TAX EVASION AND THE GENERATION OF BLACK MONEY IN INDIAN ECONOMY: A CRITICAL ANALYSIS BY - ASHISH PATHAK
TAX EVASION AND THE GENERATION OF
BLACK MONEY IN INDIAN ECONOMY: A CRITICAL ANALYSIS
AUTHORED BY - ASHISH PATHAK
RESEARCH SCHOLAR
UNIVERSITY OF LUCKNOW
ABSTRACT
Tax evasion and black money
generation is any economy has its own repercussions not only for the citizens
of that country but also for its economy. It not only creates difficulties in
curbing inflation but also creates a sense of insecurity among taxpayers. Black
Money can be defined as a money that is not reported to the Income- Tax
authorities and the source of which is not legal. The main reason of black
money generation in a country’s economy is tax evasion on part of the citizens
at large and also failure to file their Income Tax returns which creates a void
in the taxing system where accurate and transparent information of transactions
or earnings is not reported by a person (defaulter) to the Income Tax
authorities. The study of this paper includes an analysis of laws that may help
in tracing untaxed or black money back in the tax havens and also the steps
taken by the Indian government to bring back the amount of black money stashed
in tax haven nations like Switzerland, etc. The author has tried to formulate
the reasons of generation of black money in an economy and its implications at
large. The Research Questions focus on the need to have laws in India for
combating tax evasion and the generation of black money in the economy and
their impact on the current system. The researcher has followed the doctrinal
(non-empirical) method of research and the Review of Literature includes an
analysis of write ups of eminent authors and scholars.
Keywords:
Black Money, Taxpayers, Economy, Laws, Doctrinal.
1. PRELUDE
The dignitaries involved in the
framing of the Indian Constitution deliberately added principles related to
security, human rights and welfare of the citizens in the Indian Constitution.
Their zeal to give India a recognition on the world’s map made them draft a constitution
which talks about the rights and duties of the citizens parallelly.[1] Their
dreams could have been fulfilled by including provisions related to collection
of tax in the Indian Constitution because infrastructural development in any
nation can be done only through money and for that tax collection was felt
necessary.[2] Their
desire for India having a good infrastructural set up comprising of hospitals,
schools, roads, railway tracks, etc. made them create a potent system of tax
collection by including provisions related to it in the Indian Constitution and
citizens were asked to pay taxes as per their earning capacity. The highlighted
statutory laws passed by the Parliament of India include The Income Tax Act[3] of
1961 and CGST Act of 2017 regulating the modes of collection of taxes. The other
laws and authorities related to the generation of black money and nabbing
offenders include Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015, Fugitive Economic Offenders Act, 2018, Central
Board of Direct Taxes, Central Board of Excise and Customs etc. In spite of
these laws and regulations, people have taken advantage of the existing
loopholes in the present taxing system and evaded their taxes on a large scale.[4] If
the implementation of the laws would have been perfect, and the authorities had
performed their duties more effectively, the cases of tax evasion would have
been minimum. It is important to note here that Tax Evasion is primarily
responsible for the generation of black money in an economy and not Tax Avoidance.
