How can India tackle the challenge of Black Money. A very easy to understand and yet comprehensive look at the topic. Do you have difficulty in understanding what is Black Money and what can be done about it? Our experts have simplified the topic for you. Do you find that your friends talk about this topic without understanding the basic? Send them this presentation.

1. HOW can we REDUCE
Black Money
in India?

2. cvBlack Money, some basic examples
Sher Singh is a Goonda.
He makes money from kidnapping, drugs, prostitution, extortion, murder,
etc, that is from criminal activities.
The money he makes cannot be declared
to the tax authorities, and is Black Income.
Money that evades tax is Black Money.
Since Sher Singh is paid in cash, his income can be hidden easily.
EXAMPLE 1: Sher Singh
** Names used are fictional and the numbers are only for broad indicative value **

3. cvBlack Money, some basic examples
Swati Sharma is an employee in a town’s water department.
Swati approves water connections only when she is paid a bribe.
The money she makes from bribes cannot be declared to
the tax authorities, and is Black Income.
Money that evades tax is Black Money
Both Sher Singh and Swati Sharma make money from illegal
activities in addition to illegally evading taxes.
EXAMPLE 2: Swati Sharma
** Names used are fictional and the numbers are only for broad indicative value **

4. cvBlack Money, some basic examples
Dr Swami has a good private practice. He consults 50 patients/
day, charges Rs 200/patient and works 300 days/year.
Dr Swami is not happy with this 14 lakhs, and wants to make more.
EXAMPLE 3: Dr Swami
Gross Income: 50 x 200 x 300 30,00,000
(Assumed) Expenses and Deductions 10,00,000
NET INCOME 20,00,000
Income Tax @ 30% -6,00,000
Post Tax Income 14,00,000
** Names used are fictional and the numbers are only for broad indicative value **

5. cvBlack Money, some basic examples
So Dr Swami declares only half his patients to tax authorities.
Dr Swami: 15 lakhs undeclared + 3.5 declared income (UP~32%)
Dr Swami’s undeclared Rs 15 lakhs is Black Income.
NOTE: If Dr Swami is paid in cash, his income can be hidden easily.
EXAMPLE 3: Dr Swami
Declared Gross Income: 25 x 200 x 300 1,50,0000
(Assumed) Expenses and Deductions - 1,00,0000
NET INCOME 5,00,000
Income Tax @ 30% -1,50,000
Declared Post Tax Income 3,50,000

6. cvBlack Money, some basic examples
Mr Reddy buys steel and makes ball bearings to sell to
Automobile companies.
Mr Reddy is not happy with this 1.3 Crores, and wants to make more.
EXAMPLE 4: Mr Reddy
Gross Income 10 cr
Expenses -8 cr
NET INCOME 2 cr
Income Tax @ 34.6% 0.69 cr
Declared Post Tax Income 1.3 cr
** Names used are fictional and the numbers are only for broad indicative value **

7. cvBlack Money, some basic examples
Mr Reddy asks his Steel Supplier to invoice him an extra
1 Crore, pays him by cheque and gets 95 Lakh back in cash.
Mr Reddy now has an income of, 0.95 + 0.65 : 1.6 crore (UP~23%)
Mr Reddy’s 0.95 crores is Black Income,
so is the supplier’s 5 lakhs commission for ‘Inflated expenses’
NOTE: Both Dr. Swami and Mr. Reddy make money from legal activities but illegally evade taxes.
EXAMPLE 4: Mr Reddy
Gross Income 10 cr
Expenses - 9 cr
NET INCOME 1 cr
Income Tax @ 34.6% - 0.35cr
- crDeclared Post Tax Income 0.65 cr

8. Money is used to trade goods,
services and assets.
So … What is Black Money?
Governments get resources by taxing
money flows.
Taxes like service tax and excise are called
indirect taxes. Tax on income is a direct tax.
Money flow that evades these
taxes is Black Money.

9. cvIndirect tax evasion and money laundering
Mr Shah runs a Gutkha factory and the Excise duty on his
products is effectively 60%.
EXAMPLE 5: Mr Shah
Gross Sales 100 cr
Excise duties - 60 cr
Net Revenues 40 cr
Costs 18 cr
Income 22 cr
** Names used are fictional and the numbers are only for broad indicative value **

10. Indirect tax evasion and money laundering
EXAMPLE 5: Mr Shah
With the help of corrupt Excise and IT officers,
Mr. Shah declares only half his production to the Excise
department. He sells this Gutkha for cash. After paying Rs.
10 Crore in bribes, he has Rs. 40 Crore in cash.
Mr Shah ‘launders’ this cash by showing it as receipts from his theater.
This works for Mr Shah because:
• Taxes on the theater business are lower than on tobacco
• Both theater tickets and gutkha are mainly bought in cash

