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Indian black money its Sources, Effects and how to Curb it | UPSC – IAS

What is black Money and White money ?

Black money is a term used in common parlance to refer to money that is not fully legitimate in the hands of the owner or earned from illegal sources (according to the law specifies). And White money that is earned legally, or on which the necessary tax is paid. The total amount of black money deposited in foreign banks by Indians is unknown. Some reports claim a total of US$1.06 – $1.4 trillions is held illegally in Switzerland. This could be for two possible reasons.

• First is that the money may have been generated through illegitimate activities not permissible under the law, like crime, drug trade, terrorism, and corruption, all of which are punishable under the legal framework of the state.
• Second and perhaps more likely reason is that the wealth may have been generated and accumulated by failing to comply with the tax requirements.

There have been several estimates regarding the extent of black money economy also called as parallel economy. Some of the estimates suggest it to be as high as up to fifty to hundred percent.

Although black money in India is decades old problem, it has become real threat post liberalization. Illegal activities such as:-

• Crime and corruption,
• Non compliance with taxation requirements,
• Complex procedural regulations,
• Cultural and social practices,
• Globalization along with weak institutional, policy, legal and implementation structures have further augmented the black money economy.

Sources of Indian black money | UPSC – IAS

The root cause for the increasing rate of black money in the country is the lack of strict punishments for the offenders. The criminals pay bribes to the tax authorities to hide their corrupt activities. Thus, they are rarely punished by the judge. The criminals who conceal their accounts from the government authorities include big politicians, film stars, cricketers, and businessmen.

Gold imports through official channel and smuggling is a major conduit to bring back the black money from abroad and convert into local black money as the gold commands high demand among the rural investors particularly.

In particular following are some of the mechanisms through which black money is circulated, utilized and the profits earned are further invested in other sectors to generate further money.

• Real estate: Due to rising prices of real estate, the tax incidence applicable on real estate transactions in the form of stamp duty and capital gains tax can create incentives for tax evasion through under-reporting of transaction price.
• Bullion and jewellery market: The purchase allows the buyer the option of converting black money into gold and bullion, while it gives the trader the option of keeping his unaccounted wealth in the form of stock, not disclosed in the books or valued at less than market price.
• Financial markets transactions: IPO manipulations, Rigging of market such as use of shell companies.
• Public procurement: Public procurement has grown phenomenally over the years – in volume, scale, and variety as well as complexity. The Competition Commission of India had estimated total public procurement figure for India at around 10 to 11 lakh crore per year and provides ample scope of corruption due to rigged procurement process.
• Non-profit organizations: Taxation laws allow certain privileges and incentives for promoting charitable activities which are misused and manipulated. Highlighted by FATF as well. Used to park funds of corrupt politicians and businessmen.
• Informal Sector and Cash Economy: Cash transactions, large unbanked and underbanked areas contribute to the large cash economy in India.
• External trade and transfer pricing: Transfer profit/income to no tax or low tax jurisdictions by MNCs. Developing countries may be losing over US$160billion of tax revenues a year, primarily through transfer pricing strategies.
• Trade-based Money Laundering (TBML): Disguising the proceeds of crime and moving value through the use of trade transactions in an attempt at legitimizing their illicit origins.
• Tax Havens: Tax havens are typically small countries/ jurisdictions, with low or nil taxation for foreigners who decide to come and settle there. Strong confidentiality or secrecy regarding wealth and accounts, very liberal regulatory environment and allow opaque existence, where an entity can easily be set up without indulging in any meaningful commercial activity and yet claim to be a genuine business unit, merely by getting itself incorporated or registered in that jurisdiction. This makes them highly desirable locations for multinational entities wishing to reduce their global tax liabilities. Multinational entities consisting of a network of several corporate and non-corporate bodies set up conduit companies in tax havens and artificially transfer their income to such conduit companies in view of the low tax regime there.
• Offshore Financial Centres: Describe themselves as financial centres specializing in non-residential financial transactions but are logical extensions of the traditional tax havens. They have following characteristics:
  • Jurisdictions that have financial institutions engaged primarily in business with non-residents.
  • Financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economic.
  • Centers which provide some or all of the following opportunities: low or zero taxation; moderate or light financial regulation; banking secrecy and anonymity.
• Hawala: It is an informal and cheap method of transferring money from one place without using banks etc. It operates on codes and contacts and no paperwork and disclosure is required.
• Investment through Innovative Derivative Instruments: Such as Participatory Notes.

