Black money runs the black market and generates taxable income that taxpayers do not report in order to evade taxes to the Income Tax Department of India.  It is the heart and soul of the underground economy and often called No. 2 money. 

It exists in many countries: in rich nations like Belgium, Italy, and Spain; in poor nations like Haiti and Nepal; in developing nations like Indonesia, the Philippines, and Thailand. 

How much black money India has? 

It is hard to know the total supply of black money in India, but it is easy to know its importance.  For example, it is impossible to complete big transactions such as buying or selling of a house, business, or land without it. 

As to its circulation, back in 2006 on December 8, then Indian finance minister P. Chidambaram told Lok Sabha that there was no exact estimate of black money in circulation.  Its estimates vary from economist to economist, from estimator to estimator, and from time to time.

Here are some estimates: Social Scientist wrote in its issue of August 1972 that according to Wanchoo Committee nearly Rs.1400 crore were unreported in 1968-69 to evade tax and as a result of this evasion, tax revenue of Rs. 470 crore were lost for that year.  In the Illustrated Weekly of India of October 25, 1981, Nani Palkhiwala, a former ambassador to the United States, cited an estimate that each year Indian economy generated nearly Rs. 12,000 crore of black money.  The National Institute of Public Finance and Policy ranged it to be between Rs. 31,584 crore and Rs. 36,786 crore during 1983-84.  As recent as year 2008, Indian newspapers reported that Rs. 70,00,000 crore are in Switzerland banks — it couldn’t be all black.  No one knows the accuracy of any of these statistics, but they are mind-boggling and show that black money is growing.   

Also, the estimates of the underground economy as a percentage of GDP vary considerably.  Poonam Gupta and Sanjeev Gupta wrote in Economic and Political Weekly of January 16, 1982 that for the year 1967-68 the black economy “constituted 9.5 percent of the official GNP… however, by 1978-79 the amount had jumped to nearly half of the official GNP.”  Since then some economists have estimated that unreported economy grew from 20 percent of GDP in 1980s to 40 percent in mid 1990s.  Again, no one knows the accuracy of any of these statistics, but they show that the underground economy is booming. 

Why do we use cash? 

Ours has been a cash based society for generations, and the reasons for being that are simple and ample. 

It is sad but countless millions of Indians do not know how to read or write or count, so how can they open and operate a bank account.  This is why uneducated folks live with cash. 

Ours is a nation of villages, and many villages do not have essential facilities – a doctor, hospital, school, post office – let alone a bank.  This is why villagers live with cash. 

Hardship is evident everywhere in our nation.  Common people, on any given day, just to survive, spend a great deal of time doing essential activities: working or begging to make ends meet, walking miles to fetch water; waiting in line to catch a bus or train to go to work or places; waiting in line to buy basic things like ration, dairy products, vegetables, fuel for cooking; waiting in line to see doctors and buy medicine, if sick; waiting for electricity to come back or finding ways to live without it; looking after children and elderly; cooking and cleaning.  In the midst of all of these activities many of us do not have time or means to go to a bank and then, once at the bank, standing and waiting in line to deposit or withdraw money or both.  This is why people live with cash. 

It costs money to maintain a bank account.  A bank customer pays fees to deposit an out of town cheque, pays fines when his balance falls below a set limit, pays for a cheque book, and pays for many other bank services.  A bank’s fees can add up.  This is why people live with cash. 

It takes time to become a cheque-and-credit card society.  At present many people and businesses do not accept cheques or credit cards.  This is why people live with cash. 

Why do we have black money? 

We buy and sell things with cash.  Now, the businesses that receive cash, from selling their products or services, often do not record or report it in order to avoid having to pay taxes on it.  Similarly, people who receive cash, as bribe or baksheesh or salary, do not record or report it in order to avoid having to pay taxes on it.  And the higher the numbers of cash transactions, the greater the probability of not reporting them to the government.  This phenomenon is unavoidable in a cash base society. 

In addition to having cash transactions, high income tax rate, complicated tax forms, tax laws written in mumbo jumbo language, outdated tax laws, time taking for compliance with tax laws, threats from income tax officers, and many other factors cause businesses and taxpayers to cheat on their taxes and cause black money to balloon. 

What do the people do with black money? 

Black money owners try to get rid of their bad money rapidly in many ways: by purchasing real estate, jewelry, gold, automobiles, paintings, expensive clothes and accessories, and so on; by parking it in overseas banks; by traveling abroad; by giving it to politicians for election.  They cannot afford to hide money because tax collectors may confiscate it.  They purchase products or services so fast that sometimes prices of things they buy remain artificially high.  

What has government done to unearth black money? 

The government has tried numerous solutions to flush out black money.  It lowered income tax rate; it gave amnesty to people who disclosed funds voluntarily; it raided peoples’ homes and businesses; it made tax laws tougher.  But it is illusory to believe that raids, tax laws, and schemes will reduce or eliminate the black money. 

What should not be done to unearth black money? 

Many people believe that the government should be brutal and ruthless to recover black money from its citizens.  However, it should not have to be. 

It is anti-democratic to raid homes and businesses, to terrorize occupants, and to hunt for black money.  Just imagine what it is does to children, women, and elderly who are inside the building at the time of the raid.  It is a humiliating and terrifying experience.

Like citizens and businesses, income tax officers and tax collectors needed not be punished for their failures to get a handle on the black money when they have to work with red tape longer than the circumference of earth and with books of tax laws, when stacked one on top of the other, that reach the highest mountain on earth, Mount Everest.  

Our government thinks that people are crooked and dishonest.  This may be so.  But it could be that the government’s own tax policies and procedures are failing to prevent both the generation and recovery of the black money. 

What should be done to prevent black money? 

The answer is simple. 

First, abolish the corporate income tax. Businesses merely add their cost of income tax to their prices of products or services they sell. It is the consumers who pay businesses’ income tax.  By freeing businesses from the burden of income tax, they will have more time and energy to devote to their products, to make them better and cheaper, and to compete with other businesses.  These actions, in a free market economy, will cause prices of products and services to go down. 

Second, every Indian citizen between the years of 20 and 65 pays one fixed amount as income tax by going to a post office during January 1st through February 28th.   

Future 

The government will get more money in its treasury than ever before by adopting a simple way of collecting income tax and by eliminating the income tax department. 

Finally, in the absence of a very simple and fair tax method, black money will continue to balloon, befog and baffle bureaucrats, bleach businesses’ balance sheets and income statements, and buttress the underground economy.