In India, dark cash alludes to reserves earned on the bootleg market, on which wage and different duties have not been paid or which is the returns of criminal action, for example, remuneration, kickbacks and defilement. The aggregate sum of dark cash stored in outside banks by Indians is obscure. A few reports guarantee a sum of US$1.06 trillion is held illicitly in Switzerland.[1] Different reports, including those revealed by the Swiss Brokers Affiliation and the Administration of Switzerland, claim these reports are false and created, and the aggregate sum held in all Swiss financial balances by subjects of India is about US$2 billion.

In February 2012, the executive of India's Focal Department of Examination said that Indians have US$500 billion of illicit finances in outside expense asylums, more than some other country.[4][5] In Walk 2012, the legislature of India cleared up in its parliament that the CBI chief's announcement on $500 billion of unlawful cash was a gauge in view of an announcement made to India's Incomparable Court in July 2011.

In a broadcast address on 8 November 2016 by Indian Head administrator Narendra Modi, it was declared that banknotes of ₹500 and ₹1000 would stop to be lawful delicate from midnight. Programmed teller machines at a few spots were shut on 9 and 10 November. Government associations have brought out new notes. The Govt of India had acknowledged the proposition of RBI in bringing out ₹2000 banknotes and another adaptation of the ₹500. The old notes are being expelled from flow.

Source of black money

                     

Some Indian corporations practice transfer mispricing, by under-invoicing their exports and over-invoicing their imports from tax haven countries such as Singapore, UAE, and Hong Kong. Thus the promoters of the public limited companies who hold rarely more than 10% of share capital, earn black money abroad at the cost of majority share holders and tax income to the Indian government.^[9] By the year 2008, the cumulative Illicit Financial Out flows from the country touched US$ 452 billions.^[9]

Politicians, political parties corrupt higher officials of government and its institutions take bribes from foreign companies and park or invest the money abroad in tax havens for transferring to India when needed. Many times locally earned bribes, funds and collections are also routed abroad through hawala channels for evading from Indian tax authorities and consequent legal implications.

In the Vodafone-Huthchison tax case, a foreign multinational company also evaded tax payments in India by making transactions with shell companies registered in tax haven countries.

The unlawfully acquired money kept abroad is routed back to India by the round tripping processes. Round tripping involves getting the money out of one country, sending it to a place like Mauritius and then, dressed up to look like foreign capital, sending it back home to earn tax-favoured profits.

Foreign direct investment (FDI) is one of the legal channels to invest in Indian stock and financial markets. As per data released by the Department of Industrial Policy and Promotion (DIPP), two of the topmost sources of the cumulative inflows from April 2000 to March 2011 are Mauritius (41.80 per cent, US$54.227 billions) and Singapore (9.17 per cent, US$11.895 billions). Mauritius and Singapore with their small economies cannot be the sources of such huge investments and it is apparent that the investments are routed through these jurisdictions for avoidance of taxes and for concealing the identities from the revenue authorities of the ultimate investors, many of whom could actually be Indian residents, who have invested in their own companies.

Investment in the Indian stock market through participatory notes (PNs) or overseas derivative instruments (ODIs) is another way in which the black money generated by Indians is re-invested in India. The investor in PNs does not hold the Indian securities in her or his own name. These are legally held by the FIIs, but derive economic benefits from fluctuations in prices of the Indian securities, as also dividends and capital gains, through specifically designed contracts.

Proposals to prevent Indian black money

History

Even in colonial India, numerous committees and efforts were initiated to identify and stop underground economy and black money with the goal of increasing the tax collection by the British Crown government. For example, in 1936 Ayers Committee investigated black money from the Indian colony. It suggested major amendments to protect and encourage the honest taxpayer and effectively deal with fraudulent evasion.

Current Proposals

In its white paper on black money, India has made the following proposals to tackle its underground economy and black money.

Reducing disincentives against voluntary compliance

Excessive tax rates increase black money and tax evasion.When tax rates approach 100 per cent, tax revenues approach zero, because higher is the incentive for tax evasion and greater the propensity to generate black money. The report finds that punitive taxes create an economic environment where economic agents are not left with any incentive to produce.

Another cause of black money, the report finds is the high transaction costs associated with compliance with the law. Opaque and complicated regulations are other major disincentive that hinders compliance and pushes people towards underground economy and creation of black money. Compliance burden includes excessive need for compliance time, as well as excessive resources to comply.

Lower taxes and simpler compliance process reduces black money, suggests the white paper.

Banking transaction tax

Arthakranti, Pune-based think-tank has outlined policy prescription that involves replacement of most direct and indirect levies with a banking transaction tax and de-monetisation of currency notes of Rs 500 and Rs 1,000 to help prevent Indian black money, ease inflation, improve employment generation and also lower corruption.

Economic liberalisation

The report suggests that non-tariff barriers to economic activity such as permits and licences, long delays in getting approvals from government agencies are an incentive to proceed with underground economy and hide black money. When one can not obtain a licence to undertake a legitimate activity, the transaction costs approach infinity, and create insurmountable incentives for unreported and unaccounted activities that will inevitably generate black money. The successive waves of economic liberalisation in India since the 1990s have encouraged compliance and taxes collected by the government of India have dramatically increased over this period. The process of economic liberalisation must be relentlessly continued to further remove underground economy and black money, suggests the report.

