Black Money

Before Elections… we are promised to bring back Black Money but when questioned about its status… “Committee is being formed… facts are being gathered… studies need to be done… etc. etc.”

#SIT #NCAER #NIPFP

Every economically educated person knows that all these studies need not be done, because it is just quantification of facts that we already know, then why waste time and money?

So I sympathise with the Government (both current and former) for either wasting time, energy or money… or for not knowing that they don’t already know the problem and the solution.

For my friends (Including the Central Government) who don’t know about the Black money situation… stop forming any more committees or research councils and read below where I explain it in plain and simple language:

What is the amount of Indian black money?

Ans: I didn’t count it myself but during the years, many opposition parties shouted this figure... which was an estimation by National Institute of Financial Management in 2010 which was Rs. 30 lakh crore (39% of the GDP).

How the money gets converted into black money?

Ans: On the Basis of transactions:

Unreported: Transactions hidden from Revenue Authorities… any transaction which does not quote your PAN or CST no. or Excise Inv (Bina bill k transactions) (Mainly by Actors, Dancers, and other professionals whose income can’t be compared to competitors. “Hero ne yeh movie k liye sirf Re. 1 charge kiya… how sweet!)

Informal: Bhaii… Agreement aur Contracts kyu banata hai… cash dedena!

Illegal: drug trafficking; smuggling of Gold / Electronic goods; false declaration of goods under export/import as part of organised crime to obtain illegally certain benefits given by the government to promote business; human trafficking; cyber fraud; identity theft and illegal control of bank accounts; counterfeiting of Indian currency and related smuggling; counterfeited credit/value cards; trafficking in wild life products; theft of objects having cultural significance and smuggling of such products to foreign countries; arms and ammunition; white collar crime (#SatyamComputers); corruption and bribery; illegal liquor / alcohol trading; Hawala; extortions; and cattle smuggling. Mein drugs bechunga toh uspe koi tax thodi dunga!

For normal transactions… Basis of business:

Diamond Industries (The most dirty of all): stock valuation manipulation, understatement of yield, overstatement of rejection which results in unaccounted trading (smuggling)

Stock Market (Mauritius): Investors have to pay a short-term capital gains tax of 10% in India if they sell shares within 1 year of purchase. They are, however, exempt from paying long term capital gains tax (as local investors) if they sell the shares after 1 year of purchase. But by routing their investments from Mauritius, foreign investors do not have to pay even the short-term capital gains tax by virtue of Indo-Mauritius tax treaty.

Real Estate: land allotment (corruption by govt.), permissions and FSI (corruption by local auth.), wrong tax exemptions, wrong revenue recognition (% completion method), money laundering (using 1 project money into other project), asking part of the consideration in cash (so that they can pay the corrupt people for permissions and allotment),

Foreign Companies: Create companies in tax heaven countries and transfer the incomes of Indian Company to such foreign country. These transactions can be done by copyrighting or giving Royalty incomes to such company. Such foreign companies can also be used for abusing transfer pricing rules, treaty shopping, round tripping etc.

All Other Sectors: Non filing of tax returns (why not caught? Ans: corruption), false claiming of tax exemptions (10A in Income tax act, SSI exemption in service tax and excise duty, incorporating Shell Companies to claim exemption), Not paying tax on deemed dividend 2(22e), group companies creation for claiming inception loss benefit (weak law), price manipulation for custom duty evasion (corruption Customs dept.), false Inventory valuation, under claiming of income and over claiming of expenses (corruption on part of Auditors).

How they convert black into white? :

Ans: Many (Unethical) ways (dangerous stunts not to be performed)

A) For small amounts: 1. People also give the black money to a person and take a cheque from them. They show that as a loan receipt and thus they can temporarily convert their black money into white.

2. Show income in cash like tuition income or any other professional fees (except which involves TDS Provisions)… and use the basic exemption of all the non earning members of the family

3. Take gifts (in cheque) from relatives (gifts from relative u/s 56(2)vii is not taxed) who have white money and give them your black money (return gifts in cash)

4. Once in a lifetime opportunity. All money earned as gifts cash or kind from any person on occasion of marriage is exempt from tax.

5. Take an insurance cover, whose maturity is tax free, pay 1^st premium by cheque … all other premiums by cash.

B) For bit higher amounts:

1. Go to a Jeweller… Give him the amount you want to convert into white as cash... he would give you a cheque back for the same amount less 4% (current market rate of conversion). He would give you a purchase bill to show that you have sold silver utensils to him. On the amount of the cheque when you file your return you will have to pay no capital gain tax as Silver utensils are Personal effects and capital gain does not arise on sale of personal effects.

2. Create a trust for charitable purpose. Get it registered too. Make anonymous donations. Then use the amounts to pay your expenses (mostly to poor people like salary to drivers/servants). No audits required. No tax to be paid.

C) For Very high Amounts:

a) Shelf Companies (creating a company with no actual transactions, but only taking investments from black sources)

b) Participatory Notes (investing in Share Markets from outside without any identification, like a Demand draft system)

c) Transactions through Controlled foreign Corporation (CFCs) in Tax heavens

d) Other ways:

1. Create a new (just for namesake) company in Mauritius, and invest in Indian share market. (Since Mauritius Govt. don't share investor information with Indian Govt.

2. Give people money to do A & B as stated above

Where is the balance black money? :

Ans: Nowadays listening to news channels and politicians, you guys would think that all our black monies are invested outside India, LOL! Studies say that almost 60 % of the total Indian black money is in India itself (Even foreign black money is in India). You would think where it is? It is so simple to figure this out…. Whatever is overvalued… it represents black money.

Like: Investment in Gold, Share Market and Real Estate.

And yes 40% is outside India as well (Rs. 15 lac crore with annual interest assumed to be @ 13% pa and annually new black money generation is estimated at 30% pa of existing black money)

Not only in Switzerland but also in France, Germany etc.

How can we bring the money back from those foreign countries? :

Ans: 1. Sharing Info with Foreign Govt. via DTAAs and TIEAs

2. Unclaimed money (Unclaimed for a particular period say 10 years) in foreign banks of Indian citizens can be called to Govt. Funds

3. Amnesty schemes (self-declaration of black money to avoid any prosecution)

This year the Scheme managed some 638 declarations (I presume they were just the person who were already caught) of illegal foreign assets/incomes of Rs 3,770 crore, which means the average declaration was just around Rs 6 crore. Clearly, the big fish are not biting and by refusing to give up, they were essentially telling the government "do your worst."

4. Whistle blower reward scheme: Govt. can gain from Khabri system if they are provided with proper job protection, self-life safety, family safety… at present there are serious flaws in Whistle blower protection act.

5. Find the owners of P Notes (foreign investments in share market without KYC)

Cayman Islands, a country with population of just 55000, has investment of Rs. 85000 Crores in Indian Shares via P Notes.

6. Fast track courts for pending cases of Revenue frauds

7. Find the network of Hawaala system.

People who prefer money over peace of mind…. I don’t know what they want to do with all their money!

(Reference for facts and figures - NIFM study 2010.)

And … Finally for those friends who say: “Sab kuch toh samajh gaya… par yeh black money exactly hota kya hai?”

Ans: Normal income or receipt … jispe kisine tax nhi bharaa… wohi hai black money. For Ex. You earned Rs. 100… par uspe Rs. 30 ka tax nahi bharaa… then Rs. 100 tera black money ho gayaa… jiss din government ko pata chalaa… government apna Rs. 30 (with 12% pa interest) le legi.. thoda penalty bhi legi… aur thoda time tu jail mein chakki bhi peesega!