Tax Avoidance is when a person tries to exploit the gaps present in the legal
system and somewhere reduces his tax liability. While tax evasion is illegal as
it includes deliberate efforts or unwillingness on part of a person to pay his
income tax or tell the real source of his income to the authorities and it is a
kind of ‘tax-theft’. This is a problem that creates a gap between what has
been obtained and what should have been obtained by the government
in form of taxes. There have been instances where people have hesitated in
telling the exact source of Income to the Income Tax department prompting the
latter to raid the premises of the former.[5] These
people collect money that goes unreported to the authorities and stash them in
tax haven nations thereby creating black money. Economic growth of a nation
takes a severe hit due to these misdeeds of the defaulters because the money
that has been taken away and deposited in the banks of tax haven nations could
have been utilized for the benefit of the citizens of a nation. The governments
could have constructed hospitals, schools, railway stations, bridges, and other
infrastructure from the money that has not been reported to the authorities in
India thereby depriving the citizens of facilities in spite of taxes been
collected from them by the government. This creates a sense of frustration
among the citizens as they fail to understand that even after paying high taxes
to the government, why the country is lacking resources or infrastructural
development. Tax havens[6]
like Swiss Banks, etc. often impose least amount of taxes on foreign citizens
or companies. A developing country needs to utilize its maximum resources for
coming in the league of developed nations and for this, transparent taxing
system is a must. Undoubtedly, it is important to have a potent, acceptable and
justified framework of tax collection chalking out the rules and regulations
that can be a part of tax collection in a country like India. The Standing
Committee on Finance, reports that the Government of India has
signed Tax Treaties with 146 nations, advocating for Double Taxation Avoidance
Agreements, etc. between the nations.[7] The
International Monetary Fund says that revenue loss (annual) to the Indian
government is between $200 billion and $600 billion.[8]
This data is sufficient to give us an impression about the implications of the
generation of black money in an economy. The issue of black money generation in
an economy creates problems not only for the governments of a developing
country but also the developed ones. Therefore, it becomes necessary to find
out the reasons of the generation of black money in a developing country like
India and the steps that can be taken to minimize the instances of tax evasion
and thus black money generation.
2. BLACK MONEY- HOW IS IT GENERATED IN AN ECONOMY
Black Money, in any economy, is
generated due to many reasons including weak policies of the government and its
lackluster approach in nabbing tax defaulters. There are many other reasons as well like high
tax rates, corrupt minds, etc. but fragile policies to deal with tax evaders is
the most important of them. Let’s try to understand the causes of black money
generation in a developing economy like India and the effect of the black money
on its economy and the citizens living within the boundaries of the country
because without understanding these two aspects of black money it would be
difficult for a researcher to know about the complications of having untaxed
money in a country. So, let’s understand these problems one by one.
2.1 Insufficient steps on part of a government due to weak will power
For combating the problem of black
money or tax evasion, it is very much necessary for a government to take strong
steps for nabbing those who have willfully evaded their taxes and cheated the
government. This requires strong laws and more importantly, their
implementation in true letter and spirit. If the governments fail to address
the issue of black money properly, people take advantage of this and tend to
stash their untaxed money in foreign banks. Having said that, if a government
doesn’t take proper steps to bring back the money stashed by people in tax havens,
or shows reluctance in prosecuting tax defaulters, it gives an impression to
the people that they can get away by doing anything and they won’t be
prosecuted at all.
2.2 Corruption and its chain
Corruption in any nation destroys the
roots of the economy of that nation because a corrupt person finds different
ways to earn money that was not supposed to be earned by him. There have been
many instances where government officials have been found to have a nexus with
the tax defaulters and they have been accused of giving them undue advantage.[9]
The tax evaders promise to pay some amount to the government officials and in
return, they give them clean chit. This series of corruption starting from the
government officials creates a perception in the mind of the tax evader that he
won’t be caught or prosecuted because his case is not going to be highlighted
due to the support he has from the officials. He makes a habit of doing this as
he has a wide network of people who are involved in this process of hiding
taxable income from the government. Many nations have dealt with the problem of
corruption very strictly and have created a sense of honesty among their citizens
and thereby reflecting negligible cases of corruption in these countries
clearly mentioned by Corruption Perception Index report published by
Transparency International in 2023.[10]
India should definitely take an example from these nations and work on the
loopholes that are present in its tax collection system. This may include
scrutiny of the incomes of government officials twice a year by a body
constituted by the government headed by the Comptroller and Auditor General of
India.
2.3 Base Erosion and Profit Shifting
There are certain countries that
offer low tax rates thereby inviting the companies to shift their business in
their territory. The companies, sometimes pay less taxes or take advantage of
the taxing system of a country. The companies having their businesses across
the globe shift their profits or businesses in countries that demand less money
in form of taxes due to their liberal policies. This disrupts the honest
process of collecting tax by other nations.[11] This
is known as Base Erosion and Profit Shifting.
