Many shades of Black

Understanding the nuances of the common phrases used in the context of ‘black money’ is vital to ensure that we are solving the right problem.

By Surya Prakash B. S. (@SuryaPrakashBS) and Devika Kher (@DevikaKher)

Political discourse in India has been highly dominated with the anti-corruption narrative that started gaining momentum a little before the 2014 elections.  In popular usage any illegal activity that usually leads to the generation of illicit income is termed as corruption.

Painting corruption with such a broad brush does not allow us to appreciate the nuances inherent in this topic. In this attempt to widen the reach of the narrative few catchy terms have become popular in the public discourse. These popular expressions have come to mean many things depending on the context. For instance, the term ‘black money’ is used for the income generated through illegal activities, unaccounted income and undisclosed income amongst other things.

This lack of precision in looking at the undisclosed and unaccounted income dilutes the effectiveness of the policies made. Hence, it is vital to understand what the various terms and expressions mean to ensure that we are solving the right problem.

Common words and their meanings used in lieu /in the context of ‘black money’ are:

  • ‘Black money’ is generally used  to mean the income earned through any illegal activity. Black money proceeds are usually received in cash from underground economic activity and, as such, not taxed.
  • ‘Unaccounted income’ refers to the extent to which estimates of national income and output are biased downwards.  ‘Unaccounted income’ includes flouting of economic controls and related motives. Black money is only one part of the total unaccounted income.
  • ‘Black income’, is the aggregates of incomes which are taxable but not reported to the tax authorities’
  • ‘Dirty money’, is money obtained by unfair, illegal, or dishonest means. Due taxes may or may not have been paid. It is important to note that for tax purposes, legality of the source of income is irrelevant.
  • ‘Black economy’, ‘parallel economy’, ‘shadow economy’, and ‘underground’ or ‘unofficial economy’ all mean productive (value adding) activities which should be in the nations GDP computation but are not. The underground economy should not be identified with illegality. Some activities are perfectly legal but are not subject to taxes (e.g. because of their small size), and therefore escape measurement in official statistics.

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Fig: Schematic representation of various terms and phrases used synonymously to ‘Black Money’

There are various instances where these nuances change the perception of the problem.

For instance, let us the case of Dawood who sells drugs and and invests the returns on gold biscuits. He sells these gold biscuits at regular intervals when he is short of cash. In this case, the proceeds from the drug business is dirty money but may or may not be black money.

Let us take another example of Mrs Shrimati who produces widgets at her factory carrying on a legitimate business. However, at times she does not report minor cash transactions to the tax authorities. She further goes on to deposit the income earned in her sons’s back account. This income is refereed to as unaccounted income and the bank account in which such money is parked is ‘black wealth’. A major section of informal income is generated and stored in the similar manner.

In addition to the previous two examples, illegal income can also be generated by giving bribes. For example, in case of Mukesh, a businessman, few discretionary approvals can create an incentive for government officials to take bribes. In such a situation, Mukesh may not earn any income but will create back money by providing illicit income to the government officials. As the source of the income is illegal, it is usually marinated as an undisclosed asset.

Amongst all these terms, unaccounted income is the most encompassing in its scope and detrimental to the society. To begin with, the incorrect national income calculation gives rise to expansionary macro-economic policies and overindulgent social policy. High proportion of ‘unaccounted income’ also indicates that taxpayers are dissatisfied with the public services and are opting for an underground economy as a substitute. This decrease in government revenue further reduces their ability to finance the public goods. It is in this context that we have chosen to dig deep into ‘unaccounted income’.

This is the second blog in our series on unaccounted income. The previous post explains how the  current approach towards unaccounted income overlooks the sources of the unaccounted income. 

Surya Prakash B. S. is a research scholar at The Takshashila Institution. His twitter handle is @SuryaPrakashBS

Devika Kher is a Research Associate at Takshashila Institution. Her twitter handle is @DevikaKher.

Source for feature image: Wikipedia