India has been facing and fighting this ‘black money’ menace since a very long time. It is currently the most debated political and economic issue in the country. Explaining black money in simple terms is that money on which tax is not paid to the government. The process of transferring or moving this money is called ‘laundering’ as opposed to ‘transferring’ since money is basically illegal. With the growing corruption, this is very common in India.
In terms of economy, black money disrupts the taxation cycle by contributing to financial leakage. Moreover, black money is also a major threat to the country’s security as money laundering is a very common way of financing terrorism in the country.
According to Mr. Arun Kumar, eminent economist and India’s leading expert, India’s black economy is estimated to be 62% of the GDP – producing about Rs. 93 lakh crore of revenue (or USD 14 Trillion). Since its existence, the country’s economy has been losing on an average 5% growth since black economy’s inception. In India, everyone would have been seven times richer on an average if the black economy didn’t exist. The black economy majorly consists of all the activities in which black money is produced or generated which are not reported to direct tax authorities of India.
Origin of the black economy
Post-Independence, since the power was transferred from the colonial masters to the political and civil services in India, the country started off with a very weak egalitarianism but high aspirations. With the weakening of the national movement, it gave rise to corruption in the political class. The initial formed government wanted to keep the black economy in check so that further resources could be utilized for the betterment of the country. But sooner the government witnessed businesses generating profits from black market activities in all sectors of the economy.
Realizing the manipulation of trade and economic policies required closed proximity to political powers, the big businesses and corporates in India started weakening the country’s economy with corruption. Moving ahead, a lot of politicians turned businessmen openly set their own businesses and businessmen entered politics for their own personal gains. Moreover, with privatization and inception of private sector brought newer opportunities for making illegal benefits by misusing the resources such as forests, mines and land.
The current government announced demonetization in November last year to curb the black money. The government has demonetized all Rs. 500 and Rs. 1000 notes for mostly two reasons:
- To eliminate counterfeit currency utilized by terrorist and smugglers
- To eradicate black economy by forcing ‘de-hoarding’ of cash held by the government
With this exercise, the government was unable to bring back the black money and couldn’t affect the black economy at all.
Current Scenario – Combat strategy
For the past few months, the current government is harping on the fact that they can get the black money from the Swiss banks with the details of the people who have been a part of this whole black economy. Unfortunately, they have failed to do so post the demonetization drill. Switzerland has always been in the news since all the big businessmen, politicians and executives have allegedly stashed black money in the Swiss banks since they are known for very strong secrecy banking practice till a few years ago.
Last year to fight black money, the Switzerland government agreed to automatic sharing of information with India on the Swiss bank accounts of Indians as of September 2018 and onwards. Both the countries started the statutory consultation process for bringing into force Automatic Exchange of Information (AEOI) on tax matters. According to Federal Department of Finance, the introduction of the AEOI with India and other countries confirms Switzerland’s international commitment to implementing the AEOI standards. This will be strengthening the competitiveness, the credibility and integrity of Switzerland’s financial centre.
India on the other hand, has promised to safeguard the confidentiality of the data provided by Switzerland. The Switzerland Department of Finance said the automatic exchange of information with India will be implemented based on the Multilateral Competent Authority Agreement (MCAA) on the Automatic Exchange of Financial Account Information
Administrative co-operation between parties
In January 2012, India had signed the Convention on Mutual Administrative Assistance in Tax Matters. It is a multilateral agreement that promotes international co-operation while respecting the rights of taxpayers. Among others, the convention provides for administrative co-operation between the parties in the assessment and collection of taxes in order to combat tax avoidance and evasion.
Switzerland also welcomed India’s accession to the Missile Technology Control Regime. Apart from this, the Switzerland government is also supporting India’s membership in various multilateral export control regimes. Furthermore, both the countries are working towards the implementation of United Nations Counter Terrorism Strategy.
So now we have to wait and see whether this joint strategy works in eradicating this menace or makes matters even worse!