Daily Current Affairs for UPSC – 16 May 2024 :What is Black Money? Black Money Acts:

Black money is essentially money that evades the formal financial system. Here’s a breakdown of its characteristics, sources, and how governments tackle it:

What is Black Money?

Black money refers to income that goes unreported and untaxed. It can come from two main sources:

• Illegal Activities: This includes money earned through crimes like drug trafficking, smuggling, or bribery.
• Tax Evasion: This involves hiding income from legitimate sources to avoid paying taxes. People might under-report income, create fake invoices, or deal entirely in cash to avoid a paper trail.

Impacts of Black Money:

Black money has several negative consequences:

• Lost Revenue: Governments miss out on tax income they could use for public services.
• Unequal Economy: Black money creates an unfair advantage for those who avoid taxes.
• Fuels Corruption: Large amounts of black money can be used to bribe officials, further perpetuating the cycle.

 What are sources?

Tax Evasion: This is a big one. People and businesses may underreport their income or hide transactions altogether to avoid paying taxes. Complex tax regulations can also contribute to this problem.

Corruption: Bribes and kickbacks offered and accepted by government officials and businesses create a pool of untaxed cash.

Undocumented Transactions: Sellers and traders who don’t provide bills or receipts for transactions generate black money.

Real Estate: Cash payments to evade taxes and undervalued property registrations are widespread in real estate transactions.

Hawala: This informal money transfer system allows for anonymous transactions, making it a prime channel for black money movement.

Fake Invoices: Inflated or fake invoices created by businesses are used to justify illegitimate expenses and generate black money.

Hidden Wealth Abroad: Some individuals stash their wealth in foreign bank accounts and assets, keeping them hidden from Indian tax authorities.

Illegal Activities: Activities like smuggling, drug trafficking, and gambling generate large amounts of untaxed cash.

How Governments Fight Black Money?

Governments around the world use various strategies to combat black money, including:

• Stronger Tax Laws: Closing loopholes and making tax evasion more difficult.
• Improved Tax Administration: Investing in better technology and training for tax authorities.
• Information Sharing: Collaborating with other countries to track down hidden assets.
• Financial Transparency: Encouraging cashless transactions and promoting digital payments.

Steps Taken by the Indian Government:

India has specifically tried to curb black money through:

• Demonetization: In 2016, the government abruptly removed high-value currency notes from circulation, making it difficult to hold large amounts of black money.
• Tax Amnesty Schemes: These schemes offer a chance for people to disclose black money and pay a penalty, although their effectiveness is debated.
• Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015,
• Benami Transactions (Prohibition) Amendment Act, and the Fugitive Economic Offenders Act.
• For the investigation of Panama Paper leaks, the government brought in Constitution of Multi-Agency Group (MAG) with officers of the Central Board of Direct Taxes (CBDT), Reserve Bank of India (RBI), Enforcement Directorate (ED) and Financial Intelligence Unit (FIU).
• India has been collaborating with foreign governments to facilitate and expand the exchange of information. For this, the Double Taxation Avoidance Agreements (DTAAs). has been signed with tax havens like Mauritius and Cyprus.
• Operation Clean Money : Operation Clean Money was launched in 2017 for the collection, colla,tion and analysis of information on cash transactions, extensive use of information technology.

Way forward :

Disincentivizing black money:

• Financial Inclusion & Digital Transactions: Make digital payments more attractive with incentives and ease of use. This reduces reliance on cash, a common tool for black money transactions.
• Simplification of Tax Code: A complex tax code can be discouraging for honest tax payers. Simplifying the code and reducing tax rates can encourage people to enter the formal economy.
• Strengthening Regulatory Bodies: Empowering agencies like the Income Tax department with better resources and improved investigation capabilities can deter tax evasion.

Tracking and Curbing Black Money Generation:

• Real Estate Reforms: Real estate is a major sector for black money circulation. Stricter regulations on property transactions and mandatory PAN linking can make it harder to hide income.
• Electoral Reforms: Restricting anonymous funding in elections can reduce the use of black money to influence politics.
• International Cooperation: Collaborating with other countries to tackle tax havens and improve information sharing on illicit financial activities can help track down black money held abroad.

Bringing Back Black Money:

• Disclosure Schemes: Offering amnesty programs with reasonable penalties can incentivize people to declare undisclosed income and bring it into the formal economy.
• Stronger Penalties: Increasing penalties and even jail time for tax evasion can act as a deterrent.

It’s important to note that this is a complex issue with no easy solutions. The effectiveness of these measures will depend on their implementation and ongoing efforts to address the root causes of black money generation.