Impact of Black money on Indian Economy | UPSC – IAS

(Black money Merits and Demerits; and its Effects)

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

Political organizations, corrupt politicians and government officials take bribes from foreign companies then park or invest the money abroad in tax havens for transferring to India when needed. In addition, locally earned bribes, funds and collections are often routed abroad through hawala channels in order to evade Indian tax authorities and consequent legal implications

• There is a distortion in investment in economy. With black money the investment is made in high end and luxury goods.
• Huge loss of taxes amounting to billions.
• Black money leads to further corruption by creating a vicious cycle.
• Generating black money means that quality is compromised in public sector projects where black money is used to manipulate tenders and offer kickbacks.
• Investments that must have been made in the country giving the necessary boost to economy are invested elsewhere.
• Since, RBI cannot control the black money cash flow in economy, it dilutes its policies targeting inflation.
• High prices of real estate especially in big cities are due to deep pockets filled with black money.
• Forward trading of goods by cash rich speculators cause fluctuation in prices due to hoarding.
• National security is threatened because black money is used to finance criminal activities.
• Black money generated from drugs and smuggling is being used to operate terror networks.

Steps taken by government to curb Black Money generation and flow | UPSC – IAS

Tax Reforms

• Rationalization of income tax with greater tax base and lower taxes.
• Tax deduction at source in which the tax is deducted from the payment itself by the payee.

Voluntary Disclosure Schemes

• The government allows reporting black money generated through tax evasion in a given time frame, as government has given in the Black Money Bill passed this year.

Demonetisation of 500 and 1000 rupee currency notes

• As unaccounted money is often kept in notes of large denomination making it useless.

Removing currency after certain time

• So that unaccounted wealth is either brought into economy or becomes useless.

Encouraging Cashless transactions

• Government has recently announced tax benefits for making online payments for amount greater than twenty thousand rupees.

Legislative Framework

• Prevention of Money Laundering Act, 2002
• Benami Transactions Prohibition Act, 1988
• Lokpal and Lokayukta Act
• Prevention of Corruption Act, 1988
• The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015

Institutions to deal with black money

• Central Board of Direct Taxes
• Enforcement Directorate
• Financial Intelligence Unit
• Central Board of Excise and Customs and DRI
• Central Economic Intelligence Bureau
• Other Central Agencies such as NIA, CBI and Police Authorities

International Cooperation

• Multilateral Convention on Mutual Administrative Assistance in Tax Matters
• Financial Action Task Force
• United Nations Convention against Corruption
• United Nations Convention against Transnational Organized Crime
• International Convention for the Suppression of the Financing of Terrorism
• United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
• Egmont Group for international intelligence gathering regarding money landing and terrorism financing
• Cooperation through G20, Bilateral agreements

Some Measures to Curb Black Money in India | UPSC – IAS

The black money menace is still untamed and lot more needs to be done to tackle it. Some of the strengthening steps that can be taken are:

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.

• Appropriate legislative framework related to: Public Procurement, Prevention of Bribery of foreign officials, citizens grievance redressal, whistleblower protection, UID Adhar.
• Setting up and strengthening institutions dealing with illicit money: Directorate of Criminal Investigation Cell for Exchange of Information, Income Tax Overseas Units- ITOUs at Mauritius and Singapore have been very useful, Strengthening the Foreign TAX, Tax Research and Investigation Division of the CBDT.
• 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.
• Developing systems for implementation: Integrated Taxpayer Data Management System (ITDMS) and 360- degree profiling, Setting up of Cyber Forensic Labs and Work Stations, implementation of Goods and Services Tax and Direct Tax Code.
• Imparting skills to personnel for effective action: Both domestic and international training pertaining to the concerned area. For instance, the Financial Intelligence Unit-India makes proactive efforts to regularly upgrade the skills of its employees by providing them opportunities for training on anti-money laundering, terrorist financing, and related economic issues.
• Electoral Reforms: Elections are one of the biggest channel to utilize the black money. Appropriate reforms to reduce money power in elections. Thus, a holistic and all round attack from within and outside the country is the need of the hour. India should quickly take up appropriate reforms at home that will aid in curbing the black money generation and circulation in the country along with the use of bilateral and multilateral mechanisms to deal with round tripping and stashing of money outside the country.

