Black money refers to money earned through illegal or tax evading means that is hidden from the government. It is generated through various illegal activities like corruption, tax evasion, underreporting of incomes, and transfers of money to tax havens. The menace of black money includes loss of tax revenue, inflation, weakening of governance, and criminalization of politics. Steps to curb black money include strengthening laws and enforcement agencies, improving tax administration, fostering transparency, cooperation with international organizations, financial inclusion, and demonetization.

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 .