Professional’s Guide to Generate Black Money in India

Black Money is the tax evaded money. The income generated from illegal means on which the taxes are not paid is black money. Though there is no such concept in economics, it is a popular term among professional service providers. Chartered Accountants, Company Secretaries, or even lawyers are the service providers who help businesses to hide their taxes. They help in creating structures that help them to evade taxes.

India is a country of innovative professionals. There are many loopholes in the tax system of India and there are many methods of generating black money. In this post, we would discuss one such method which is popular among accountants.

Black Money Generation Process

1. In the first stage, bogus bills are issued to financial criminals or the businesses for which the client pays through the bank. Then the money is taken out by the Professional from the bank account and returned in cash to the client after deducting the commission.
2. Clients pay the cash and then the Professional issues them loans from “entry” companies and NBFCs. Entry companies provide the journal entry for a cost. These are only paper entries. These “entry” companies are created for the cash-intensive businesses where cash is deposited by people like peon, washer-man, etc.
3. These entry companies or shell companies have the perfect setup in the banks. They operate current accounts and sometimes also avail the cash management facilities provided by the Private Indian Bankers.
4. These “Entry companies” are traded among professionals. Some companies have accumulated losses, which makes them an attractive target for acquisition by profit-making companies. Whereas some would have capital, cash in hand, etc. These financials create value for them.
5. They have tie-ups with post offices, insurance companies, NBFCs, and small banks for evading tax. They manage income tax, service tax, and sales tax cases. They keep a part of their income in the bank (life-saving account) to bribe the officer in case of a raid or any legal action against them.
6. They arrange huge loans for their clients then the clients show fake expenses with the help of professionals and convert public money into their own black money.
7. They list companies on stock exchanges, then the public money is converted into black money by the management with the help of Professionals. Most companies show fake expenses, take away money and show fewer profits thereby giving fewer profits to the investors and fewer taxes to the economy.
8. Newspaper advertisements are booked at inflated prices, however, the actual ads are really cheap or get canceled with a fake penalty. This amount is given back in cash after deducting commissions.
9. Donations are used to evade taxes and get exemptions. These donations are paid back in cash after deducting commissions.
10. They have fake receipts and bill books from transport companies, steel suppliers, etc. They issue fake contract notes of share brokers for evading taxes through long-term capital gains or losses in thinly traded or penny stocks. They will show that you bought a penny stock one year ago and have sold it for an extremely high price making the income tax-free or taxable at a very low rate of income.

In a real sense, these professionals harm the whole financial system by using loopholes in the tax laws to create a black money cycle. They help the rich become richer leading the poor to become poorer.

Network of Professionals

It is challenging to trap them as they don’t work with direct or new clients easily. They prefer to work with other professionals. A  single professional can’t do these activities single-handedly that’s why one professional gives to another to convert and he might outsource the work to someone who supplies bills or to someone who provides entry companies as per the need. This is an entirely nested network, they have strong connections and contacts.

Yes, not all professionals do this wrongdoing, however, a majority of them are.

The Preventive Measures

1. The bank account should have the same phone number and address as in adhaar card. So if you have to update the phone number then you have to update it in adhaar card. This way the professional who uses the account in the name of other people will not be able to do it easily as the original owner will get to know about it.
2. Banks should regularly send the details of transactions in the bank account to the owners of the account. This way it will become difficult to manipulate.
3. Tax benefits should be provided for retail transactions through banks or cards.
4. The personal properties, assets and belongings of professionals and their close relatives should be audited for any discrepancy in income and expenses. If there is a huge inflow of funds for a simple service like tax audit or filing returns then further investigation should be conducted.
5. It should be made mandatory for a company to disclose the directors’ educational qualifications, work experience, and source of capital on the company website or blog. This will keep a check of fake company directors as people can identify easily if a doubtful person becomes a director.
6. The electronic property passbook will keep a check on Benami properties as everybody has to register his/her property in the passbook.
7. Rs.2000 note should be discontinued after 6 months. It becomes difficult to count, store and move black money in small denominations due to large quantities in terms of space and weight.
8. Officers must randomly check the bank lockers in front of a bank official and the owner of the locker.
9. They move the cash in Ambulance, Diplomat cars, News Channel vans, and Beacon cars. Interns get the duty to move small amounts on bikes or in small cars. So there should be some measures taken to check these vehicles.
10. STT should be removed from penny stocks that will make the transaction unfit for long-term capital gain.
11. Government banks should come up with wallets that can work without the internet and smartphone. It is possible through a combination of SMS and NFC. This will allow small payments through a simple mobile phone and will keep a check on tax evasion. Mobile payments can be incentivized by the Government.

Some proposals have already been put into practice, and there may be more on the way. This is merely an overview of the black money cycle. Black money is money that is not counted in the Indian tax system, not necessarily money made through illicit activity. if you want to read more about black money used in Money Laundering you can visit The Hindu Article.

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