Higher Education in India & UGC | UPSC – IAS

University Grants Commission (UGC) was established in 1946 regulate Central Universities of Aligarh, Banaras and, Delhi. However, post-independence, the University Education Commission was set up in 1948 under the Chairmanship of S. Radhakrishnan and it recommended that the UGC be reconstituted on the general model of the UGC of UK. It was given a statutory status by UGC Act, 1956 and has the unique distinction of being the only grant-giving agency in the country which has been vested with two responsibilities:-

• That of providing funds and that of coordination,
• Determination and maintenance of standards in institutions of higher education.

What is UGC’s mandate ? | UPSC – IAS

• Promoting and coordinating university education both public and private universities  including deemed universities and affiliated colleges.
• Determining and maintaining standards of teaching, examination and research in universities.
• Framing regulations on minimum standards of education.
• Monitoring developments in the field of collegiate and university education;  disbursing grants to the universities and colleges.
• Serving as a vital link between the Union and State governments and institutions of higher  learning.
• Advising the Central and State governments on the measures necessary for  improvement of university education.
• Enforcing regulations and punishing for violations.
• Accreditation for higher learning is overseen by autonomous institutions established  by the UGC. These institutions include: AICTE (All India Council for Technical  Education), NAAC (National Assessment and Accreditation Council), MCI (Medical Council of  India) etc.

Evaluation of UGC’s performance | UPSC – IAS

General Performance of Higher Education Institutes:

• Some institutions of India, such as the IITs, IIMs, NIITs, University of Mumbai  and Jawaharlal Nehru University have been globally acclaimed for their standard of education.
• The IITs enroll about 10000 students annually and the alumni have contributed to both the  growth of the private sector and the public sectors of India.
• Several other institutes of fundamental research such as IACS, IISc, TIFR, are acclaimed for  their standard of research in basic sciences and mathematics.
• Mumbai University was ranked 41 among the Top 50 Engineering Schools of the world 2012. ISB,  Hyderabad was ranked number 12 in global MBA rankings in 2010 while the AIIMS, Delhi  has been recognized as a global leader in medical research and treatment.
• Government universities through affirmative action like reservations has been able  to cater to the most backward and deprived sections of the population.
• Foreign universities actively seek Indian students.

However, our higher education suffers from many limitations some of which owe their  origin to the limited effectiveness of UGC. Therefore, before discussing the problems of higher  education it is better to discuss the problems of UGC itself.

Problems of higher education in india | UPSC – IAS

• Politicization of education with UGC becoming an arm of the HRD ministry, lacking autonomy  and freedom.
• It is an overburdened body which regulates and oversees all the universities of the country  including private and deemed, which is practically impossible for a single body  considering the number of universities and affiliated colleges in the country.
• Policy fluctuation and arbitrariness.
• All the rules made by UGC need parliamentary approval but these are not always taken and  hence they can be cancelled by the court, jeopardizing the future of thousands.

All this factors combined with government apathy and interference and status-quoist attitude of  policymakers, has resulted in considerable malice in our higher education. In specific terms they  are as follows:

