Chirag is a local government official. He lives in a major city with his family and has been relatively successful in his career earning a good living from politics. Chirag has worked for the Indian government for more than 10 years. In that time he has seen many of the country’s evils: bribery, drug trafficking, prostitution, money laundering and much more. During his tenure he has been involved in some tough committees including those that oversee the enforcement of city ordinances, provide community leadership, protect the welfare of the city and its inhabitants, and investigate suspicious financial activities.
What is black money?
Black money is unregistered and untaxed cash generated by dealings in a black economy or through organized crime. Investopedia explains that that it is ‘the segment of a country’s economic activity that is derived from sources that fall outside of the country’s rules and regulations regarding commerce. The activities can be either legal or illegal depending on what goods and/or services are involved’. Black money is often sent abroad to foreign accounts to avoid taxation. Possible sources of black money include, weapon trading, drug trafficking and selling illegal products.
Chirag’s latest assignment was to work on a new committee formed to tackle corruption. His committee was informed of a number of instances where large companies were showing very little taxable profit, but seemed to have large cash outlays. The committee decided to commission a report on the accounting practices of these companies. As resources were tight, Chirag knew such a report was likely to take at least a year, maybe more. By that time, he may not even be on the committee anymore.
How does black money affect the poor?
Black markets reduce the amount of declared profits that would normally be taxable. This lost tax revenue could have been used for public good, which invariably would help all citizens. With black money diverted away from the tax inspector, this money now only helps a few. If used correctly by the government, which in itself is a challenge, it can be used to build infrastructure, medical and education facilities, and create jobs.
Black money also alters the consumption patterns in favour of the rich. As we live in a capitalist society, on what we spend our money and the price we pay is important information for the market. The rich like to travel, consume luxury goods and services, and when money is diverted from taxes to personal consumption (usually by those rich enough to understand how) prices and consumption patterns are distorted. Black money alters product choices in the market that favours luxury goods which leads to focus of resources on such goods at the expense of goods and services demanded by the poor.
A year passed and the reports were imminently due. As corruption has become such a hot point in India, there was some interest from investigative journalists, but the general populace had other issues that were more pressing, such as poor labour conditions, security and trying to earn enough to afford healthcare and education for their children. Anyway, most people had little confidence in such reports, as it was expected that inspectors were bribed by the companies that they were investigating. It would not be the first time.
How does black money affect the economy and politics?
The black economy causes regressive distribution of income in society, which increases the inequality between the rich and the poor. More affluent, better educated people are able to game the system to reduce or eliminate taxes, whilst the poor are forced to pay their share. The very wealthy can do this at a corporate level. Very wealthy can only consume so much, so the additional wealth created from avoiding taxes only serves to increase their wealth on paper. This tied up capital is not really that important to them, but can make a huge difference in the country that is was stolen from.
In order to remain powerful, black money is often used to corrupt the political system. Ministers and other high officials collect funds, which can be untraceable. In extreme cases, this money can be provided in cash as bribes.
The reports were delayed by a further six months, which was put down to the inspectors requiring more data. When they were eventually released, little wrong doing on the part of the companies was found. A few minor issues were reported, but wholesale fraud or tax evasion was rejected. By this time Chirag had moved onto another committee, and was readying himself for re-election. Some of the companies that were being investigated showed their support by contributing to his campaign funds.
Can the government stop black money?
According to Dheeraj Tiwari the government has taken action to curb black money in the economy. In the last two years, the Indian government has set up tax laws that provide strict monetary penalties for tax evaders. Tiwari states ‘the government has taken sustained steps for curbing black money which includes enactment of a new Black Money Act with strict penalty provisions and new income disclosure scheme formulated for domestic black money’. The government took initiative to strengthen their monitoring and increased the number of tax raids and seizures which can help to stop black money.
The Finance Ministry of India stated in an article in the Indian Express that ‘a special investigation team has been constituted which is chaired by ex-Supreme Court Judge Justice MB Shah. Many recommendations of SIT have been implemented since then. A new Income Disclosure Scheme is formulated for domestic black money’.
Other initiatives in India include renegotiating tax treaties with countries such as Switzerland to avoid further black money exiting the country, and promoting a cashless economy so money is more traceable. Time will tell on how well these initiatives perform, and whether subsequent governments continue to curb black money or gut these new schemes. Particularly important will be the actions taken when larger pools of black money are discovered, and whether penalties for these crimes are enforced.
In a complex world, a lot of things have to work together before tax evasion or corruption can be discovered, proven and result in convictions of those involved. Transparency of the type the Indian government is pushing will help, but this will take years if not decades to implement. Smart accountants and financial professionals use this time to circumvent existing laws to legally divert profits into tax havens. A first real step would be to break to connection between business and political contributions, which plague not only developing nations, but also developed nations. Then we may see more politicians working for the public good, rather than re-election funds.
About the Author
Sukhdev is a British Indian, who has lived and worked in a number of cities including London, New York, Boston, Vilnius, Bogota and Dubai, where he resides with his wife. He currently works to help start-up companies that have a social impact. His latest venture is Chanzez, which will produce (not source) clothing ethically and use profits generated in the production countries solely to fund social impact projects such as school scholarships. Sukhdev is a CFA charter holder with an MBA with top honours from Columbia Business School in New York, an MSc from The London School of Economics and a BSc (Hons) from Aston University in Birmingham, England.