11. cvIndirect tax evasion and money laundering
All customers pay the full price of Gutkha including the Excise
duty. Mr. Shah never pays the Excise on undeclared Gutkha to
the government.
Mrs. Shah’s New Income 40 Cr + 2 = 42 Cr (UP~100%)
Mr Shah’s 40 crores is Black Income.
EXAMPLE 5: Mr Shah
Declared Gross Sales 50cr
Excise duties - 30cr
Net Revenues 20 cr
Costs 18 cr
Income 2 cr

12. PAAN
2) Through Wholesaler
the Paanwalla routes cash
back to Gutkha Mfr
GUTKHA
1) Ramesh withdraws money
from an ATM, then buys
Gutkha and pays cash
ATM
3) Gutkha Mfr pays
cash to Tobacco
farmer for tobacco
5) Gutkha Mfr pays
cash to Govt Officer
as bribe
GOVT
6) Officer uses cash to buy
a fancy watch. Seller
declares income
4) Tobacco farmer uses
cash to pay a Doctor who
does not declare it
+ Doctor +
Not all cash transactions …are black
BLACK
WHITE

13. Money can be received in
cash or by electronic means
If the money flow is
not declared to tax
authorities and
applicable tax is not
paid it becomes black
Cash transactions are easier
to hide from tax authorities
Not all cash transactions …are black

14. Why is Black Money a Problem?
1) Taxes are used for nation-building - transport,
schools, hospitals and law and order.
Tax evaders steal nation building money.
Existing taxes need to be used more effectively.
However, this cannot be an excuse to cheat on taxes.
3) Black money cannot be easily used for
legal activities and hence funds illegal
activities. This is a vicious cycle.
2) Black Money funds bribes and political activity.
This gives tax evaders a lot of power.

15. How is Black Income used?
Do people with Black Income stash it, or use it?
Of course they use it, and a very large chunk goes into these 5 areas:
Buy Cars, Land,
Jewellery, etc in
cash for
consumption.
Pay Bribes to
Govt officials and
make donations to
political parties.
Use for legitimate
business
expenses like
buying material.
Launder part of it
by showing it as
being income from
other businesses.
Stash it in
Benami property
or companies or
land or jewellery.

16. Black Income Model
Let us summarize the earlier information diagrammatically …
1. The Tax Thief makes his Black Income by evading taxes. This is usually in cash.
Tax evaded
INCOME

17. Black Income Model
2. The Tax Thief uses a large part of the cash for Benami purchase of companies,
properties and gold. (Benami holdings estimates = multiples of cash stash)
Tax evaded
INCOME
Money stashed in
BENAMI companies,
property, gold, etc.
Money stashed in
BENAMI companies,
property, gold, etc.

18. Black Income Model
3. Where does Black Money go?
Tax evaded
INCOME
CORRUPTION
Bribes and
Political Donations
BUSINESS USE
Expenses to make
more Black Income
PERSONAL use
Land, Jewelry, Luxe
LAUNDERED and
re-routed to business
Money stashed in
BENAMI companies,
property, gold, etc.

19. Businessmen
There are multiple uses for Black Income, so
the cash stash is smaller proportion of Black
Income
NOTE: We believe that majority of Black Income is
generated by Businesses.
Businessmen Vs Professionals/Bureaucrats
Professionals / Bureaucrats
Personal use and benami investments are only
major uses, so their ‘stash’ is larger proportion
of Black Income

20. Tackling Black Money…
Prong 1. Detect and stop
Black Money generation
Prong 2. Neutralise Benami assets
Prong 3. Make Use of Black Money difficult
…using the Black Money Model

21. Tackling Black Money
Challenges
• Limitations of Tax Officers: Tax thieves have
more weapons on their side than Tax Officers.
• Government Silos: Different Government
departments do not share information with each
other to detect tax evasion.
• Justice System: Tax thieves use the slow speed
of justice system to their advantage.
• Cash usage: Cash payments are easier to hide
than non cash payments.
Prong 1. Detect and stop Black Money generation

22. Challenge 1 Tax Officer Limitations
Referring to our example of Mr. Reddy,
• A Tax Officer (TO) cannot know all industries well. X tonnes
of raw steel makes how many tonnes of ball bearings?
Without this knowledge the TO finds it difficult to judge
correctness of expenses claimed by Mr. Reddy.
• Mr Reddy would not inflate expenses from just one Supplier,
but would spread it across many suppliers.
• Mr Reddy is not bound to share information with the TO in
an analysis-friendly electronic form. He gives a physical
ledger that is difficult to analyze.
• While one TO scrutinises more than a 100 companies, each
company can hire a dozen+ CAs to confuse him.
• The TO may be corrupt.
1
Tackling Black Money - Prong 1

