The root cause for the increasing rate of black money in the country is the lack of strict punishments for the offenders. The criminals pay bribes to the tax authorities to hide their corrupt activities. Thus, they are rarely punished by the judge. The criminals who conceal their accounts from the government authorities include big politicians, film stars, cricketers, and businessmen. Some Indian corporations practice transfer mispricing, by under-invoicing their exports and over-invoicing their imports from tax haven countries such as Singapore, UAE, and Hong Kong. Thus, the promoters of the public limited companies who hold rarely more than 10% of share capital, earn black money abroad at the cost of majority share holders and tax income to the Indian government.[9] By the year 2008, the cumulative Illicit Financial Out flows from the country touched US$452 billion.[9]
The unlawfully acquired money kept abroad is routed back to India by the round tripping processes. Round tripping involves getting the money out of one country, sending it to a place like Mauritius and then, dressed up to look like foreign capital, sending it back home to earn tax-favoured profits.[11]
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Investment in the Indian stock market through participatory notes (PNs) or overseas derivative instruments (ODIs) is another way in which the black money generated by Indians is re-invested in India. The investor in PNs does not hold the Indian securities in her or his own name. These are legally held by the FIIs, but derive economic benefits from fluctuations in prices of the Indian securities, as also dividends and capital gains, through specifically designed contracts.[citation needed]
Gold imports through official channel and smuggling is a major conduit to bring back the black money from abroad and convert into local black money as the gold commands high demand among the rural investors particularly.[14] Also fictitious high value round trip transactions via tax haven countries by diamonds and precious stones exporters and importers is a channel for to and fro transactions outside the country.[15] Also, fictitious software exports can be booked by software companies to bring black money into India as tax exemptions are permitted to software companies.[citation needed]
James Nason of Swiss Bankers Association in an interview about allowed black money from India, suggests "The (black money) figures were rapidly picked up in the Indian media and in Indian opposition circles, and circulated as gospel truth. However, this story was a complete fabrication. The Swiss Bankers Association never said or published such a report. Anyone claiming to have such figures (for India) should be forced to identify their source and explain the methodology used to produce them."[4][19]
In August 2010, the government revised the Double Taxation Avoidance Agreement to provide means for investigations of black money in Swiss banks. This revision, expected to become active by January 2012, will allow the government to make inquiries of Swiss banks in cases where they have specific information about possible black money being stored in Switzerland.[20]
The 2016 Panama Papers scandal is the largest-ever leak of information on black money in history.[31] International Consortium of Investigative Journalists first obtained the leaked information, revealing over 11 million documents. These documents pertain to 214,000 offshore entities and span almost 40 years. The papers originated from Mossack Fonseca, a Panama-based law firm with offices in more than 35 countries. The list of names exposed in the scandal includes 500 Indians who flouted rules and regulations, such as Amitabh Bachchan, Aishwarya Rai, Niira Radia,[32] KP Singh, Garware family, Harish Salve, and others.[33][34][35]
Noted jurist and former law minister Ram Jethmalani along with many other well known citizens filed a Writ Petition (Civil) No. 176 of 2009 in the Supreme Court of India (SC) seeking the court's directions to help bring back black money stashed in tax havens abroad and initiate efforts to strengthen the governance framework to prevent further creation of black money.[44]
The SC on 4 July 2011, ordered the appointment of a Special Investigating Team (SIT) headed by former SC judge BP Jeevan Reddy to act as a watch dog and monitor investigations dealing with the black money. This body would report to the SC directly and no other agency will be involved in this. The two judge bench observed that the failure of the government to control the phenomenon of black money is an indication of weakness and softness of the government.[47]
On 27 October 2014, Indian Government submitted name of three people in an affidavit to the Supreme Court who have black money account in foreign countries.[51] But on the very next day, Supreme Court of India orders centre Government to reveal all the names of black money account holders which they had received from various countries like Germany. The honorable bench of the Supreme court also asked the Centre not to indulge in any kind of probe rather just pass the names to them and Supreme court will pass the order for further probe.[52]
