As I had planned, I am continuing to blog about many ways how black money is made. Today I am writing about the invoicing route to black money. It is not that I am writing a new concept; many people have practised this and I am only taking an academic perspective to things...
Visit any stone shops in Bangalore (or any other place in India). By stone, I mean those stones that are used in construction of buildings - such as Marble or Granite (or Sandstone or anything similar). In Bangalore, you will find these shops concentrated on Bannerghatta road and Sarjapur road, though they are seen elsewhere too. You may buy any quantity, bargaining with often unrelenting dealers. These dealers are mostly non-native Bangaloreans. They hail mostly from the north western region of India where these stones are found in abundance. There are stone reserves in Andhra Pradesh that neighhours Karnataka (of which Bangalore is the state capital) but these are insignificant compared to the premium stones. In any of these shops, all transactions happen in cash only - absolutely no credit card or cheque. Though cheques may not be a safe instrument for the seller, because of the prolonged recourse if the cheque bounces, credit cards are perfectly safe. Why do these dealers not accept credit cards and expect the buyers to put all the cash, running often to the tune of a few hundred thousands, on the table? The answer is simple. The dealers do not wish to pay any tax to the governments; more so, they do not like to have a record of the transaction at all! However, they are even more crooked and crafty. They are happy if a customer asks them a receipt. This gives them opportunity to gain more. They give the customer a receipt and promptly add tax amount as well. This is because they pocket the "tax" money as well, destroying the copy of the receipts at the earliest. Some willing customers are smart and seek to under-invoice to reduce their tax (sales tax) liability. Do you think the dealers are smart, then note this. The receipt the dealers give the buyer is a "credit receipt" and not a cash receipt. This is because, even if an official (rarely honest) examines the books, the dealers say they sold goods on credit and never received the money. Most of these dealers own palatial houses and swanky cars. The also maintain accounts, mostly encrypted (such as a few missing trailing zeroes) in their languages such as Gujrati and Marwadi but not in English. This presents a barrier to a professional corporate auditor and the governments allow them to maintain account in any constitutionally recognized languages such as Gujrati. Hence, the auditor has to be a native and can work hand in glove with the dealer. Computerization can bring in some transparency in accounting, but then do they want to be transparent? Never! The would like to keep their business opaque and succeed in doing so by maintaining the books the old way.
Ditto with the dealers of timber, sand and other building materials, but are a small fry compared to the stone dealers.
If those are the cases of non-invoicing or under-invoicing, the story is incomplete. Last week, I discovered a new crooked behaviour. I went to a hotel with my family - this is Hotel A** on Gandhi Bazaar main road, Bangalore. The captain, unlike in other hotels, did not note our order on paper (slip), even when we insisted. The dishes were served, we had lunch and paid the receipt amount. In India, it is a common practice for hotels to take back the receipts (remember, they do not wish to have any record of a business transaction?). I was in a hurry, paid with cash but did not get the receipt. I insisted and got the receipt. Later I discovered that I was over-billed. I called up the hotel in the evening and after many calls, the cashier said he cannot reverse because it was a different cashier who had accepted the cash (though the shift had not changed and I knew he was lying). My wife went to the hotel the next day and asked for a reversal which the cashier vehemently refused. She insisted on meeting the hotel owner. The owner courteously reversed and refunded. So where's the catch? It works as follows. The captain and the cashier collude and over-invoice careless or unsuspecting patrons. If the patron pays by credit card, they do not gain (the hotel may, if the patron does not seek a refund). If the patron pays with cash, then after his / her departure, the cashier and captain reverse the transaction on the billing machine to the correct amount and shares the excess cash he / she got with the accomplice captain. E.g., if the patron had to be billed INR 500, they bill say INR 600. After the patron has paid by cash and left the hotel, the cashier and captain reverse the excess amount i.e, INR 100 and share the money amongst themselves, without the knowledge of the hotel owner. This incident reminded me of my colleagues narrating similar experiences they had had in other hotels in Bangalore. How do you trace such malpractices of over-invoicing? The hotel owner / manager has to use the statistical technique discussed in the book Freakonomics. A trend of "daily bill corrections / amount reversals" for lowering the amounts over a period of time (say, a month) will reveal the cheating pattern.
This makes me infer that the urge to cheat or get money in black is not specific to any class. It is all pervasive from a waiter to a quarry owner to the high earning government official. A friend said "you can't help it, corruption is in the blood of the people". Truth is something we realize after many others have.
So people have ingenious ways of making money either by under-invoicing or over-invoicing. Does it really make a difference whether it is black money (as in no tax paid) or money earned by cheating someone? After all, there is no victim-less crime.
Will write more on other ways of con/black/grey money soon.
K Venkatesh
