Indians Turn “Black Money” Into Gold

Many Indians have thwarted a government policy to bring the underground economy out of the shadows by converting their “black money” into gold.

Last fall, the Indian government announced a surprise demonetization policy meant to drive so-called black money out of the shadows, declaring current 1,000 and 500 rupee notes would no longer be valid. The suddenly worthless note notes made up 86% of the currency in circulation in the country at the time. The move made virtually all of the cash in India valueless.

The government policy was meant to force Indians to trade in the old notes for new ones. But there was a catch. The government placed limits on the amount of currency Indians could exchange, but no limits on bank deposits until the end of the year. The idea was to push Indians into putting their hoarded cash in the bank – thus bringing it “out of the shadows.” The demonetization policy resulted in severe cash shortages that persist to this day in some areas of the country.

Indians complete nearly 90% of all transactions in cash. It is an overwhelmingly cash economy, and virtually every Indian has currency stashed away in their home – black money. Transactions using this black money mean no taxes collected. Therein lies the rub for Indian authorities. Government estimates show that only about 1% of the Indian population pays any taxes at all. By making the 1,000 and 500 rupee notes valueless, government officials hoped to force this black money into the light in order to get their cut.

It didn’t quite turn out that way.

According to a report in the Economic Times of India, many Indians skirted the government scheme by using their black money to buy gold.

Income Tax officials said black money holders avoided the bank-deposit route because they wanted to conceal their identities and somehow had “managed to get many jewelers” to convert their unaudited cash into gold.”

Tax officials attempting to track black money say gold jewelry sales spiked the night of Nov. 8 after the government announced the demonetization policy.

“Jewelers offered a platform to convert unreported cash into gold,” one official said.

To avoid reporting the transaction, sellers simply split single transactions into multiple sales in order to keep them below the Rs 2 lakh threshold that triggers reporting requirements in India.

US tax laws also allow you to buy and sell gold while maintaining your privacy. Download the SchiffGold Guide to Tax-Free Gold and Silver Buying to learn the IRS rules.

Tax officials were able to track some of these transactions, but its certain that the vast majority of the gold sales went undetected.

Gold historically offers the ultimate safe haven. While government policies can readily manipulate the value of paper money and fiat currencies – or in the case of the Indian government simply declare it worthless – they cannot devalue gold. Gold is money. Fortunately for many Indians, they were able to convert their valueless paper into real money  – gold.

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