• We have only 722 universities, as against the National Knowledge Commission (NKC)  recommendation of 1,500.
• Not even one Indian higher education institution made it to the top 200 club in the Times  Higher Education (THE) rankings for 2014-15.
• Disparity in access to education, especially in terms of economic class, gender,  caste and ethnic and religious belonging.
• Expansion of the private, self-financing education sector, with commercial intent, has been  another reason for the propagation of disparities. There has been a decline in the government  institutes and increase in the private institutes. For 2013 the share of private undergraduate  colleges and students is at 59 per cent and 37 per cent respectively. Out of the 712 universities,  about 360 are of private, state and of deemed status. The high cost of private education has  affected access by the poor to education.
• Lack of autonomy and independence, universally accepted as fundamental in higher education.
• Narrow view of education with education limited to attendance, exam, marks and  degree. This results in poorly skilled students. As per a survey only 19% of engineering and 5%  of non-engineering graduates are employable.
• Unscientific, partisan and non-merit based appointment of the faculty/vice-chancellor.
• Outdated Curriculum susceptible to tampering based on ideology of the government. It curbs  creativity and critical thinking with skills set out of sync with modern times.
• Faculty accountability is missing in India. Worldwide, teachers are assessed by the students  but the practice is yet to be followed in India in spite of rising salaries especially in the  government universities and colleges.
• Poor quality of Research and Development in the universities, with the link to the  industries missing and declining government support to R&D.
• Lack of access to global courses and knowledge.

Way Forward and Suggestions for Improvement | UPSC – IAS

Suggestions for Higher Education:

• The National Policy on Education (NPE) that was adopted by Parliament in May 1986  and Programme of Action (POA), 1986, and updated in 1992. Last review done in 1965  by Kothari Commission. Like in west regular review of education policy including higher  education. For example UK has an institute for education statistics, as policy making with reliable  data on a regular basis to assist policymaking.
• Emphasis should be on better teachers with quality training modules for them.  Given the low rate of enrolment, we need more quality teaching institutions at the  undergraduate level.
• Massive expansion of government universities and colleges providing quality  education at low cost is the need of time. Expansion of self-financing private  institutions be restricted to a reasonable level or compensate low income strata  students with scholarship to enable them to study in private colleges. The present  method, of extending educational loans from banks with interest subsidy by the MHRD,  does not help the poor. Else, education rather than being a socio-economic leveler will become a  source of disparity.
• Infrastructure can be improved with an increase in financial allocation. Academic reforms should be after deliberations with all the stakeholders and consistent to avoid unnecessary controversies like FYUP or CBCS. In the case of faculty, enforce the University Grant Commission’s (UGC) teacher-student ratio for each State, and ensure that the financial requirement of additional faculty is shared by the Centre and States.
• English textbooks of concerned subjects should be translated to the hindi/regional languages. The three- language formula needs to be adhered to. Teaching in the regional languages would make understanding relatively easy while minimal language competence in English should facilitate student access to English books. This method has been successful in Japan.
• Allow foreign educational institutions to enter into collaborations with Indian institutions  on a large scale. Use of Massive Online Open Courses be encouraged.
• Autonomy as far as academic and administrative aspects are involved is a must. It includes  the appointment of heads of institutional and executive bodies. A UGC committee had  suggested the independence of institutions from the government as the bottom line for autonomy.
• Efficient use of skill development program of the government and improving the apprenticeship  scheme.
• Identifying and empowering 50 top universities in every possible manner to seek global  excellence as done by Russia.
• Increasing funding, including corporate funding for Indian universities.
• Incentivising research and publications among faculty members.
• In Korea, the best students enter the teaching profession because the social status of a  teacher is very high. We need such a system in India.

Reforms Specific to University Grants Commission | UPSC – IAS

Higher education remains over-regulated and badly governed with far too many regulatory agencies in the picture. For such reasons, the NKC recommended the setting up of an Independent Regulatory Authority for Higher Education which would take on most of the roles of the UGC, the All India Council for Technical Education (AICTE), the Medical Council of India (MCI) and the Bar Council of India, all of which would either be abolished or assigned more limited roles. A government-appointed committee has already recommended abolishing UGC and replacing it with Independent Regulatory Authority for Higher Education.

Hence, it is important that structural and functional reform be introduced for UGC to make it relevant in contemporary times rather than an obstruction to the development of a world class higher education system. It should be provided autonomy so as to remain independent of changing ideologies of successive governments. Its regulatory and overseeing role needs to be relooked at to make them conducive rather than interfering. It should also be provided with representation from states for more holistic and grounded policymaking.