Thursday, August 11, 2011

Money that changes color

This article is about the process of interconversion of black money into white and vice versa. White signifies that the money is generated through legal means whereas black signifies otherwise. Great confusion arises between the two because the money is synonymously connected with currency notes. However, it is important to understand that money is a concept which is abstract whereas currency notes are physical entities that are real. To make things comprehensive, the concept of accountability is introduced.

When any economic activity is concerned where money exchanges hand, it is important to keep records from where the money came and where it goes. Accountability refers to all the necessary paperwork involved to keep these records. In this regard, it is very clear that money involved in illegal activities goes unaccounted. Nobody is foolish enough to go to bank with bundles of cash and say that this money is obtained through drug trafficking or prostitution or any other illegal activity. Thus in conclusion, black money is an entity where you cannot explain its origin or its destination where it is going to be spent.

Now comes the question of black money getting converted into white and vice versa. To answer this question we need to know that a trade off has to be maintained between accountability and easy of flow of money. If each penny has to be accounted, it can amount to a lot of overhead in terms of paperwork. It seriously restricts the easy of use of money as it comes at a cost of time to maintain records. In order to avoid a chaotic situation, the laws in the country provide some relaxation in terms of the limit of money which could be transacted in cash without asking for its origin or destination. So how does it work ?

Let me explain a real scenario. Any legally registered organization in India is allowed to do transaction in cash upto Rs 20,000 (Income-Tax Act 1961). Any amount higher than this has to be transacted through check/draft/e-banking. This regulation ensures that large sum of transaction should be clearly accounted while facilitating smaller transaction in cash. Now this limit of Rs 20,000 can be a very big machinery for converting black money into white. For example, you obtain some cash through illegal means which is black and invest in the company in chunks which are less than Rs 20000. In this manner, your black money gets accounted in the company and turns white. An economy which is 7-8 orders higher than this limit does not bother for this petty conversions of black into white.

In is interesting to highlight other scenario where white money gets converted into black. An example is inevitable. Suppose a shopkeeper works very hard and earns a profit of Rs 1000000. According to present income tax laws, he is supposed to pay a tax of Rs156,560 (refer tax calculator) which is about 15.6 % of his income. If the guy pays full tax then he possess white money of Rs 843440. However, by avoiding income tax completely, the guy's entire income becomes black.

Read the next article :- Multi-facet consequences of Black Money

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