22 Methods - How Black Money is Generated in Economy?

22 Methods - How Black Money is Generated in Economy?
Update on Twitter: @vijaysardana

Black Money can be generated mainly under two heads:

Generating it by manipulation of accounts and generating it in some vulnerable sections of the economy.

Under each of these heads, the paper lists 11 different ways to generate cash. Here are 22 ways to generate black money:

A. Manipulation of accounts

1.Out of book transactions: Not entering transactions that might result in taxation into the book of accounts. The taxpayer either maintains no book of record or reports partial transactions only.

2. Parallel book of accounts: Adopted by those who are obliged under law to maintain books of account. The taxpayer maintains one book for their own use which records all transactions while another is submitted to concerned authorities reporting part of the transactions.

3. Manipulation of books of account: When tax payers have to maintain books under different acts like Companies Act, Income Tax Act etc, it is difficult to maintain multiple parallel books. In that case they just manipulate the books of account.

4. Manipulation of sales/receipts: A taxpayer is required to pay taxes on profit or income which is the difference between sale proceeds or receipts and expenditure. Thus manipulation of sales or receipts is the easiest method of tax evasion. They might also divert sales to dummy or associated entities.

5. Under reporting production: Manipulation of production figure may be resorted to for the purpose of evading central excise, sales tax, or income tax.

6. Manipulation of expenses: Since the income on which taxes are payable is arrived at after deducting the expenses of the business from the receipts, manipulation of expenses is a commonly adopted method of tax evasion. This means under reporting of income.

7. Other manipulations: Besides inflation of purchase or raw material cost, expenses like labour charges, entertainment expenses, and commission can be inflated or falsely booked to reduce profits, generally done through showing wrong bills.

8. Manipulation by Way of International Transactions through Associate Enterprises: Manipulation of profits and taxes payable thereon may involve using associated enterprises in low tax jurisdictions through which goods or other material may be passed on. This may lead to accumulation of black money earned from within India to another country which are typically tax havens.

9. Manipulation of capital: The capital of the taxpayer reported in the balance sheet is the accumulated wealth which is invested in the form of assets or as working capital of the business. Manipulation of capital can be one of the ways of laundering and introduction of black money in books of accounts.

10. Manipulation of closing stock: Suppression of closing stock both in terms of quality and value is one of the most common methods of understating profit. This might include undervaluation of inventory, which means that while the expenses are being accounted for in the books, the value being added is not accounted for, thereby artificially reducing the profits.

11. Manipulation of capital expenses: Over-invoicing plant and equipment or any capital asset is an approach adopted to claim higher depreciation and thereby reduce the profit of the business.

These manipulations cannot happen without the 'team work of very loyal & trusted team members' and support of competent people.

Black money in vulnerable sectors of the economy

12. Land and real estate transaction: The taxes applicable on real estate transactions in form of stamp duty and capital gains tax can be avoided by under-reporting of transaction price.

13. Bullion and Jewellery Transactions: Cash sales in the gold and jewellery trade allows the buyer to convert black money into gold and bullion, while the trader can keep his unaccounted wealth in the form of stock, not disclosed in the books or valued at less than market price.

14. Financial market transaction: Financial markets can generate black money, especially in IPOs by rigging of the markets.

15. Public procurement: The total public procurement figure for India has grown phenomenally and is currently estimates at around Rs 10-11 lakh crore per year giving ample opportunity for creation of black money.

16. Non-profit sector: Taxation laws allow certain privileges and incentives for promoting charitable activities. These can be misused through entities claimed to be constituted for nonprofit motive and are among possible sources of generation of black money.

17. Informal Sector and Cash Economy: Dependence on agriculture, existence of a large informal sector, and insufficient banking infrastructure with large un-banked and under-banked areas have meant huge cash transactions in the economy making it vulnerable to more black money.

18. External trade and Transfer Pricing: More than 60 per cent of global trade is carried out between associated enterprises of multinational enterprises who function across geographies. They might manipulate to take use of different taxation regimes they work across giving rise to more black money.

19. Trade-based Money Laundering: This is the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt at legitimising their illicit origins.

20. Tax Havens: These are typically characterised by no or very low taxes, lack of effective exchange of information, and lack of transparency about substantial activities. Though they have agreed to share more information over time, they can be used to generate more black money.

21. Off shore financial centers (OFC): Some of the old tax havens have adopted the more benign designation of OFC and tend to describe themselves as financial centers specialising in non-residential financial transactions. They generally can also generate black money with their array of secrecy provisions that lack regulation.

22.Investment through Innovative Derivative Instruments: With increasing sophistication of derivative instruments, new opportunities for investing and making profits without being subjected to taxes and regulations are also opening up, which might also lead to black money.

C. Bribe: This is called speed money or facilitation part both in government as well as private sector.

In Government System: Bribe, also called speed money, is just another method used to get the work done out of turn or to speed up the slow government process or to get some facilitation help or to minimise fine or punishment. 

In Private Sector: Bribe is also used in private sector also to get the orders, discounts, to settle quality related issues, priority in delivery or to facilitate timely payments.

This itself is a full chapter. Will discuss soon.

Now concern is, will government review various laws to fix these gaps.

Important: It is in the interest of management of private companies to review their systems and SOPs to check role of bribe in business orders and payments. Discretion must be avoided at all levels.

If you know any other method, pl. share.

Update on Twitter: @vijaysardana

Feel free to share to create awareness...