There is no definition for black money in economics. Different people define it in different terms such as unaccounted income, underground income, black wealth, or at economy level it is known as parallel economy, black economy, shadow economy and unofficial economy.

There are certain sectors and activities like land and real estate transactions, bullion and jeweller dealings, complex financial market transactions, charitable activities, informal sector and cash economy, self-employed professionals, external trade and transfer pricing, forms the origin to the culmination of black money.

Broadly or in layman's language we can define it as, money that has been acquired through illegitimate means or money which is unaccounted for, that is, for which tax is not paid to the government. Black money may be generated either by illegitimately drug trade, terrorism, corruption, or legitimate failure to pay the dues to the public exchequer yielding the generation of unaccounted wealth.

In addition to wealth earned through illegal means, the term black money would also include legal income that is concealed from public authorities:

• To evade payment of taxes (income tax, excise duty, sales tax, stamp duty, etc)
• To evade payment of other statutory contributions
• To evade compliance with the provisions of industrial laws such as the Industrial Dispute Act 1947, Minimum Wages Act 1948, Payment of Bonus Act 1936, Factories Act 1948, and Contract Labour (Regulation and Abolition) Act 1970
• evade compliance with other laws and administrative procedures.

Black money causes financial leakage, as unreported income that is not taxed causes the government to lose revenue. In addition, these funds rarely enter the banking system. As a result, it can be more difficult for legitimate small businesses and entrepreneurs to obtain loans.

Black money may be generated through the crude approach of not declaring the income or the activities leading to it. This is the likely approach in all cases of criminal, illegal, and impermissible activities. Another approach can be by not declaring or reporting activities and the income generated there from may also be followed in cases of failure to comply with regulatory obligations or tax evasion on income from legitimate activities.

However, complete evasion or non-compliance may make such incomes vulnerable to detection by authorities and lead to consequent adverse outcomes for the generator. Thus, a more sophisticated approach for generation of this kind of black money is often preferred, involving manipulation of financial records and accounting.

Tax evasion involves misreporting or non-reporting of the transactions in the books of account.

Different kinds of manipulations of financial statements resulting in tax evasion and generation of black money are summarized below:

• Out of Book Transactions
• Parallel Books of Accounts
• Manipulation of Books of Account
• Manipulation of Sales / Receipts
• Under-reporting of Production
• Manipulation of Expenses
• Manipulation by Way of International Transactions through Associate Enterprises
• Manipulation of Capital
• Manipulation of Closing Stock
• Manipulation of Capital Expenses

Impact of black money on Indian economy:

• Poverty
• Loss to state exchequer
• Deline in GDP of the country
• Rise in prices in Real Estate Market

Measures to curb black money:

• Demonetisation (As an inititaive taken by Modi Government)
• Raids by the competent / respective departments
• Prevention of Money Laundering Act 2002
• Benami Transaction (Prohibition) Act 1988
• The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015