UPSC Prelims 2021 Q9: Effects of Black Money in India — Explained
Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?
- Diversion of resources to the purchase of real estate and investment in luxury housing
- Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
- Large donations to political parties and growth of regionalism
- Loss of revenue to the State Exchequer due to tax evasion
Answer: (d) Loss of revenue to the State Exchequer due to tax evasion
Statement-wise explanation
- a: incorrect — Black money does often go into land and luxury housing. The Finance Ministry's White Paper on Black Money (May 2012) lists land and real estate as a sector where it is easily generated and parked. But this is one place where black money is used. It is not the core harm. The government's central concern is income that escapes tax, wherever it is later invested.
- b: incorrect — Bullion and jewellery are also listed in the 2012 White Paper as vulnerable sectors. Buying gold or gems with unaccounted cash is a way to store black money. It is a symptom, not the main worry. The loss to the state comes earlier, when the income is hidden from the tax authorities.
- c: incorrect — Black money in political funding is a real concern, raised in debates on electoral funding and by the courts. But regionalism is a political phenomenon with social and historical causes, not an effect of black money. Pairing it with donations makes this option weaker still.
- d: correct — By definition, black money is income or assets not reported to the authorities, so tax on them is not paid. The direct result is lost revenue to the exchequer. That shrinks the tax base, keeps the tax-GDP ratio low and widens the fiscal gap. Laws such as the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 aim to recover that tax: 30% tax plus a penalty of three times the tax on hidden foreign income.
How to eliminate
Start from the definition. Black money is income hidden from the tax authorities, so the first and unavoidable effect is tax not paid. Every other effect depends on how the hidden money is later spent. Real estate and gold are ways to park black money, not the harm itself, and the two options are alike: both describe where black money goes. When two options share the same logic, neither is likely to be the 'main' effect. Drop the option on political donations and regionalism, because regionalism is not an economic effect of black money. That leaves the only option about the state's own loss. In 'main cause of worry to the Government' questions, pick the effect that hits the government directly, here the exchequer. Fact to remember: black money = untaxed income, and its first cost is lost tax revenue.
Know more
Black money is income or assets that were never reported to the authorities when earned and were never disclosed while held (Finance Ministry White Paper, May 2012). It comes from two kinds of sources:
- Illegal activities: crime, drug trade, corruption, smuggling.
- Legal activities with concealed income: under-reported sales, cash payments, inflated expenses, manipulated accounts.
The 2012 White Paper named the sectors where it is most easily generated: land and real estate, bullion and jewellery, financial markets, public procurement, the non-profit sector, and the informal and cash economy.
Why it worries the government: each rupee of hidden income is a rupee of tax not collected. This keeps the tax-GDP ratio low and pushes the government to borrow more. It also makes taxation unfair, because honest taxpayers carry a larger share.
| Term | Legal? | Meaning |
|---|---|---|
| Tax planning | Yes | Using deductions the law intends |
| Tax avoidance | Legal but checked by GAAR | Using loopholes to cut tax |
| Tax evasion | No | Hiding income or inflating costs |
| Money laundering | No | Making illegal money look clean |
Key measures against black money
| Measure | Year |
|---|---|
| White Paper on Black Money tabled in Lok Sabha | 2012 |
| Special Investigation Team (SIT) on black money | 2014 |
| Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act | 2015 |
| Benami Transactions (Prohibition) Amendment Act | 2016 |
| Demonetisation of ₹500/₹1000 notes | 2016 |
| GAAR in force | 2017 |
| Automatic exchange of financial account information (Common Reporting Standard) | 2017 |
The 2015 Act taxes undisclosed foreign income and assets at 30%, with a penalty of three times the tax. It also allows prosecution for wilful evasion.
NCERT Concepts to Revise
- Black money: The question asks for the main effect of black money, so begin with what makes money 'black'.
- Tax avoidance and tax evasion: Tells illegal evasion apart from legal avoidance; the options turn on what hidden income does to the state.
- Benami transaction: Benami property is a common way to park black money in real estate, which one option describes.
- Money laundering: Shows how black money is moved and cleaned after it is created, as opposed to its first effect.