Black money conversion – talk of the town- Is your method fool proof

Black money is basically the money that has not gone under the scrutiny of the tax department and somehow has been kept aloof from money being taxed. Corruption, the sale of goods without issuing an invoice for it, keeping excess money at home to avoid depositing it in banks are some of the ways through which black money is generated.

Shri Narendra Modi took a very bold and decisive step to fight corruption, black money and counterfeit currency. From 8th November 2016 midnight, the old Rs.500 and Rs.1000 notes were declared no more to be legal tender for exchange. Those who have not declared their illegal income in Income declaration scheme that ended on 30^th Sept 2016 or those who are not paying income tax honestly are in real trouble now.

People with black money are on a lookout for ways through which their black money in old currency notes can be converted into white money or new currency notes. Here we have tried to compile a few for you:

1. Bogus Loan Entry: This is a popular method used to convert black money to white. Modus operandi under this case will be people giving black money to friend or relative in return for a cheque from them. This is kind of a bogus loan entry to convert black money to white. However people who do this should keep in mind that Section 68 on loans is applicable and you will have to prove the creditworthiness as well as the genuineness of transactions to the IT Department or else the loan receipt will be treated as income from undisclosed sources.
2. By using PPF Accounts: This is not very popular but yet effective way to convert your black money into white. People invest for their children so that they can get some lump sum amount when they attain the age of 21. The modus operandi here is to open a PPF account in the name of child in the year of birth. Deposit the black money in the PPF account every year to the limit of Rs.1,50,000/- for 15 years. Afterwards, deposit only Rs. 500/- per year for the next 6 years. The final amount can be withdrawn in the 21^st Also, the Income Tax department cannot issue notice in the year of withdrawal for any year before six years.
3. Temple donations: In this method, people give their black money to temple or donation boxes. Temple management will show this money as anonymous donations and exchange it for new currency notes. After deducting a commission for this service, they return the balance amount to the owner. Moreover, the government has already clarified that temple hundis will not be asked questions.
4. Back-dated FDs in co-operative banks and credit societies: Since such institutions still do a lot of their work manually, they can issue fixed deposit receipts in back date. Owners of black money can get various FDs in such institutions in names of various villagers in back dates and can get new currency notes in due course, after paying a cut to those in whose name, they deposited the money.
5. Using poor people as money mules: Black money owners’ can find poor people to deposit Rs. 2.5 lakh in cash since the government has already declared that deposits of up to that amount won’t be questioned. Later the money can be withdrawn after giving a cut to the account holders. Since this requires trust, black money hoarders are first and foremost using their staff and their relatives.
6. Finding Jan Dhan account holders: The Jan Dhan accounts are a good medium for converting the currency from black to white. Jan Dhan accounts can have deposits up to Rs 1 lakh a year but there are also Jan Dhan accounts which have a lower limit of Rs 50,000 if they don’t adhere to Know Your Customer norms. While the government says it will monitor unusual activity in Jan Dhan accounts, it will be easy for a poor person to say the small amount was his life saving at home.
7. Approaching the banknote mafia. Overnight, a banknote mafia has emerged. These are people accepting old Rs 500 and 1,000 notes and giving back the value in Rs 100 notes after deducting their commission. The people collecting old notes will be able to earn a profit by converting them into white, new currency through poor people, or through other means.
8. Paying advance salaries: Businesses can use old notes of Rs 500 and 1,000 to pay advance salaries for anywhere between the next 3 to 8 months. The idea is to pay each employee less than Rs 2.5 lakh – the limit above which deposits will be examined. This way they will be able to deposit old currency notes before 30^th December and withdraw new ones easily, without attracting the attention of the Income Tax department.
9. Using professional money laundering firms: Run by chartered accountants, there are money laundering companies that specialize in converting black money into white while evading the taxman. Known as ‘jama-kharchi’ firms in Kolkata and pad-pedi in Mumbai, they launder money by using businesses such as highway transport which run completely on cash. These ‘cash-in-hand’ firms match the needs of companies which need short-term funds with those who have excess black money to park. Showing back-dated transactions in the current fiscal year is not difficult for such firms. They are said to be burning the midnight oil till 30^th
10. Using political parties: Since political parties can collect donations of Rs 20,000 or less without having to reveal who donated the money, let alone their PAN, they will have the easiest time with demonetization. A political party can say it collected this amount of cash in old currency donations before demonetization and demand that it be changed into new currency by 30^th
11. Putting the money in the bank: The finance ministry said those who deposit large sums of cash that don’t match their income, may have to pay up to 200% tax. However, one can put in a large amount of cash in bank, show it as income from ‘other sources’ in the current assessment year, and pay 33% income tax on it. To be able to levy income tax penalty on your deposit, the government will have to be able to prove, you didn’t earn this cash in the current assessment year.
12. Formulation of Trust & doing charity: Another popular way used by people to convert black money to white is by forming a Trust for social cause. People make executive bodies of own people in Trust and donate black money to this Trust as charity. On paper, it is charity but off the shelf, it is conversion of black money to white.
13. Showing Income as Agriculture Income: Agricultural Income is exempt from Income Tax. This means the money earned from the sale of paddy, pepper or wheat is exempt from tax. So, the people who earn black money will obtain a fictitious receipt from traders in agricultural commodities as if they have sold the products. For the sake of records, these people will acquire or show the proof of ancestral property in villages.
14. Showing Cash Income from Profession: Another popular way to convert black money to white is by showing income in cash. Income from tuition, professional fees or commission is shown as cash by many tax payers, it is nothing but converting black money in white.
15. Sale of personal belonging like Jewellery: Go to a Jeweler, give him the amount you want to convert into white as cash. He would give you a cheque back for the same amount less 4%. He would give you a purchase bill to show that you have sold silver utensils to him. On the amount of the cheque, when you file your return, you will have to pay no capital gain tax as Silver utensils are personal effects and capital gain does not arise on sale of personal effects.
16. Converting Black money by Investment: Another method people use to convert black money to white is by making investment where it is allowed to invest in cash and where the maturity is tax free for example buying an insurance policy where you are not required to show all your premiums and the maturity is tax free. For example, if insurance premium is Rs. 25000/- payable quarterly then people pay first premium via cheque and rest all premiums in cash. This is most simple and popular way to convert black money in white.
17. Getting Black money as gift: Another popular way to convert black money to white is by getting gift from relative. If you have black money and your relative has the same amount of white money, then you can take cheque from him and pay back the money in cash.
18. Depositing Black Money on name of family members: Yet another popular method for converting black money to white is to open bank account on each and every individual family member’s name. Deposit black money on the name of every family member to convert it in white.
19. By Real Estate: Real estate is that sector where majority of black money is parked. People use real estate deals to convert black money to white. The modus operandi under this case will be Mr. Y makes payment of Rs. 30 lacs to Mr. X by way of a cheque as the advance money and Mr. X in turn gives the black money to Mr. Y of the same amount. Now, Mr. Y intentionally fails to make balance payment within the due time and the amount is forfeited by Mr. X. In this manner black money of Mr. X is converted to white money.
20. By Declaring Black Money: Last but not the least, the Best method for converting black money to white is by declaring this money to IT authorities and paying tax on this money to convert it in white.

Disclaimer

I am against black money and black money generation ideas and I don’t recommend readers to follow any of these methods for black money conversion. This article is just for exposing loop holes of our system. So, that RBI and the government can take appropriate action by formulating strict rules to remove black money from India.