Swachh Bharat - What color is your money?

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The recently launched clean India campaign should also manifest to our finances. Let us examine how clean our earnings are? How dirty is our wallet and what color is our money. We may be law abiding honest citizens, but when it comes to taxes, “Do we take a shortcut?”

A little prudence in filing taxes will take us a long way in resounding financial health and fitness. At the same time it is also important to understand what black money is and what can we do to curb it.

What is black 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. 
Where does black money arise?
This 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. The second and perhaps more likely reason is that the wealth may have been generated and accumulated by failing to pay the taxes in one form or other. In this case, the activities undertaken could be legitimate but s/he has failed to report the income so generated, comply with the tax requirements, or pay the dues to the public exchequer, leading to the generation of this wealth. 

Applications of Black money?
It is generally used in Land and property transactions, buying jewellery and other cash based transactions.

What efforts does the Government take to reduce black money?
Recently the government has incorporated a Special Investigation Team to acquire information on the Swiss Bank Accounts of Indians. All the Direct and Indirect taxation codes are amended from time to time. The Double Taxation Avoidance Agreement is also reviewed. The Income tax department has increased scrutiny on high value transactions, introduced limits on cash transactions, foreign transactions and increased the checking, survey and raids.

All these efforts by the government need to be aided by us. We need to have a corruption free and honest approach to our finances. 

Under which provision of Income tax is black money liable to Taxation?
1) Unexplained credits: If a sum is found credited to you and you are unable to provide explanation about its nature and source, this sum is taxable as your Income for that year
2) Unexplained Investments: If you have made some investments and they are not found to be recorded in your books of accounts, you are unable to explain their nature and source, the same is taxed as your Income for the year
3) Unexplained assets: If you are found to be the owner of any money, jewellery, bullion, any other valuable articles which are not recorded in your books of accounts and you are unable to provide a reasonable explanation about their nature and source. The same is taxed as your income.
4) Unexplained expenditure: If you have made an expenditure and are unable to offer any explanation about the source of such an expenditure. The same will be added to your Income.
Apart from being added to the Income, the above contraventions attract additional interest and penalty.

Who has black money?
Every person has black money. The quantum may differ from person to person. Every time you purchase something without an invoice, you are contributing to the black economy. You may be a salaried individual with all your Income in “white”. If you forget to report and pay taxes on your interest on various investments such as fixed deposits etc. You have black money.

What efforts can we make to curb the black money?
We must insist on receiving a bill and check that we have been billed for the correct amount. Also, with the use of plastic money, all transactions have a banking trail. The advent and popularity of e-commerce is also a positive step in this direction. All payments are electronic transfers. At the end of each year, we should also scrutinize all our incomes and report them while filing the returns.

To keep India financially clean lets take a pledge to pay our taxes on time and raise our voice against financial malpractices. A better tax regime, collection and utilisation of taxes along with people’s honesty in financial reporting is the key to a cleaner India.

(Shubham is a Chartered Accountant and MBA (Finance). She is on the forum of “Economic Times” experts on Taxation.   She specialises in Individual Taxation and Taxation of Freelancers & Small businesses. She can be reached on for answering your tax related questions.)
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