Shades of Black Money

The recent discovery of cash and valuables amounting to crores buried in the walls and floors of a perfumery businessman brings to light that such evasion of tax and hoarding of black money is neither unique nor isolated. Many are the modes of generating and stashing black money, and it virtually runs a parallel economy. But what is of equal concern is that associated with it are many illegal and criminal activities that go hand in hand

Recently, we saw visuals on TV of bundles of currency notes tumbling out from a house in Kanpur. Next, we saw currency notes buried behind the wall and under the floor of this same person’s house at Kannauj. This was found during the search action conducted by the Directorate of GST (Intelligence), and the person raided was a perfume merchant-cum-manufacturer. The total currency notes discovered amounted to Rs.194 crores. In addition to the hard cash, some other valuables including gold slabs were also found. The search action finally resulted in the seizure of about Rs.250 crore cash and valuables. This was the highest valuable seizure done so far by the Directorate of GST. The targeted person was not a well-known businessman, and this made the outcome of the search really surprising. One intriguing point that emerged was that the person had accumulated this huge cash after the demonetisation of 2016, that is within just five years. This discovery is an indication of the huge black money floating around in our country. We must ponder over this issue of black money, as these are not isolated cases.

Outside the tax net

Black money is un-taxed money. Money earned requires tax to be paid and if tax is not paid, then it becomes black. Black can be equated with darkness. The different ways to earn black money are not easily visible as they are undercover. Normally, the operators of black money keep on changing their methods, but the most common one is by suppression of receipts or inflation of expenditure or both. It is difficult to map out all the ingenious ways of earning black money but an attempt will be made to point out some common ways of making black money.

"Hawala agents transfer cash from one place to the other for a commission. This activity is parallel to banking activity but the cash moved is black money, and the commission earned is again accrual of black money"

Myriad methods

Goods that attract maximum indirect tax like GST, customs duty and other levies are very good targets for black money operators. Here, the main aim is an evasion of indirect tax. The indirect tax evaded becomes profit in the first leg of evasion and the goods when sold further give rise to additional black money. Such goods evade indirect tax while passing through many hands till they reach the consumers when the journey finally ends. The operation becomes easier when the operators work as a team in this dishonest activity.

To illustrate, let us consider the case of ‘gutka’. It is a highly taxed item. A pouch of gutka sold at Rs.5 has a tax component of Rs.3. The raw materials are mainly kathha, supari and some essence along with a packing pouch. The gutka manufacturer may earn say, 10% profit of Rs.0.50, if the five-rupee pouch is sold in a rightful way. The greed to earn more, tempts the gutka manufacturer to sell that five-rupee pouch without paying indirect tax of Rs3, in the black market. This way he earns Rs.3 as a profit at the very first instance. He earns further when that tax-not-paid pouch gets finally sold. The consumer pays Rs.5 for that pouch and that further earns him 10% on that sale. This way, on the sale of a five-rupee pouch of gutka, the gutka manufacturer earns Rs.3.50 (Rs.3 + Rs.0.50). He may have to pay some commission to his agent. The net profit here is all black money. The suppliers of ‘kathha’ and ‘supari’, essence and packing pouch turn out to be his teammates. Since the pouch is being sold in the black market, the manufacturer has to purchase raw materials and packing materials also in black and gladly the input suppliers accept the offer of selling their goods also in the black. Thus, at each stage of supply of ‘kathha’, ‘supari’ and essence and packing material, black money is generated. It is something like a chain reaction of black money. However, this is a hypothetical case to explain tax evasion and I don’t mean to speak against this industry nor against any manufacturer in this sector. There are good and bad people everywhere.

Illegal goods

The other very big source of black money arises when goods are procured by violating laws, which sometimes give rise to criminal proceedings or even arrest. For example, goods obtained by smuggling or violating customs laws are another source of black money. The procurement of narcotics is another source of black money. Such goods are traded only in the black market, as the holders of such goods do not come in the open, fearing arrest.

Trading in the black market gives rise to black money at the hands of the sellers of such goods. Another identical situation of violation of law is taking bribes in which the procurement of goods is not involved. Bribes are black money and the bribe-takers try to hide them as they remain scared of criminal proceedings. Our elections are expensive and in many cases, black money is offered as donations to political parties. The donors do not want their names to be revealed, and political parties suppresses information about these cash donations and do not furnish full details of the donation received in their income tax returns.

"Goods that attract maximum indirect tax like GST, customs duty and other levies are very good targets for black money operators. Here, the main aim is evasion of indirect tax. The indirect tax evaded becomes profit in the first leg of evasion and the goods when sold further give rise to additional black money"

Hawala trade

There are trades and activities which automatically give rise to black money, but apparently, they may not give rise to criminal proceedings. Hawala trade is one such big example. This is a trade of making entries without actually supplying goods. A businessman can evade tax by inflating expenditure on his business. This requires bogus bills for the materials. Hawala operators provide such bills for a commission. Against these bogus bills, the hawala operators receive cheques that are encashed after retaining a commission of about 5%. The balance cash is returned to the businessman and this entire cash becomes black money.

There are other sections of hawala agents, whose activity is to transfer cash from one place to the other for a commission. This activity is parallel to banking activity but the cash moved is black money, and the commission earned is again accrual of black money. These people are so sophisticated that they transfer money even outside the country. Bank frauds carried out through sham companies by some big business houses also work as generators of black money. Bank money gets transferred to paper companies and then are diverted to some unknown destinations. These days, the Enforcement Directorate is busy uncovering these shady trails of money. Illegal betting also gives rise to black money. There are many criminals betting alongside legal betting. There are bettings in the racecourses which may appear legal, but many are not. Match-fixing in the cricket world is another source of black money. There are endless ways of earning black money. Each operator generates black money in a novel way. The fertile mind of an author creates books while the fertile mind of a black money operator creates new strategies to generate black money. Tax not paid is their big income. The operators of black money believe in the theory that it does not matter if a cat is black or white as long as it catches mice.

Hiding, an art

The making of black money is not the end in itself. Further, ways and means are to be devised to avoid getting caught. The hiding of black money like the one adopted by the perfume trader of Kanpur and Kannauj, is an obsolete and crude way. Efficient operators of black money will not keep huge quantities of cash in their houses. They devise complex architectures of offshore companies and offshore trusts so that their black money can have a peaceful sleep in the Cayman Islands or in such other tax havens. But, these operators are not so foolish as to allow their black money to remain in perpetual rest too. The black money so kept are used when needed for investments or even for business transactions, but with the use of a clever mask to hide the identity of the holder.