As promised, finance minister Pranab Mukherjee is out with the white paper on black money, which attempts to give an elaborate backgrounder on the generation of black money in India and abroad.
Black money, according to the white paper released today, can be generated mainly under two heads: generating it by manipulation of accounts and generating it in some vulnerable sections of the economy.
Under each of these heads, the paper lists 11 different ways to generate cash. Here are 22 ways to generate black money:
Manipulation of accounts
1. Out of book transactions: Not entering transactions that might result in taxation into the book of accounts. The taxpayer either maintains no book of record or reports partial transactions only.
2. Parallel book of accounts: Adopted by those who are obliged under law to maintain books of account. The taxpayer maintains one book for their own use which records all transactions while another is submitted to concerned authorities reporting part of the transactions.
3. Manipulation of books of account: When tax payers have to maintain books under different acts like Companies Act, Income Tax Act etc, it is difficult to maintain multiple parallel books. In that case they just manipulate the books of account.
4. Manipulation of sales/receipts: A taxpayer is required to pay taxes on profit or income which is the difference between sale proceeds or receipts and expenditure. Thus manipulation of sales or receipts is the easiest method of tax evasion. They might also divert sales to dummy or associated entities.
5. Under reporting production: Manipulation of production figure may be resorted to for the purpose of evading central excise, sales tax, or income tax.
6. Manipulation of expenses: Since the income on which taxes are payable is arrived at after deducting the expenses of the business from the receipts, manipulation of expenses is a commonly adopted method of tax evasion. This means under reporting of income.
7. Other manipulations: Besides inflation of purchase or raw material cost, expenses like labour charges, entertainment expenses, and commission can be inflated or falsely booked to reduce profits, generally done through showing wrong bills.
8. Manipulation by Way of International Transactions through Associate Enterprises: Manipulation of profits and taxes payable thereon may involve using associated enterprises in low tax jurisdictions through which goods or other material may be passed on. This may lead to accumulation of black money earned from within India to another country which are typically tax havens.
9. Manipulation of capital: The capital of the taxpayer reported in the balance sheet is the accumulated wealth which is invested in the form of assets or as working capital of the business. Manipulation of capital can be one of the ways of laundering and introduction of black money in books of accounts.
10. Manipulation of closing stock: Suppression of closing stock both in terms of quality and value is one of the most common methods of understating profit. This might include undervaluation of inventory, which means that while the expenses are being accounted for in the books, the value being added is not accounted for, thereby artificially reducing the profits.
11. Manipulation of capital expenses: Over-invoicing plant and equipment or any capital asset is an approach adopted to claim higher depreciation and thereby reduce the profit of the business.
Black money in vulnerable sections of the economy
12. Land and real estate transaction: The taxes applicable on real estate transactions in form of stamp duty and capital gains tax can be avoided by under-reporting of...