23. Tackling Black Money - Prong 1
Challenge 2 Government Silos
• Business like Mr Reddy’s are separately assessed
by different Tax Authorities such as Excise / Sales
Tax / VAT / IT etc.
• These authorities do not share information with
each other about Mr. Reddy.
• If Mr. Reddy’s steel supplier is investigated for
non payment of VAT, that information should be
given to Mr. Reddy’s IT officer.
2

24. Tackling Black Money - Prong 1
Challenge 3 Justice System
• Mr Reddy / Businessmen invariably dispute the
claims of the IT Officer and the prosecution could take
a lot of time because of the slow justice system.
• Though the Steel Supply company directors from Mr
Reddy’s example can be prosecuted for generation of
inflated bills - often such companies have benami
Directors who are faraway villagers, while the real
people responsible remain hidden.
(NOTE: Daksh reports the pendency of IT appeal in Karnataka
HC as 1408 days - much higher than most other cases)
3

25. What can be done?
1. Continuous and
high-quality training
of IT Officers.
2. Complete automation of tax filing
and accounting information, facilitating
accurate analysis.
3. Ongoing monitoring
of corruption allegations
6. Specialised Tax Courts with time-
bound targets for case disposal, and
stiff penalties for tax departments and
plaintiffs for frivolous appeals.
4. Exchange of information between
government departments - with
adequate safeguards.
Tackling Black Money - Prong 1
5. Reduce use of cash in
the economy, making it
more difficult for people
to hide their income.

26. Tackling Black Money
The largest part of black money wealth is parked
in assets viz. immovable property. These assets are
not held in the name of their real owners. The
paper owners of these assets are menial employees
of the real owners, private companies or fictitious
persons. To prevent this:
• Benami ownership of immovable property and companies must
be discouraged.
• Ownership data of immovable properties must be digitised and
put into independent NSDL like land-record depository
institutions
• The task of tracking ownership data of private companies in India
must also be given to NSDL/CDSL- as is already the case for
publicly listed companies
Prong 2. Neutralise Benami assets

27. Tackling Black Money
Making use of Black Money difficult reduces the
incentives to create it in first place
Measure 1. Eliminate Cash from Property and other
high value transactions
Buying property is the most popular use of
black money. Cash was necessary earlier due
to low bank account penetration, but we now
need to prohibit the use of cash in property
transactions.
Luxury goods like cars, jewellery and watches also need to go
the non cash route.
Measure 2. Reduce Corruption
If corruption is reduced, the incentive to generate
Black Money reduces.
Prong 3. Make Usage of Black Money difficult

28. Funding Politics … legitimately
Political activity in a democracy is legitimate. If not funded legitimately, it
will find illegitimate sources.
How much money is needed? Here are 2 basic back-of-the-envelope calculations:
• India has 4120 assembly constituencies. At 2 Lakh / year, 5 employees /
constituency, even just 3 political parties would need 1,236 Cr / year.
• There are 545 parliamentary constituencies. At 4 Cr / candidate and 3
major candidates only Rs. 6,540 Cr would be required for every national
election.
Political funding needs are a very small part of BM generated!
NOTE: These are basic estimates to start a discussion. What do you think is
India’s cost of democracy?
RECOMMENDATION: Make realistic estimates of the cost of
democracy and provide for it.

29. Why Black Money? GREED!
Society does not always look down on the
Tax Evaders. In fact, they may be lionized.
Being wealthy is cool.
Paying full taxes
should be cooler.

30. Money is used to trade goods, services
and assets between two parties.
What is Offshore Black Money?
Governments get resources
by taxing money flows.
Money flow that evades these
taxes is Black Money.
When one party is outside India
Offshore Black Money is generated.