2.3.1 Double Taxation Avoidance Agreement (DTAA)
India has entered into treaties with
many other countries for the purposes of regulating taxes and DTAA is one of
them. Section 90 of the Indian Income Tax Act, 1961 empowers the Central
Government in India is empowered to make an arrangement (in form of an
agreement) with another country to seek relief in respect of Income which has
been doubly taxed or to finish double taxation of an individual or a company in
a different nation thereby promoting mutual cooperation.[12] Double
Taxation Avoidance Agreement (DTAA) helps a company to be taxed only in one
country. A Treaty that helps an individual as well as a company to claim[13]. For
e.g. a person who is a resident[14]
of India has moved to a different country for starting his business or to
arrange means for his livelihood. His income is subject to the taxes decided by
the government of that country. In this case, it would be difficult for this
person to pay his taxes to the governments of that country as well as India and
it becomes necessary for the two countries (India and the other nation) to come
together and make certain rules for ensuring that the person is taxed only once
and not twice as it will be difficult for him to pay taxes on his income in two
different countries. The aim of DTAA is twofold. First to make it easier for a
person or a company to pay taxes in one country and second to ensure
investments and attract people for working in a country by making it entitle to
collect taxes. However, there are some people who try to manipulate the terms
and conditions of these treaties as well and we can understand this through “Round
Tripping and Treaty Shopping.” Shell companies play a major role in Round
Tripping. Shell Companies are fictitious companies that don’t have any
authentic set-up and are formed only on papers. The reason for making these types
of companies is to hide untaxed income or invest black money in them. In this
case, the exchequer of the Indian government takes a severe hit and the money
that was supposed to be deposited with Indian government goes in wrong hands. So,
due to shell companies and tax evasion on part of a person, the rights of the
citizens of a nation are severely affected. Treaty shopping happens when a
foreign company comes to start its business in India through a tax haven nation.
It registers a company the headquarter of which is in a tax haven nation and
establishes its subsidiaries in India.
2.4 Money Laundering
Money Laundering is a process through
which people make their untaxed money (black money) convert into white. It
includes separation of untaxed money from the taxed one and then ultimately
mixing the untaxed one later with the money on which taxes were already paid. For
e.g. Mr. A is running a business of restaurants and earns a profit of 1 lakh
INR every month but he mentions 1.5 lakhs per month in the record books and
deposits this 1.5 lakhs in the bank. This mixing of black and white money is
called as money laundering.
3. EFFECT ON ECONOMY
As said earlier, black money
generation in any economy creates a gap in the economic structure of the
company it not only raises inflation in the country, but also prevents
government from taking necessary steps for the welfare of its citizens. The
black money deposited in tax haven nations fails the plans of the government
related to the implementation of welfare programs, policies, etc. Let’s try to
discuss the impact of tax evasion and the generation of black money in an
economy because a perusal of these points will help us in coming up with potent
solutions at large.
3.1 Government fails to implement welfare projects, policies, etc.
The citizens of a nation expect good
and implementable policies from their governments because they pay regular
taxes. The governments need funds for implementing the policies that were
framed by them. But, if there is a large influx of black money in any economy,
it will negatively affect the government’s idea of starting welfare programs in
the nation. For e.g. if the government decides to chalk out a plan for
improving the education, medical or industrial sector, the money it needs for
their development is less as the expenditure of the government on these
policies often becomes more than the desired results or the outcomes. The
resources that could have been utilized for the welfare of the citizens could
not be materialized due to the rampant tax evasion on part of the citizens. The
money deposited in Swiss banks, etc. cannot be used for the citizens of a
nation at large because once deposited, it is very difficult to bring it back
due to the opaque policies of tax haven nations. A nation becomes dependent on
international market too much if huge amount of black money is generated in its
economy or gets deposited in tax haven nations. Therefore, it is necessary to
anyhow stop people from evading their taxes and generating black money in any
economy including India’s as well.
3.2 Price Rice
Tax Evasion in an economy plays an
important role in creating inflation in the market. Inflation occurs due to the
increase in the cost price of a commodity. Limited resources force people to go
for alternatives. This can be understood from an example like a student goes
for tuition classes due to worst teaching and resources in his school. Failure
to control the supply of money in an economy by the Central Bank of that
country creates inflation and this only due to the large extent of black money
generation in the economy. The economic balance of the society takes a severe
hit and the rich becomes richer and the poor, becomes poorer. This divide of
the society on the financial basis is not good for any economy be it a
developed or a developing one.
