Black Money

Black Money
•  Not unique to India – a global problem
•  WB estimates : $ 1-1.6 trillion pa
- total black money in banks – $ 10-15 trillion
•  Equally prevalent in developing as well as
developed countries
•  Destination is developed countries / tax havens
•  Political corruption is a major source esp. in
case of developing countries
 Black Money

•  Unreported income or a transaction

•  No traceable/official records
•  Not part of ‘official’ economy
•  Can’t be taxed
•  Criminal activities: Bribes / Theft /
Organised crime
•  False commercial transactions
Why Black Money is Generated

•  Illegitimate source of income

•  Secrecy
•  Unwillingness to comply with laws and
pay tax
•  High level of taxation
•  Bans / prohibition
•  Demand for black money
 Black vs. White Transactions

•  White – White ( legal – traceable

cheques / recorded / reported cash)
•  Black – Black ( unrecorded / unreported
cash / secret bank accounts )
•  Black – White ( money laundering )
•  White – Black ( forced to convert )
Money Laundering – Three Steps

1.  Placement
Money derived from illegal sources is
introduced in the system – using it for some
transaction etc or depositing it in bank by
showing it as collection of legitimate
business proceeds.
 Money Laundering
2. Layering
Large no. of selling and buying transactions
forming a complex web to make it difficult to
trace the original source

3. Integration
Re-entry of money in mainstream economy in
legit form – fully ‘laundered’
Black Money Generation

False Commercial
transactions

International Trade
 Transactions thru’ a Tax Haven
•  Company A in country A sells product X @ USD
1000 to Company B in a tax haven country B.
Cost – USD 1000 resulting in zero profit for
company A, hence no corporation tax!
•  Company B then sells it to Company C in
Country C @ USD 2000/-
•  Company C sells it @ USD 1500 at a loss.
•  Tax evaded on a profit of USD 500.
•  Strategy followed by dubious multinationals.
 Under-invoicing of Exports
•  Company A in country A exports product X @
USD 1000 to Company B in country B. Actual
cost – USD 1000.
- Zero profit for company A, hence no corporation
tax!
•  Market price of product X is USD 1500.
•  Company B pays the difference to Company A in
a bank account in a tax haven.
•  This evades paying tax on profit in country A.
 Over-invoicing of Imports

•  Company A in country A imports product X @

USD 2000 ( market price is USD 1500 ) from
Company B in country B.
•  Company B pays the difference – USD 500 to
company A in a tax haven.
•  Company A sells it @ USD 2000 and evades
tax.
Black Money Generation

False Commercial
Transactions

Domestic
 Black Money Generation

•  Unrecorded Trade
- Small traders ( VAT )
•  Recorded price lower than the
transacted price
- Real estate transactions
•  ‘Benami’ transactions
 Participatory Notes
•  FIIs invest in Indian stock market on
behalf of undisclosed offshore clients.
•  FIIs are not required to disclose their
customers.
•  These customers – mostly hedge funds
based in tax havens - are issued
participatory notes by the FIIs.
•  50%+ of FII investments are thru P-notes.
 Hawala
•  Money transfer overseas without
documentation
•  Works on trust
•  Circulates black money
•  Can be used for money laundering
 Tax Havens
•  Small nations – main source of earning is
the tax/fee charged from corporations
•  High Secrecy
•  V. low taxation and controls
•  Attract non-recorded funds
•  Funds deposit / withdrawal / usage is
without asking too many questions
GFI – Global Financial Integrity

•  www.gfia.org
•  A program of Centre for International
Policy - a think-tank
•  Focusses on greater transparency in
global financial transactions
•  Conducts research on black money and
money laundering
 Curbing Black Money
•  Greater transparency ( auctions etc. ) in major
buying decisions to reduce bribes / kickbacks
•  Greater monitoring of trade mispricing / stricter
norms for transfer pricing by multinationals
•  Stem money transfer to tax havens
•  Demand greater responsibility and accountability
from Lawyers and accountants
•  Greater ‘legal’ co-ordination amongst countries
•  Greater pressure on banking system for greater
controls - KYC
Curbing Black Money legislation
•  Patriot Act ( USA ) 2001
•  Stolen Asset Recovery Initiative
( StAR ) 2007 of World Bank
•  Money Laundering Act 2002
•  Tax haven Money Abuse bill introduced
by Senator Obama in 2008 is still under
discussion!
 Capital Flight
•  Countries lose capital to other countries
that can be taxed in the country and
used for development
•  India has lost $ 460 billion since 1947.
•  Sweden claims to lose $ 7 billion every
year to USA
•  Egypt claims to lose $ 60 bln every year
•  Russia claims to have lost $ 427 bln
between 2000-2008
 TIEA

•  Financial Action Task Force on Money

Laundering (FATF) initiated by G7 (1989)
•  Forum on Transparency and Exchange of
Information for Tax Purposes ( OECD )
•  Taxation Information Exchange
Agreement ( TIEA ) initiated in 2010 and
are being signed between countries
 TIEA
•  Indian wants to sign TIEA with
Bahamas, Bahrain, Congo, Liberia,
Liechenstein, Marshall Islands, Monaco,
Panama, Seychelles, St Kitts & Nevis,
Maldives, Bermuda, British Virgin Islands,
Cayman Islands, Gibraltar, Guernsey, Isle
of Man, Jersey, Netherlands, Switzerland
and Macau.
 DTAA

•  Double Taxation Avoidance Agreement

•  Helps avoid double taxation on any entity
in both the countries.
•  India has DTAA with 60 countries
 India – The Mauritius angle
•  India has a Double Tax Avoidance Treaty
( DTAA ) with Mauritius ( under review )
•  Mauritius effective tax rate is app. 3%
•  Mauritius contributed about 43% of the
total FDI received since 2001.
•  India has set up a tax office in Mauritius
•  India is yet to ink TIEA with Mauritius