What is Black Money –
Black money is tax evaded income. It can be earned through both legal
and illegal means. The majority of the black money is the income
received in cash not accounted in books and not revealed to the
government for tax purposes.
How does the black money get generated?
Corruption–
Mr. Blackappa, an officer in government service, demands Rs.1 lakh from
Mr.Shortcut for doing a favour (say to approve the building sanction
plan). Mr. Shortcut hands over Rs.1 Lakh to the officer in cash (no one
takes a bribe in cheque/demand draft!). This money will not be accounted
in the books of Blackappa and he won’t pay any taxes on it (it may be
good to legalize bribe and collect taxes on it)
Count # 1 – Rs.1,00,000 black money is generated.
Sale of property
– Mr. Greedy buys a property from Mr. Cheat for a total sale value of
Rs.50 Lakhs. He takes Rs.35 Lakhs in cheque/DD and the balance in cash.
He pays stamp duty on Rs.35 Lakhs, and the seller pays
capital gain tax considering the value as Rs.35 Lakhs.
Count # 2 – Rs.15,00,000 black money is generated.
Sale of goods/services without invoice
– You buy a sofa set from a furniture dealer. What is the price? The
shopkeeper will tell “the price is Rs.60000 plus taxes at 14.5%”. Any
discount? The answer from him will be “Yes madam, I can offer it at
Rs.58,000 without the bill. If you want, I can write on a piece of paper
or on a quotation”
Count # 3 – Rs.58,000 black money is generated.
Accounting for fictitious expenses
– A businessman tells his accountant “I can’t pay so much tax. Do
something, reduce the taxes” The accountant accommodates by booking
fictitious expenses. If the businessman declares a profit of Rs.15 Lakhs
against the actual profit of Rs.25 Lakhs, black money of Rs.10 lakhs is
created.
Count # 4 – Rs.10 Lakhs black money is generated.
How is it converted?
The
difficult part is converting the black money into white money without
any taxes. In all the above examples, the people who have earned money
in cash (black money) can’t deposit it in the bank. Right? So, they have
to hoard the cash somewhere, say in a bank locker, suitcase, etc. Or
they can also spend this amount in cash towards the purchase of
property, white goods, etc. Let’s understand the ways of converting
black money.
Showing fictitious sales – There was
a movie casted by the son of a powerful politician. This movie was an
utter flop. But, it ran ‘houseful’ (fictitious) in Kalpana Theatre of K G
Road for a year! During those days, people were talking that the black
money earned by the father is converted into white by showing the income
from the movie!
The money earned through illicit means or
corruption is converted with the help of businessmen by booking
fictitious sales in the books of the company.
Increase the sale price of an asset – One
of my clients decided to buy a property from a senior government
officer for a price of Rs.42 Lakhs. But the Officer wanted him to pay
Rs.60 lakhs in cheque! In turn, he wanted to return the difference
amount of Rs.18 Lakhs and additional stamp duty/
registration
charges in cash to the buyer. Thereby the Officer converted Rs.18 Lakhs
of black money to white without paying any taxes. (He reinvested the
sale proceeds in another property and got the long term tax exemption!)
Hawala Route
– Have you heard about hawala transactions? If not, I will tell you in
simple words. Assume Mr.ABC, a politician or government officer in
Bangalore has Rs.25 Lakhs in cash. Since it is black money, he can’t
deposit the same in the bank. So, he identifies a hawala agent (
don’t search in google, you won’t get one!).
The Hawala operator takes the cash in Bangalore and through his
counterpart, hands over Rs.25 Lakhs worth in dollars/pounds/dirhams in a
foreign country to his/to his representative. Mr.ABC gets this money
back to India as Foreign Direct
Investment
(FDI) or seed fund in a private company, etc. Or he may choose to
invest abroad in properties / shares. Thus, he converts black money to
white without paying any taxes.
Depositing in banks less than Rs.50000
– This route is taken by small time operators. They open multiple bank
accounts and deposit cash upto Rs.50000 at a time. Remember, if you have
to deposit over Rs.50000, you have to give PAN details to the banker.
Mostly, these kind of petty transactions goes unnoticed by the income
tax department and thus, black money is converted to white without
paying any taxes.
Agricultural Income
– Agricultural Income is exempt from Income Tax. This means the money
earned from the sale of paddy, pepper or wheat is exempt from tax. So,
the people who earn black money will obtain a fictitious receipt from
traders in agricultural commodities as if they have sold the products.
For the sake of records, these people will acquire or show the proof of
ancestral property in villages!
Gifts from relatives and friends on occasions
– Any amount of money received from relatives (gift) is exempt from
Income Tax. Is it not an easy way to convert black money to white?
Simple, show the cash received in your son’s or daughter’s birthday as
gifts from relatives!
Gifts from non-relatives and friends attract
income tax. But those who have huge black money can show gift and pay
taxes. Still the money earned through corrupt practices can be converted
into white (after paying taxes). One of the classic examples is the
amount of gift declared by a former Chief Minister who paid huge taxes
during that year. She declared around Rs.200 Crores as gift received
from her well-wishers and paid taxes on it!
Sale of Gold and Diamonds
– Well-known professionals suggest this route. Suppose, Mr.XYZ has
Rs.25 Lakhs cash and gives this amount to a Jewellery shop (not all
shops will do this kind of dirty job). The Jewellery shop will issue a
receipt for having bought Gold/Diamond worth Rs.25 Lakhs and make
payment in a cheque to Mr.XYZ. For facilitating this transaction, he
will charge a fee. Thus Mr.XYZ converts his black money into white,
without paying any income tax.
Avenues for spending black money in black
Investing in property
– The middle-class black money earners spend/invest them in black. For
example, Mr.GHK sells a house for Rs.90 Lakhs (of which, he takes Rs.30
Lakhs in Cash – black) and reinvests/buys another flat/plot by giving
Rs.30 lakhs apart from white money. So, the rule is Black for Black and
white for white
Spend on weddings and functions –
I needn’t explain it. If you attend the weddings at Palace Grounds in
Bangalore and hi-fi wedding halls, you will get to see the ‘real color’
of black money. As I understand there are people who spend 2-5 Crores
for a wedding! A large sum of corrupt money is spent on social events
and functions.
Buying goods/services where the identification is not mandatory – For example, white goods, building houses and its interiors, etc., are done using black money earned in cash.
School Fee and donations – You may be aware of donations! For the medical seat, over a crore of rupees to be paid as a
donation in cash!
Buying gold / precious metals
– Instead of accumulating cash, people will buy gold, diamond and other
precious metals. People buy gold in small quantities, from different
shops, in the name of all members of the family.
Elections –
As per the Election Commission of India, a maximum of Rs.70 lakhs can
be spent by a candidate per Lok Sabha Constituency. Do you believe that
they spend only Rs.70 lakhs? I understand that each candidate spends
over Rs.30 Crores per Lok Sabha Seat! From where is this kind of money
available? Corrupt money is spent in elections.
Now the big question
– Is this not known to the Government? What actions have they taken to
curb the black money? Honestly, so far, nothing much is done, except
‘lip service’ by a few politicians and a few ‘cosmetic’ changes in the
law.
Recently, Special Investigation Team (SIT), appointed by the
Supreme Court has come out with its findings and suggestions to curb
black money. In my next article, I will write about other sophisticated
ways of converting black money such as creating multi-layer companies,
rigging in stock market, participatory notes, etc. and also the
recommendations of SIT report.