3.3 Parallel Economy
Parallel economy means running of an
illegal sector with the main economy having a tussle with the objectives of the
justified and acceptable standards of an economy or of sanctioned sector in the
same economy.[15] The
black money is generated in such a large amount and its effect is so huge that
it appears to be a parallel economy running with the main economy. Mexico can
be an example of this where drugs and tax evasion has forced parallel economy
to come in. The currency of a nation gets degraded if black money is being used
continuously creating a parallel economy and the result is price rate,
joblessness, etc. The money generated through parallel economy affects the authentic
procedure and forces the governments to take steps against the citizens like
raising taxes arbitrarily, increasing the price of the commodities, etc.
3.4 Tarnishing the image of the nation
The image of a country is tarnished
if repeated cases of tax evasion are reported from its territory. The
businessmen around the world develop a sense of insecurity and are often scared
of investing in these countries. The governments of nations hesitate to have
business relations with the countries having a huge chunk of black money stored
in their economy and IMF and the World Bank are not too sure about helping
these nations financially. Economy is the base of every nation and therefore it
is necessary for the governments to keep an eye working of tax officials as
well as taxpayers because their conduct will decide the reputation of the
country at the global level because we are living in a globalized world where
almost every nation is dependent upon any other nation for fulfilling its needs
and therefore it won’t be difficult for any country to know about the internal
problems (including tax evasion on part of the citizens) of any country and
thereby affecting their relations with each other at the global level.
3.5 Government’s deficit gets increased
Government’s deficit gets increased
due to tax evasion and black money generation in the economy of a country as the
funds that were required to be deposited in the government’s exchequer finds
place in the tax haven nations. Let’s try to understand it with the help of a
hypothetical example. For e.g. if 5000 rupees were to be deposited as tax to
the government by a taxpayer but he decides to deposit only 2000, this deficit
of 3000 rupees creates an imbalance in the economy. This may compel the
government to go for more borrowings and increase rates of taxes as well.
4. PREVENTIVE MEASURES ARE NECESSARY
The Indian government in December,
2021 failed to provide authentic figure of untaxed money kept by the Indians in
tax havens. A rough estimate of Rs. 8644 crores were taxed and 1294 crores in
form of penalty were imposed on the people who were considered to be tax defaulters.[16]
However, it is presumed that a huge amount of untaxed money of the Indian
people is kept in tax haven nations like Switzerland, etc. The Swiss National
Bank released its data saying that the Indian’s money (in form of black money)
has swelled to Rs. 20,700 crores in the year 2020.[17] This
is a serious problem because India is lacking behind on infrastructural
development in some sectors like constructing proper schools and hospitals in
interior areas including villages, towns, etc. and this problem can be solved through
funds which is directly related to the prevention of tax evasion and generation
of black money. The government of India has taken some crucial steps in the
direction and enacted statutory laws as well. The government has been successful
in estimating the disclosures related to undisclosed foreign assets as well
under the law enacted in 2015. However, for ensuring transparency, proper
implementation of these laws is the need of the hour. There are certain measures
that can be adopted to address the problem of black money generation in India’s
economy and they can be summed up in the following manner:
4.1 Making necessary changes in the taxing system
India, being a democratic country has
a system of collecting taxes which allows the government to go for imposing
taxes on the citizens. But, if the government through proper strategy decides
to implement policies related to reduction of taxes and collection in the most
appropriate form, people will find it easy to pay their taxes because low tax
rates won’t hurt them at all. Hurting here means affecting their pockets. It
doesn’t mean depriving the government to collect appropriate taxes from the
citizens, rather it is something related to collection of taxes in a balanced
manner where the tax payers are happy to contribute to the government’s account
without considering it to be a burden on them.
4.2 Digitalization
In order to create a robust tax
collection and record system, the Indian government along with the State
governments should make an electronic record for all kinds of transactions and make
it mandatory for the parties do go for digital transactions as it helps in
creating a record. Cash transactions often go unreported and it is difficult to
nab those who use black money in form of cash. Maintaining exact record of cash
transactions in a country of more than 140 crore citizens is not that easy and
creates difficulty in prosecuting those who are accused of doing illegal
transactions. Digitalization removes any kind of opacity in the transactions
and creates a record for knowing the details about the person.