31. Mr Gupta owns ABC Corporation and also anonymously
owns an international firm, XYZ Consultants.
EXAMPLE 6: Mr Gupta
ABC
Corp
XYZ
Cons
Anonymously ownsOfficially owns
Offshore Black Money Examples
** Names used are fictional and the numbers are only for broad indicative value **

32. Mr Gupta generates offshore Black Money by 1) Funds siphoning
ABC Corp shows an expense of $1 M for consulting fees paid to Mr Gupta’s own firm XYZ
Consultants. XYZ then deposits this $1M in a Swiss Bank and invests it in global markets.
Mr Gupta’s gains: Tax evaded by reducing profits in India by $1M
EXAMPLE 6: Mr Gupta
Swiss
Bank
Expense $ 1 M
VALUE: $0
Invoice: $1M
Black Income $ 1 M
ABC
Corp
XYZ
Cons
Offshore Black Money

33. THEORY: 180 countries are signatories to the Financial Action Task Force (FATF)
and have agreed that the the identities of Owners of Companies registered in their
countries should be known.
REALITY: Rules that prevent hiding identities of company owners are ineffective.
Source: Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies
THE ANONYMOUS OWNERSHIP PROBLEM
Offshore Black Money
ABC
Corp
XYZ
Cons Anonymously ownsOfficially owns

34. Mr Gupta also generates offshore Black Money by 2) Under-invoicing of Exports
Showing an Invoice of $80M for goods worth $100M, Mr Gupta gets $18 M in his Swiss
Bank Account (after paying a small commission to the Buyer). He also reduces his profits in
India and hence his taxes.
EXAMPLE 7: Mr Gupta
Swiss
Bank
Buyers
cut
$ 2 M
White Income $ 80 M
VALUE: $100 M
Invoice: $80 M
Black Income $ 18 M
Offshore Black Money

35. Mr Gupta also generates offshore Black Money by 3) Over-invoicing of Imports
Showing an Invoice of $120 M for goods worth a value of $100 M, Mr Gupta gets $18 M in
his Swiss Bank Account (after paying a small commission to the Seller). By doing this, Mr.
Gupta evades some import duty and also reduces profits in his Indian company.
EXAMPLE 8: Mr Gupta
Swiss
Bank
Sellers
cut
$ 2 M
Gross Payment $ 120 M
Invoice: $120 M
VALUE: $100 M
Black Income $ 18 M
Offshore Black Money

36. Offshore Black Money Problems
Plus, Offshore Black Money could
also give foreign powers influence
over policy in India - through the
money of powerful politicians,
bureaucrats and businessmen.
Offshore Black money has all the problems as
domestic black money:
• Less money for nation building activities
• Disproportionate Power in the hands of a few
• Possible escalation of criminality in society

37. THE CHALLENGES
Challenge 1. Indian investigative agencies do not have
jurisdiction over foreign entities
Challenge 2. The skill required to investigate
international transactions is much higher.
Challenge 3. Sovereignty Trading: Some countries design
their laws to encourage inflow of foreign black money.
They deny foreign agencies access to data unless
wrongdoing is proven - though that very data is required
to investigate and prove wrong doing.
Offshore Black Money

38. Going back to our fundamental Black Money model …
Indian Government has some control
Indian Government has
very, very limited control
The focus has to be on reducing the
Offshore Black Money generation, rather than bringing it back.
Offshore Black Money challenges
Black Income Generation
Usage Usage
STASH
STASH

39. Discussion on offshore Black Money focuses on bringing back
‘Indian money from foreign banks’ rather than tax loss.
GFI estimates that in period 2004-13, $506 Billion was taken out from the the country
illicitly. However, we don’t know how much of this came back through trade mis-invoicing,
capital flow or hawala. It could be 100% or 0% or most likely somewhere in between.
More important, getting money back is much more difficult.
Real issue is not 'money taken from the country' but the tax loss!
Source: http://www.gfintegrity.org/
Offshore Black Money challenges

40. • Enter into agreements with major trade partners to
exchange trade data to reduce export under-
invoicing and import over-invoicing.
• Customs officers should be trained on global
prices so that they can verify value of traded
goods like coal.
When wrongdoing is detected - fast
investigation and prosecution is essential!
Tackling Offshore Black Money
STOP THE GENERATION OF OFFSHORE BLACK MONEY
• Make use of own databases to check trade values. E.g, export proceeds in banks
can be cross- checked agains quantity and market price of exports.

41. Political Challenge of Black Money
The issue of Black Money is tough to understand.
Effective solutions are not understood by most people
Easily understood but ineffective solutions dominate social
discussions.
Political rhetoric also focuses on easily understood though
ineffective solutions.
Experts have a special role to steer the discussion towards
effective solutions.
SOLUTION: Non partisan experts to develop simple objective
measures such as Tax / GDP ratio and popularize them.
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IN CONCLUSION,
Please ask your Political Representatives
How will you reduce
Cash / GDP?
How will you reduce
cash use in property deals?
How will you reduce
benami ownership?
How will
you increase
Tax / GDP?
How will you
reduce cash use in
political funding?