Saturday, 7 January 2017

Black Money - Crime, Corruption & Commerce in India

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:
  • to evade payment of taxes
  • to evade payment of other statutory contributions
  • to evade minimum wages, working hours and safety standards, etc.
  • to evade complying with laws and administrative procedures.

There are three sources of black money – crime, corruption and commerce (business). 
  • The ‘criminal’ component of black money include proceeds from activities viz. 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.
  • The ‘commercial’ limb of black money usually results from tax evasion by hiding transactions leading to evasion of one or more taxes. The main reason for such black economy is under reporting revenues / receipts / production, inflating expenses, not correctly reporting workers employed and avoiding 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.

In high income countries, the official sector with transparency & well defined procedures, provides good governance and proper enforcement of contracts restricting size of the shadow economy. In the developing countries, on the other hand, enterprises could engage in entirely unreported activity such as restaurants, bars, doctors, lawyers and even bigger manufacturing entities may indulge in under reporting. Big companies, though easier to monitor but to escape rigours of taxation takes recourse to inducements. Under such socio-economic conditions, the underground economy and corruption reinforces each other.

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. Low level of literacy reduces penetration of the banking sector resulting in a large cash economy.

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 reduce the availability of resources for economic development of the country.

One of the most important sources of black money within the country is leakages from public expenditure warranting improvement of the public procurement system and allocation of natural resources is needed. One of the main contributors to black money in the country is its out-dated laws and their lax administration by the state governments, such as stamp duty values being completely out of line with the prevailing market rates, and state governments to tackle the menace of black money as important stakeholder in controlling it. Although FICN (Fake Indian Currency Notes) forms only a small part of black money, more effective measures were required to counter its debilitating consequences. Since most of the black money going out of the country through banking channels there is a need for a central repository of such data. Black money holders may be allowed to come forward with disclosure of unaccounted income and assets both in India and abroad, but without any harassment or threat of prosecution.

Some of the methods for reducing the menace of black money are:
  1. Electoral reforms, including state funding of elections.
  2. Tightening of laws, increasing the severity of punishments, and trial of cases relating to illicit money generated and stashed abroad through fast track courts.
  3. Confiscation of undeclared assets or money kept abroad.
  4. Monitoring of persons travelling frequently to tax havens and persons indulging in frequent transactions overseas.
  5. Existing laws were enough to deal with economic offences but there was a need to strengthen the administrative mechanism to enforce the existing laws.
  6. Existing information exchange mechanism should be improved and additional manpower and financial resources provided to the investigating agencies to tackle the scourge of black money.
  7. Better regulation of the real estate sector, the largest contributor to black money. 
  8. Maintaining the security of currency by upgrading the existing security features.
  9. The flow of information has improved but the information received can be used only for tax purposes.
  10. The huge economic cost of de-monetizing higher denomination bank notes of  Rs.500 and ` Rs.1000 is not a feasible idea.
  11. For deterrent effect, fast-tracking through summary trials. 
  12. Maximum punishment for serious offences under the PC Act are  necessary to be enhanced from seven years to ten years. 
  13. There should be limitation of carrying and holding of cash for personal use, for which either the existing laws may be amended or a new law enacted.
Rising burden of taxation, increasing burden of compliance are reasons to enter the black economy. Lack of tax morality, non-compliant attitude of the citizenry towards tax laws tends to increase the size of the black economy. In developed countries black money is generated primarily through illegal activities such as drug trade, illegal migration, etc. In the developing countries generation of black money is from all conceivable sources – corruption, siphoning of public resources, trade-based black money, inflation of expenses, and through criminal activities such as counterfeit goods, smuggling, extortion, cheating, financial frauds, narcotics trade, printing and circulation of fake currency, manufacturing & trade in arms, ammunition and explosives, etc.  Therefore fight against black money is far more complex in developing countries like India. This needs stronger legal framework, administrative measures, and stronger resolve to fight the menace.