4.3 Making agencies stronger
The Income Tax department ensures
proper collection of taxes as per the provisions of the Indian Constitution and
the Income Tax Act and goes into the details of cases of tax evasion and gives
notice to the people who are accused of refraining from paying their taxes in a
transparent manner or don’t pay at all. The need of the hour is to come up with
strong strategies for stopping the officers of Income Tax departments from
becoming the puppets of influential personalities. In simple terms, the
government should keep a check on the records of the tax defaulters prepared by
the IT department and scrutinize it in the best possible manner and for doing
this, regular checking by government through its investigative agencies has to
be ensured to avoid any kind of nexus between the officials and the tax
evaders. At the same time, the government should give free hand to honest
officials who have credible information related to tax defaulters or people who
are accused of tax evasion for taking action against them within the boundaries
of law. This will surely create a sense of terror in the minds of tax
defaulters or those who are habitual offenders and have been engaged in evading
their taxes over a long period of time creating problems for the country’s
economy. Strong agencies in any country, through their modus operandi will
ensure effective implementation of relevant laws and nabbing tax evaders as
well.
4.4 Patch up with nations
The current Indian government has
brought various laws on combating the generation of black money in India
covering different topics related to it as well.[18] At
the same time, the Indian government has asked the governments of various other
nations and their banks like Swiss bank, etc. to share the details of the
Indians who have evaded taxes in India and deposited their untaxed money in the
bank of Switzerland. I think that the government of India pressurize the countries
where tax evaders of India keep their money for disclosing the names and making
transparent procedure for bringing back the money, so stashed here. Various
treaties, conventions, declarations, etc. can be formulated between India where
it is easier for bringing back a person who is accused of evading taxes in
India and goes abroad for settling purposes.
4.5 Right to Information
In India, there are many political
parties that are funded by various NGOs, businessmen, etc. It is important to know about the actual
donations that are given to the political parties by these people and their
source as well. This is necessary because it will not only stop the influx of
black money in Indian elections but also help in creating a transparent system
of regulating spendings by the political parties. The Income Tax department as
well as the Enforcement Directorate should be given free hand by the government
to inquire about the fundings to different political parties in a course of time
and more importantly, it should be made mandatory for every donor to make
online or digital transactions while giving donations to political parties.
This transparent approach will help in nabbing tax defaulters as well as
creating preventive measures for those who have the intention and tendency of
evading their taxes.
5. CONCLUSION AND SUGGESTIONS
Our nation, India would have
developed a lot if tax evasion and the generation of black money in the country
was seriously handled by the governments and the judicial system. This money
could have been utilized for creating infrastructural development in India,
thereby giving a boost to its economy. The framers of the Indian Constitution
wanted to have a country where citizens have access to basic facilities like
food, clothing and shelter and at the same time, live with dignity. They were
desirous of including the principles of equality and liberty for ensuring the
upliftment of citizens. However, some greedy people, just for the sake of their
self- interest have failed them by going against the principles of the Indian
Constitution. Tax evaders, through their antics shatter the dreams of the
founding fathers because the means they adopt are totally illegal and deprive
the government from the benefits it should have got. A said earlier, tax
evasion, at any level is problematic for any nation. It questions the
patriotism of a citizen as he is directly harming the economy. India has a
well-oiled organizational structure for collecting taxes and nabbing tax defaulters
but the zeal on part of the officials as well as the government to nab tax
defaulters is lacking somewhere. In India, it’s often seen that corruption on
part of the government officials play an important role in giving a shield to
the actual offenders. This habit of taking undue advantage by any person,
especially the government officials should be addressed at the earliest. It is
desirable that the laws that have been enacted to combat the menace of black
money generation are properly applied. An example should be set by the
government for others showing that anyone who is engaged in tax evasion or the
generation of black money in the economy would be severely punished. The
government officials and the ministers should be counselled properly and the repercussions
of tax evasion should be clearly explained to them by highlighting the cases of
nations whose economy has been torn apart due to rampant tax evasion and black
money generation. A comparison of India with least corrupt countries like
Denmark, Finland, New Zealand, etc. will give us an impression that these
countries have always kept a check on the generation of black money in their
economies. India can learn something from these countries and take proper steps
for implementing the policies adopted by them. The citizens should be explained
the tax laws properly and in a simple manner and they should be taught to save
their taxes instead of evading them. India
doesn’t lack resources and is very much capable of fulfilling the needs of its
citizens but for doing so, it is required that transparency is maintained in
its internal workings including collection of tax. If this would have been done
right from 1950-51, our nation would have been in the list of developed
countries because we have some of the excellent brains in the world. But,
because of the harmful steps taken by some citizens including politicians, the
country still lags behind. The divide of the rich and the poor has widened and
it is because of corruption and tax evasion primarily. It is high time when the
Indian government should take a bold stand on the generation of black money in
India and implement the provisions of laws in a stricter and transparent
manner. These steps will not only help in curbing the problem of black money but
also create a genuine fear in the minds of people preventing them to take any
illegal step in this direction. The sooner it is done, the better it is.
