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Black Money: Definition, Types, Measures to Control, Black Money UPSC

By BYJU'S Exam Prep

Updated on: November 14th, 2023

Black Money can be defined as an income that is not declared by a person or group of persons in a nation. It includes all the funds gained through illegal activity and income that is not recorded for tax purposes. Black Money has several definitions in economics. It is a huge economic and social issue for India.

Often associated with illegal activities and tax evasion, Black Money casts a shadow on the formal economy, hindering growth, distorting markets, and eroding public trust. This article highlights types, causes, and measures to control Black Money that would help the UPSC aspirants in their preparation.

What is Black Money?

There is no official definition of Black Money in economics. There are various terms such as black incomes, parallel economy, illegal economy, and irregular economy are being used. The simplest way to understand Black Money is the money that is hidden from the tax authorities.

Black Money UPSC Notes

Black Money has been an old problem in India, but it has become a threat post-liberalization. Unlawful activities such as corruption, complex procedural regulations, and implementation structures have increased the Black Money economy. Black Money is hidden from the government, and it is not shown in the Indian GDP, national income, etc.

How is Black Money Formed?

Black money is formed through various means, primarily involving illicit activities and practices aimed at concealing income or evading taxes. Here are some common ways in which black money is formed:

  • Illegitimate Activities – the illegal activities through which Black Money can be generated are- Crime, Smuggling, Corruption, Complex procedural regulations, Non-compliance with tax requirements, Money laundering, etc.
  • Tax Evasion – Here, an entity doesn’t pay taxes that are due to the government. Individuals or entities may intentionally underreport their income or inflate expenses to evade taxation.
  • Tax Avoidance – Here, an entity takes advantage of existing loopholes in the system to prevent tax paying, which is not illegal either.

Sources of Black Money

ack money, also known as illicit money or unaccounted wealth, has various sources that contribute to its formation. While it is challenging to pinpoint exact figures due to its clandestine nature, here are some common sources of Black Money in India

  • The price of real estate has been increasing over the years. The builders undervalue the transaction cost and take money in cash which generates Black Money.
  • There are many Self-Help Groups that don’t show the sources of their funds clearly or the donations they have received.
  • NGOs receiving their funds from foreign sources rarely file their annual reports with the government. Loopholes in laws allow these NGOs to the mobilization of Black Money.
  • Traders or sellers who don’t give bills create Black Money as well. Investing in gold or jewellery is another source of generating Black Money.
  • Tax havens: There are small countries known as Tax havens where people don’t have to pay taxes. Big companies take advantage of this and transfer their profits to shell companies located in those countries. With this, they can avoid tax liabilities by a big margin.
  • Hawala: hawala is a method of transferring money from one place to another without using banks. It operates without any paperwork.

Effects of Black Money

Black Money, or unaccounted wealth, has a wide range of detrimental effects on economies, societies, and governments. Here are some of the key effects of black money:

  • Black Money affects the financial system of a country. The central bank can’t control the Money Supply in the economy, which leads to higher inflation. As a result, the value of currency decreases.
  • Black Money is used for illegal activities such as narcotics, drug dealing, and other illegal activities. Government loses a significant amount in the form of taxes.
  • Black Money also results in an increase in real estate prices and affects the credibility of a country in a negative way.
  • Black money undermines the formal economy by promoting a parallel economy where transactions occur in cash or through illegal means.
  • Black money can weaken financial institutions as it is often kept outside the formal banking system. This reduces the number of deposits in banks and hampers their ability to lend for productive purposes, hindering economic growth.
  • The presence of black money erodes trust in government institutions and weakens governance. It fosters a culture of non-compliance, erodes the effectiveness of tax systems, and undermines the credibility and legitimacy of public administration.

Measures to Control Black Money

The government has taken actions to restrict the generation and flow of Black Money. They are mentioned below.

  • Tax Reforms- tax base has been increased, and the rates have been decreased. A deduction of tax at the source is being made.
  • Demonetisation of Rs.500 and Rs. 1000 was done in 2016 to make the Black Money useless.
  • Institutional measures like CBDT, Central Board of Excise and Customs, Directorate of Revenue Intelligence (DRI), CBI, Financial Intelligence Unit, NIA, and Police authorities.
  • Encouraging a cashless economy in which initiatives like UPI, Jan Dham Accounts, and RuPay Cards are promoted.
  • Electoral Reforms are also expected to curb Black Money because, in elections, black money is used.

Legislative Framework to Curb Black Money

What is Money Laundering?

Money Laundering is one of the most popular and common ways to convert Black Money into white money. People with Black Money have to be careful about the way they spend it. With the help of Money Laundering, they can convert it into white money.

In the method of money laundering, people separate the Black Money from its source and mix it with white money. After that, they send it back to the source. Another popular way is people send Black Money to a tax haven to avoid paying taxes in India.

Black Money – Way Forward

Black Money is a big concern for India, and many things need to be done to tackle it. Some of the steps are:

  • The right legislative framework is needed to be related to UID Adhar, Public Procurement, whistle-blower protection, and Prevention of bribery of foreign officials.
  • The institutions dealing with illegal money need to be strengthened. Elections are the best way to use the Balck Money. Electoral Reforms can reduce money power in elections.
  • Proper systems need to be developed and implemented, such as ITDMS, Cyber Forensic Labs and workstations, Direct Tax codes, etc.
  • Black money often flows across borders through offshore accounts and tax havens. Enhancing international cooperation and information sharing among countries can help track and recover illicit funds.
  • Encouraging the use of digital payments, promoting cashless transactions, and reducing the use of high-denomination currencies can also help in tracking and reducing illicit financial flows.

Black Money UPSC

The pervasive issue of black money holds immense importance in the UPSC economics syllabus, as it intertwines various dimensions of economics, governance, and socio-political challenges. Black money, characterized by undisclosed income and illicit financial flows, has profound implications on the economy, governance structures, and social equity.

Understanding the causes, consequences, and strategies to tackle this menace becomes imperative for UPSC aspirants to gain insights into the complexities of financial systems, policy interventions, and the broader impact on national development. Candidates can expect a few questions related to this topic, and that’s why they must cover it during their UPSC Prelims exam preparation.

Black Money UPSC Questions

Question: What is black money? a) Money generated from illegal activities b) Money earned through tax evasion or corruption c) Money used for financing terrorism d) All of the above

Answer: d) All of the above

Question: Which government body is responsible for combating black money in India? a) Central Bureau of Investigation (CBI) b) Enforcement Directorate (ED) c) Reserve Bank of India (RBI) d) Income Tax Department

Answer: d) Income Tax Department

Question: Which of the following measures has been taken by the Indian government to tackle black money? a) Demonetization b) Implementation of Goods and Services Tax (GST) c) Introduction of the Benami Transactions (Prohibition) Act d) All of the above

Answer: d) All of the above

UPSC Notes
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