On 2 November 2015, HSBC whistleblower Herve Falciani said he is willing to "cooperate" with the Indian investigative agencies in black money probe but would need "protection". Prashant Bhushan and Yogendra Yadav furnished a letter written by Falciani on 21 August 2015, to Justice (retd) M B Shah, who is heading the SIT on black money.[60][61] Under the supervision of the SIT the I-T department has recovered just around Rs 3,500 crore from some of the account holders and expected to recover a total of 10000 crore till March 2015.[62]
The HSBC Black money whistleblower Herve Falciani, who works with a team of lawyers and experts, told NDTV that there is "1000 times more information" available for investigators and there are a lot of business procedures to be unveiled to them. "It's just up to (the Indian administration). They can contact us," he said. He said India was given only 2 MB of the 200 GB of data. "If India asks tomorrow we will send a proposal tomorrow," he added.[68] On 2 November 2015, Falciani told in a press conference organised by Prashant Bhushan and Yogendra Yadav that, India has not used information on those illegally stashing away black money in foreign bank accounts, and still millions of crores were flowing out.[60][69][70]
The UBS bank has denied Indian reports alleging that it maintained a business relationship with or had any assets or accounts for Hasan Ali. Upon formal request by Indian and Thailand government authorities, the bank announced that the documentation supposedly corroborating such allegations were forged, and numerous media reports claiming US$8 billion in stashed black money were false.[84][85] Today, in a later article, wrote, "Hasan Ali stands accused of massive tax evasion and stashing money in secret bank accounts abroad. But the problem is that the law enforcement agencies have precious little evidence to back their claims. For one, UBS Zurich has already denied having any dealings with Hasan Ali."[86]
As Schneider estimates, using the dynamic multiple-indicators multiple-causes method and by currency demand method, the size of India's black money economy is between 23 and 26%, compared to an Asia-wide average of 28 to 30%, to an Africa-wide average to 41 to 44%, and to a Latin America-wide average of 41 to 44% of respective gross domestic products. According to this study, the average size of the shadow economy (as a percent of "official" GDP) in 96 developing countries is 38.7%, with India below average.[87][88][89]
After a series of ongoing demonstrations and protests across India, the government appointed a high-level committee headed by MC Joshi (the then CBDT Chairman[90]) in June 2011 to study the generation and curbing of black money. The committee finalised its draft report on 30 January 2012. Its key observation and recommendations were:[91]
In 2012, the Central Board of Direct Taxes had recommended demonetisation, saying in a report that "demonetisation may be a solution for tackling black money or economy, although it is largely held in the form of benami properties, bullion and jewellery".[97][98] According to data from income tax probes, black money holders keep about 9% of their ill-gotten wealth as cash, hence targeting this cash may be considered as a successful strategy.[99]
The Government of India devised an Income Declaration Scheme (IDS), which opened on 1 June and ended on 30 September 2016. Under the scheme, the black money holders could come clean by declaring the assets, paying the tax and penalty of 45% thereafter.[106]
Even in colonial India, numerous committees and efforts were initiated to identify and stop underground economy and black money with the goal of increasing the tax collection by the British Crown government. For example, in 1936 Ayers Committee investigated black money from the Indian colony. It suggested major amendments to protect and encourage the honest taxpayer and effectively deal with fraudulent evasion.[109]
Excessive tax rates increase black money and tax evasion. When tax rates approach 100 per cent, tax revenues approach zero, because higher is the incentive for tax evasion and greater the propensity to generate black money. The report finds that punitive taxes create an economic environment where economic agents are not left with any incentive to produce.
Another cause of black money, the report finds is the high transaction costs associated with compliance with the law. Opaque and complicated regulations are other major disincentive that hinders compliance and pushes people towards underground economy and creation of black money. Compliance burden includes excessive need for compliance time, as well as excessive resources to comply.
Arthakranti, Pune-based think-tank has outlined policy prescription that involves replacement of most direct and indirect levies with a banking transaction tax and de-monetisation of currency notes of Rs 500 and Rs 1,000 to help prevent Indian black money, ease inflation, improve employment generation and also lower corruption.[110][111] 2ff7e9595c
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