[1] WWW. CONSTITUTIONOFINDIA.NET (Last
visited May. 2, 2024) Read - Constitution of India
[2] India Const. art. 265
[3] Income Tax Act, 1961, S. 4, Acts
of Parliament (India)
[4] “GST
officials detect 14,597 tax evasion cases in Apr-Dec: Govt informs LS” 2024,
Business Standard, February.
[5] “Top 10 biggest Income Tax raid in India” 2024 Clear
Tax, May 20, Biggest Income Tax Raid in India | Top 10 Biggest Income Tax Raid
in India (cleartax.in)
[6] A Tax haven country has zero or
very less tax rates and it does not share the information of the depositor with
other nations.
[7] 73rd Report, Standing
Committee on Finance (2018-2019).
https://taxguru.in/income-tax/status-unaccounted-income-wealth-country-critical-analysis.html.
(24th June 2019)
[8] Richard Mahapatra, Tax avoided by corporate groups can
eradicate global poverty, Down To
Earth, https://www.downtoearth.org.in/blog/economy/tax-avoided-by-corporate-groups-can-eradicate-global-poverty-66243,
August 20, 2018
[9] Virendra Singh Ghunavat, Munish
Chandra Pandey, Mastermind of Nirav
Modi- PNB scam reveals how he helped carry out fraud transactions, 2022,
India Today news, Apr. 11, https://www.indiatoday.in/india/story/rs-11-400-crore-pnb-fraud-ed-may-attach-properties-of-nirav-modi-mehul-choksi-cbi-seals-brady-house-branch-1172622-2018-02-19.
[10] Corruption Perception Index.
[11]
https://www.rauias.com/daily-current-affairs-for-upsc-ias/double-tax-avoidance-agreement-cairn-energy-upsc/
[12] Mittal D.P. 2014, Indian Double
Taxation Agreements and Tax Laws, 104, (Taxman’s Publications 2014)
[14] A Resident refers to a person who as per the relevant
laws of the Contracting States, i.e. India and the US are liable to pay tax by
reason of domicile, residence, citizenship, place of management, place of
incorporation, etc.
[15] Sukanta Sarkar, The Parallel Economy in India: Causes Impact
and Government Initiative, Economic Journal of Development Issues,
124, 124-125.
[16] No official estimate of black
money I foreign accounts in last 5 years: Govt. in Parliament, Times of India
News, April 7, 2022, https://timesofindia.indiatimes.com/business/india-business/no-official-estimation-of-black-money-in-foreign-accounts-in-last-5-years-govt-in-parliament/articleshow/88279663.cms
[17]Indians’ funds in Swiss banks climb
to Rs. 20,700 crores, highest in 13 years, India Today news, April 12, 2022, https://www.indiatoday.in/business/story/indian-black-money-swiss-bank-accounts-latest-estimate-1816211-2021-06-17
[18] Dr. Pradip Kumar Das, The Menace
of Black Money in India, Archives of Business Research 7, 77-87