How Black Money is being converted to White Money now?
After demonitisation initiative and abolition of Rs 500 and Rs 1,000 notes by Central Government in India, there is a huge increase in search on google about how to convert black money to white money. Several experts are analyzing various ways on how black money can be converted to White Money so that they can help Big black money holders. In this article, I am providing some of the ways where black money is being converted to white money now, loopholes and how Income Tax Authorities are trying to bridge this gap.
What is Black Money?
In simple terms, Black Money is the income earned in the black market where the income tax is not paid. In order to remove black money from market, Narendra Modi, Prime Minister of India has abolished Rs 500 and Rs 1,000 notes from 8th November, midnight. These old currency notes can be deposited / exchange with banks by 31st December, 2016. However, the limit of cash exchange is restricted earlier to Rs 4,500 per person and now it is reduced to Rs 2,000 per person per day.
How Black Money is being converted to White Money now?
The news of high value notes demonetization is not being digested by black money holders and politicians. Many black money holders are finding ways to convert their black money to white. Here are some of the ways they are trying and how income tax authorities are bridging the loop holes.
Buying Jewellery / Gold Biscuits
Black money holders are buying gold jewelry and gold biscuits with huge cash they are holding. They are rushing to jewelers and buying at higher prices. Jewelers are issuing invoices with prior dates of 8th November, 2016. They are able to escape from this as they need to file sales tax returns only in Dec-16 pertaining to Nov-16.
Income tax authorities are asking all companies to declare the cash in hand as of 8th December, and transactions done from 9th November to 31st December, 2016. However, we need to see how it would be implemented effectively.
Payment for Credit Card Bills
This looks funny. However, many black money holders are paying their credit card bills by cash. Some of them are depositing cash for entire credit card limit which would be beyond their credit card bills. E.g. Mr.X has a credit card with limit of Rs 2 Lakhs. However, he has a credit card bill for Rs 1 Lakhs. They are able to make payment for totaling to Rs 3 Lakhs (Rs 1 lakh outstanding and Rs 2 Lakhs as credit card limit) which banks are also accepting the same. They can later utilize such funds for purchases done at later point of time. If one is holding 5-7 cards (for his entire family members), they can simply convert Rs 20 Lakhs black money into white.
Income Tax authorities have indicated banks to provide cash deposits done over Rs 2.5 Lakhs to be intimated separately to them to track it. However, we need to see how they can differentiate between credit card bill and excess deposited in credit cards which is black money.
Payments for Utility Bills
Do you know hefty bills of politicians pertaining to power bills and water bills? They generally do not pay and they keep piling up. Now with Govt of India relaxing rules that one can pay old notes for power and water bills, these money is being used to convert black money to white money.
Income tax authorities are keeping an eye on payments made over Rs 2.5 Lakhs, however not sure how they can differentiate between normal payments and black money payments.
One of the unique method which black money holders are trying to convert black money to white money is through Temple Donations. They are approaching temple presidents and trying to convert their black money. They are paying some commission and donating some money in this process, in return, they are converting black money to white money. E.g. Recently a Real estate boss in Hyderabad converted Rs 1 Crore to white money. They approached a temple authorized persons and agreed to have 20% commission and a 10 % donation. These notes were deposited in Hundi and in return 70% was paid in all smaller denomination notes (which was being offered by the general public in Hundi) 20% were kept in a pocket by agents and 10% were automatically converted as a temple donation through Hundi.
We are yet to see how income tax authorities would address such methods of converting black money to white.
Gifting money to family members and relatives
This has become a popular method in the last 2 weeks to gift money upto Rs 2.5 Lakhs in cash to family members and their relatives so that they can deposit money in their bank account. Since income tax authorities indicated that any amount upto Rs 2.5 Lakhs cash deposit would not be questioned, many black money holders are adopting this method. Post dated checks are being taken upfront from relatives / friends with a discounted amount after commissions payable to the relatives/friends. One should understand about Gift Tax Rules and Guidelines in India.
Converting through Professional Income method
Many professionals like Advocates, Doctors, Chartered Accountants, etc., who were not declaring the black money are now depositing them in their bank account. The caveat is that if they need to show them as the white money for this year, they need to pay advance income tax. Since 30-Sep is already crossed for payment of advance income tax, many individuals are thinking from this angle. However, they are proceeding and making an advance payment as of now. This way, even in future if income tax query comes it would substantiate that they paid advance tax and it pertains to this year income and they would file income tax returns in the next year as per IT Act.
Hiding under Agriculture Income
We are all aware that agriculture income is exempted from income tax. Many agricultural land owners are now depositing huge cash in their bank accounts indicating this as agricultural income. However, they are not aware that it should meet specific criteria to term it as Agricultural Income. One should posses agricultural land in their name and should have proof that they got money through agricultural income. If it is genuinely agricultural income, one need to collect these proofs and keep it ready so that they do not face problem with IT authorities at later point of time.
Conclusion: These are NOT tips and tricks to convert black money to white money. These are various ways where bada babus converting money to white and some of the loopholes which Income Tax Authorities are trying to fix them.
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How Black Money is being converted to White Money now