Black Money Committee Report, 2012

CONCEPTS AND DEFINITIONS OF BLACK MONEY

2.1        There is no uniform or accepted definition of ‘black’ money. Several terms are in use – such as ‘black money’, ‘black income’, ‘dirty money’, ‘black wealth’, ‘underground wealth’, ‘black economy’, ‘parallel economy’, ‘shadow economy’, ‘underground’ or ‘unofficial’ economy. If money breaks laws in its origin, movement or use, and is not reported for tax purposes, then it would fall within the meaning of black money. The broader meaning would encompass and include money derived from corruption and other illegal ways – to include drug trafficking, counterfeiting currency, smuggling, arms trafficking, etc. It would also include all market based legal production of goods and services that are concealed from public authorities for the following reasons –

(i)              to evade payment of taxes (income tax, excise duty, sales tax, stamp duty, etc);

(ii)             to evade payment of other statutory contributions;

(iii)            to evade minimum wages, working hours and safety standards, etc.; and

(iv)           to evade complying with laws and administrative procedures.

2.2        There are three sources of black money – crime, corruption and business. The ‘criminal’ component of black money would normally include proceeds from a range of activities including racketeering, trafficking in counterfeit and contraband goods, forgery, securities fraud, embezzlement, sexual exploitation and prostitution, drug money, bank frauds and illegal trade in arms. The ‘corrupt’ component of such money would stem from bribery and theft by those holding public office – such as by grant of business, bribes to alter land use or to regularize unauthorized construction, leakages from government social spending programmes, speed money to circumvent or fast-track procedures, black marketing of price controlled services, etc.

2.3        The ‘commercial’ limb of black money usually results from tax evasion by attempting to hide transactions and any audit trail relating thereto, leading to evasion of one or more taxes. The main reason

for such black economy is underreporting revenues / receipts / production, inflating expenses, not correctly reporting workers employed to avoid statutory obligations for their welfare. Opening of the economy permits contracts of all kinds – particularly for allocation of scarce resources such as mineral and spectrum – which, in the absence of transparent rules and procedures for licenses and non compliance of contractual obligations of the persons concerned, leads to increased generation of black money. In all the three forms of black money – ‘criminal’, ‘corrupt’ and ‘commercial’ – subterfuges are created which include false documentation, sham transactions, benami entities, mispricing and collusion. This is often done by layering transactions to hide their origin.

2.4        Studies correlating the extent of corruption with the size of the ‘shadow economy’ have been few. There is, however, reason to believe that it differs among high and low income countries. In high income

countries, the official sector provides good governance and proper enforcement of contracts. In the developing countries, on the other hand, enterprises could engage in entirely unreported activity – restaurants, bars, doctors, lawyers – and even bigger manufacturing entities may indulge in under-reporting. Big companies, though easier to monitor – in order to escape rigours of taxation – may take recourse to inducements. Under such socio-economic conditions, the ‘underground’ economy and corruption are likely to reinforce each other.

2.5        Level of development affects extent of black economy in another way. Developing countries have large parts of their economy in the informal sector, which is difficult to regulate. Further, cash component of the economy is usually higher and leads to problems of monitoring. Lack of regulation and monitoring reinforces the black economy and also helps its expansion. Opportunities for leakages increase. Low level of literacy reduces penetration of the banking sector resulting in a large cash economy.

2.6        For the purposes of this report, we shall interchangeably use two terms – ‘black money’ to broadly mean unaccounted or undisclosed income and assets not reported for tax purposes, without reference to its origin (whether legal or illegal), and ‘black economy’ to denote the sum total of incomes / assets as well as activities that are not accounted for.

2.7        Inflation of expenses takes money out of the system and, therefore, turns ‘black’. Wrong claims of deductions or incentives provided in the law reduce the tax liability and thereby keep more funds with the concerned person than with the State. However, money in this case remains within the system and cannot be said to be unaccounted or ‘black’. Similarly, shifting of profit for taxation outside the country through transfer pricing by related concerns results in organizing a reverse capital flow from poor to rich countries. This also cannot be said to be ‘black’ in that money does not go ‘underground’. However, these

aspects are also discussed in the report as they reduce substantially the availability of resources for economic development of the country.

Source : Chapter – II, Black Money Committee Report,  2012, headed by Chairman, CBDT, Ministry of Finance, Government of India – To view the complete report , please click  on : http://dor.gov.in/sites/upload_files/revenue/files/Measures%20to%20Tackle%20Black%20Money.pdf

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