Reforms in vulnerable sectors of the economy

Certain vulnerable sectors of Indian economy are more prone to underground economy and black money than others. These sectors need systematic reforms. As example, the report offers gold trading, which was one of the major sources of black money generation and even crime prior to the reforms induced in that sector. While gold inflows into India have remained high after reforms, gold smuggling is no longer the menace as it used to be. Similar effective reforms of other vulnerable sectors like real estate, the report suggests can yield a significant dividend in the form of reducing generation of black money in the long term.

The real estate sector in India constitutes about 11 per cent of its GDP. Investment in property is a common means of parking unaccounted money and a large number of transactions in real estate are not reported or are under-reported. This is mainly on account of very high levels of property transaction taxes, commonly in the form of stamp duty. High transaction taxes in property are one of the biggest impediments to the development of an efficient property market. Real estate transactions also involve complicated compliance and high transactions costs in terms of search, advertising, commissions, registration, and contingent costs related to title disputes and litigation. People of India find it easier to deal with real estate transactions and opaque paperwork by paying bribes and through cash payments and under-declaration of value. Unless the real estate transaction process and tax structure is simplified, the report suggests this source of black money will be difficult to prevent. Old and complicated laws such as the Urban Land Ceiling Regulation Act and Rent Control Act need to be repealed, property value limits and high tax rates eliminated, while Property Title Certification system dramatically simplified.

Other sectors of Indian economy needing reform, as identified by the report, include equity trading market, mining permits, bullion and non-profit organisations.

Creating effective credible deterrence

Effective and credible deterrence is necessary in combination with reforms, transparency, simple processes, elimination of bureaucracy and discretionary regulations. Credible deterrence needs to be cost effective, claims the report. Such deterrence to black money can be achieved by information technology (integration of databases), integration of systems and compliance departments of the Indian government, direct tax administration, adding data mining capabilities, and improving prosecution processes.

Supportive measures

Along with deterrence, the report suggests public awareness initiatives must be launched. Public support for reforms and compliance are necessary for long term solution to black money. In addition, financial auditors of companies have to be made more accountable for distortions and lapses. The report suggests Whistleblower laws must be strengthened to encourage reporting and tax recovery.

Amnesty

Amnesty programmes have been proposed to encourage voluntary disclosure by tax evaders. These voluntary schemes have been criticized on the grounds that they provide a premium on dishonesty and are unfair to honest taxpayers, as well as for their failure to achieve the objective of unearthing undisclosed money. The report suggests that such amnesty programmes can not be an effective and lasting solution, nor one that is routine.

Excessive demonetised currency notes

After the recent demonetisation of old 500 and 1000 Rs notes, Reserve Bank of India (RBI) collected these notes in excess of (more than INR 2 trillions) what it had released in to circulation earlier. The value of fake notes received by RBI is negligible compared to total value. GoI shall conduct thorough probe to reveal how it has happened and bring to book the culprits. This could have happened by unscrupulous politicians yielding power with the connivance of RBI top brass to plunder wealth of the nation.

International enforcement

India has Double Tax Avoidance Agreements with 82 nations, including all popular tax haven countries. Of these, India has expanded agreements with 30 countries which requires mutual effort to collect taxes on behalf of each other, if a citizen attempts to hide black money in the other country. The report^[2] suggests that the Agreements be expanded to other countries as well to help with enforcement.

Modified Currency Notes

Government printing of such legal currency notes of highest denomination i.e.; ₹1,000 (US$15) and ₹500 (US$7.40) which remain in the market for only 2 years. After a 2-year period is expired there should be a one-year grace period during which these currency notes should be submitted and accepted only in bank accounts. Following this grace period the currency notes will cease to be accepted as legal tender or destroyed under the instructions of The Reserve Bank of India. As a consequence turning most of the unaccountable money into accountable and taxable money.

Holding US$ currency

Many people in India who want to stash black money keep it as cash in US$ which will fetch appreciation in its value also as the INR gets devalued against US currency. GoI should tighten the rules to prevent acquiring/holding of the foreign currency (FC) cash in huge quantities by tracking cash transactions in US$ and limiting FC availability in small value through reputed banks / authorised firms by cashless transaction only. Smuggling of US$ in to the country by NRIs, foreign tourists shall be curbed at entry ports. NRIs / foreign tourists shall conduct cashless transactions for acquiring INR currency, etc. All Indians who are going abroad should use international credit / debit cards instead of carrying US$ in cash with them. This would also prevent international trade in narcotics, terrorist funding, etc.

Corruption in education

Many institutions that are meant to provide education have been promoting corruption, and education has been a major contributor to domestic black money in India. Single common entrance exams for various professional courses (medicine and allied, engineering and allied, business management and allied), releasing the audited financial statements of the trusts/not-for-profit organizations that own these educational institutions in the publicDOMAIN (website, a common e-repository), stoppage of government funds from AICTE, DST etc. to such institutions, are some of the suggestions to reduce the generation of black money in education.^[105] As per a report submitted by National Institute of Public Finance and Policy (NIPFP) to the Finance Ministry in December 2013, the capitation fees collected by private colleges, on management quota seats in professional courses, the previous year was around Rs 5,953 crores.

Withdrawal of currency notes of higher denomination

There has been suggestions to withdraw currency notes of higher denominations such as the 2000 rupee notes.^{[107][108][109]} While this can lead to an increase in printing costs for RBI, the opinion is that that these costs should be weighed against the misuse of high-value notes