance of unorganised sector
• Good governance • Good governance yet to take up
• Almost all transactions are reported • All transactions not reported
• More /universal financial inclusion • Less / marginal financial inclusion
• Less cash and more e-money • More cash / tendency to hold cash
• Black money generated through arms
trade, drugs, illegal migrant,
prostitution
• Black money generated through
almost all activities like land/ real
estate, corruption, leakage of govt.
funds, gold, counterfeit currency etc.
• High tax morality and compliance
attitude
• Low tax morality and propensity to
evade tax

5. MENACE
• Loss to exchequer.
• Demand pull inflation. Esp. real estate and land
• Leads to conspicuous consumption- Mounting CAD
• Electoral malpractice- prevalence of money power-criminalization of politics
• Organised crime and terrorism.
• Disincentive to honest citizens.
• Incentive to corruption.
• Hot money and flight of capital-the same capital sometimes comes as FDI through
Round tripping .
• Creates a corporate-politician-criminal nexus.
• Weakens public service delivery
• Erosion of legitimacy of government – leads to protests.

6. WAYS TO CURB BLACK MONEY
• Legal and Statutory : various law of Parliament like the Income Tax Act 1961,
Wealth Tax Act 1956 , Benami Transaction ( Prohibition ) Act, FEMA 2002,
PMLA 2002 , Prevention of Corruption Act , Representation of People Act ,
Lokpal and Lokayukta Act etc.
• Government Bodies : Enforcement Directorate , CBDT , CVC , CBI , Information
Commissioners , Lokpal &Lokayukta , Revenue Service officers etc.
• Tax buoyancy : The tax rates and filing should be rationalized to make it attractive
for compliance . Introduction of VAT , GST , DTC.
• Global Crusade : UN convention on Corruption , FATF-(Financial Action Task Force),
FIU-IND-( Financial Intelligence Unit )-India , FATCA – ( Foreign Account Tax
Compliance Agreement ) , EAG project-(Eurasian Group Project) , APG-(Asia/Pacific
Group on Money Laundering)
• Good Governance and IT/ITES : Online tax filing , centralized database , Direct
Benefit Transfer / Direct Subsidies / Cash transfer , Financial inclusion ,
Computerization and digital connectivity.

7. • Transparency and Disclosure : RTI Act. KYC norm in banks , Transparency in
government procurement & allocation of scarce natural resources , spectrum etc.
• Corporate Governance and adoption of good practices.
• Tax Havens : covered under DTAA but it does not automatically lead to sharing of
information . Hence need to sign Bilateral Information sharing Agreements.
• Government Schemes :
 Demonetization of high denomination notes.
 Promote cashless transactions as it leaves a trail to follow.
 Voluntary Disclosure Schemes & Amnesty Schemes .