Corruption in the private sector is an issue not much in public focus or debate. Corruption flows from private motive or greed, fueled by discretionary powers vested in an office empowered to distribute resources, goods and services to public. Dishonesty in private sector, for private benefit or profit, is largely responsible for bribery, siphoning of public funds and leakages in public expenditure. It also results in conspicuous consumption, money laundering and sustenance of the black economy. The way to deal with private greed is to design well-laid down rules and regulations, and ensure their proper enforcement and transparency in decision-making without compromising trade interest.

Cash as an asset has its own demand. In large cash economies such as India, counterfeit currency poses a major threat to its economy, as it disrupts smooth commercial transactions and has a multiplier effect on mainstream economy. India faces this problem, as immigrants become carriers for small amounts. The Bangladesh, Pakistan and Nepal borders are targeted for this purpose by agencies inimical to the interests of India.

Demonetization of high denomination currency notes is believed to be one of the methods to ‘kill’ the extant black economy, and to curb the generation of black money. In India, demonetization was implemented in 1946 and 1978. Experts have criticized that demonetization did not achieve the objective it was aimed at. Further, inflation over the years and a large cash economy requires higher denomination currency notes to keep the cost of monetary management of the economy low.

There is no uniformity of methodology or approach, or certainty of estimation relating to ‘black’ money. The ‘shadow’ economy is not distinct, and the ‘parallel’ economy enmeshes the white economy. Thus, ‘black’ money exists to a substantial extent in our economy, its quantum cannot be determined exactly.

Generation of black money from legitimate activities, such as businesses or professions, non reporting of income, overstated expenses, etc., undermines the economy, its tax-base and the rule of law, and creates inequalities. The way to fight this menace is through comprehensive and better reporting mechanism, data-mining and analysis.

However, fact remains that although several anti corruption agencies have been functioning for several decades, leakages in public expenditure has continued unabated. Both oversight and enforcement mechanisms against corruption need to be strengthened.

There are two dimensions of the issue of black money – first, its generation and, second, its consumption and use, including laundering of black money back to mainstream economy. Dealing with this menace has to cover both these aspects. So far as generation of black money from crime or corruption is concerned, its remedy does not lie merely in legislative or enforcement domains but also in finding much deeper socio-economic solutions. There may not be any need to have new law to especially deal with black money and black economy, various existing laws need to be comprehensively reviewed and strengthened accordingly.

Aadhaar UID and direct transfer of subsidies will stop leakages in some sectors. Institutions of the Lok Pal and Lokayukta may be put in place at the earliest, in the centre and states, respectively, to expedite investigations into cases of corruption and bring the guilty to justice.

My View:
The latest methods of corruption by politicians and officers is that they would do no favors but who ever wins the contract have to pay them fixed percentage. Modi was known as 4% Chief Minister in Gujarat but has not violated any law/rule/procedure. This results in inflated estimates. Today the menace has reached 30% of estimate is work and remaining 70% is bribes and profits. If you happen to visit customs clearing at any airport or seaport you will have go with bundles of notes to pay each and every person you may encounter whose prices are fixed (C&F Agent will be helpful) to clear your consignment otherwise you will end up with delays leading to demurrage charges and re-establishing logistics. En-route at border check-posts, your truck will be kept aside and allowed to proceed only after bribe payment is arranged and made in a far away town by way of bank transfer into that benami account. Without socio-economic changes, awareness and campaigns, any amount of tightening of procedures, the corrupt will discover a way around it. 

As long as taxes are high and tax compliance procedures are expensive and burdensome, cash will rule informal economy and black economy will flourish. Uneducated self employed people will prefer to remain in cash sector no matter what ever is said and done simply because they see security in cash. Education is the key to growth and prosperity of the nation. The people at large should feel the effect of good governance in comforting them rather than harassing and squeezing a portion of their hard earnings and that alone would result in voluntary tax compliance. 

Modi, lacking sincerity of purpose, attempting 'quack economist advised demonetization' for pecuniary and political benefits and risking the entire national economy for his high decibel publicity is not only disastrous for him and BJP but also the nation with its economic pillars crumbling. He simply destroyed country's economy and shot himself in the foot and landed in ditch and is further digging with denial. In the coming month's stories of economic disaster will surface incessantly for next two years. He lacked sense that any weapon unleashed to destroy 'black economy' will also destroy 'white economy' simply because they are so much intertwined and enmeshed.

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