Black Money in Startup World: A complete case study

Yash Gupta Yash Gupta
Jan 20, 2020 6 min read
Black Money in Startup World: A complete case study

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India is a breeding ground for cultural, grassroots and frugal innovation. And a population of over one billion to the mix—it becomes an exciting geography for startups to create scalable and repeatable business models. We all know, startups, give you the liberty to innovate, explore and provide you with a chance to rather be the dreamer than the worker.

Introduction to Black Money in Startups
Current Scenario and Analysis of Black Money in Startup World
How White Washing of Black Money is Done?
Impact of White Washing Black Money on the Economy

Introduction to Black Money in Startups

Startups in India
Startups in India

Home of the largest e-commerce deal between Walmart and Flipkart, 31 unicorns and counting, and plenty of untapped opportunities — it shouldn’t come as a surprise that India has been home to some of the biggest startup success stories.Over the years, Indian startups have found success across sectors, with startups in enterprise tech, e-commerce and travel tech grabbing global attention.

But, in the recent years a grey cloud is meandering over the blooming startup industry, something we are all versed with - Black Money. Canadian-Indian writer Rohinton Mistry says,“It is so much a part of our white economy, a tumour in the centre of the brain — try to remove it and you kill the patient. A 2015 FICCI report estimated black money in India to be as high as 75 per cent of the GDP.

One may wonder how did this social anomaly enter the sacred world of budding new talent, which made the new generation soar to the greatest heights of recognition and profit. This case study aims to analyse the entry of black money in the industry, the factors that influence it, how it is being whitewashed and the impact all of this has on our economy.

Current Scenario and Analysis of Black Money in Startup World

Let’s look upon the case where a  reputed startup lawyer (let us name him ‘A’) in the capital who has worked with startups including two well known hotel room aggregators, a funded media startup and few e-commerce firms.

He is also involved in deals with a well known real estate group in the country who is trying to dabble into tech startups. He gives a shocking revelation: “Startup investing has become a means to bring black money by some businessmen parked overseas into India.”

Here’s the underside,“Suppose you have US$10 million cash parked in Mauritius. You look for tech startups where you can take a majority control or create an entity which can furnish a website, an app and a small team in place. You incorporate the company as a private limited entity and also register an overseas subsidiary. Once a legal structure is in place , you start routing the overseas money into that technology company.

The routing can happen on the seed stage - A funding round. Now to embezzle the funds, from that startup money you can buy a luxury car and other assets, pay yourself, your kin huge sums as directors. You run that company for a period of two years or more till you’ve routed all the money into India.

Once done, you can simply close that startup, declaring the company bankrupt and paying off creditors and share-holders which might be your own companies. Even if they have not routed the money overseas, dabbling in startups by opening up mentorship firms has become an easy and a glam route to use that money legally.

“Am not saying all such firms are using startups as a means to turn black money into white but this glamorous route has started to be misused in India,” says A, a managing partner of the law firm, requesting anonymity.

Also Read: Startup Hubs In India

Also Read: Indian Startups Funding Data

How White Washing of Black Money is Done?

Another lawyer (let us name him lawyer B) who is brokering deals for a Gurgaon based fashion app and another small hotel rooms aggregator ratifies it. His firm which specialises in transaction advisory for tech startups says that there are many ways dishonest businessmen launder.

  • An unsavoury investor makes his family members the board members of that startup.
  • Other companies of the same group act as vendors to that startup and quote ridiculous prices for that service or product.
  • These investors ask for too much equity and control of the startup (often over 70%).They wish to keep their kin on board.
  • They park the money in a trust-friendly jurisdiction, such as Switzerland, before it is moved to a tax-efficient country such as Cyprus, where the taxation levels are very low, or have no taxes. It is then routed to a tax-friendly country like Mauritius, before reaching the final destination in India. India has a Double Taxation Avoidance Treaty (DTAA) with Mauritius.
  • Trade mispricing, is a tool used to siphon off money, plays an important role in bringing money back into India. Instead of inflating invoices, a business can under-invoice and export machinery or software. One can open a company to sell bags or a restaurant. The business may not take off, but the owner can still show cash sales of Rs 1 lakh to Rs 2 lakh a day. Slowly, but surely, all money would be legitimate one day!

Also Read: 10 Points to Evaluate before Raising Funds for Startup

Impact of White Washing Black Money on the Economy

Along with the economic effects, black money also has social consequences. Some of them are mentioned below:-

  • Loss of revenue to the government and running of parallel economy in the country – The increase and spread of black money has a serious impact on the economy as it results in the reduction if government revenues. The black money is in such amount that it is said that a separate economy including only black money is running parallel to the current Indian economy. If only some part of the black money which has been in circulation in the economy could have been paid as taxes to the government, it would have benefitted the Indian economy to a large extent.
  • Vicious circle as a result of black money and corruption – Black money has added to corruption by the illegal transactions made to hide the black money, bribes are given by the people to bureaucrats, government officials, etc. This forms a vicious circle which is never going to end unless some serious step is taken by the government.
  • Effects on national income and real capita income– Black money is a result of revealing low income to the government while paying tax by people which  results in low national income of the country. The national income of the country will take a big leap if the amount of black money in circulation is backed up to the national economy of the country. This will also increase the quality of life for the whole country.
  • Higher taxation and inflation – The main reason behind the taxation is to earn revenues for the expenditures done by the government in order to make a balanced budget. Therefore it is obvious that if the amount of black money which the people are hiding from the government is revealed and included in the budget of the government then the tax rate will surely come down as the revenues which the government wants to earn from the people by imposing high taxes will already be with the government. The RBI has admitted that the amount of money in circulation in the Indian economy is quite more than the money inflow on papers. Therefore the amount of goods and services which were there in the market according to the accounted money gets a hike in their prices which results in inflation.
  • Difficulty in the formation of monetary and fiscal policy – This is an obvious impact as the government while making these policies is not able to count the exact national income because of the hidden black money which makes such policies unrealistic.
  • Increased criminal activities in the society– The illegally earned or the black usually gives rise to various illegal activities in society and corruption is one of them. The duration of elections is also the time when the illegal use of black money can be seen. Various terrorist activities have backup power of hoarders of black money which is even harmful to the whole country. The illegal weapons with various groups of unsocial elements are usually bought up by the use of black money. It is usually said money corrupts the life of even a normal person, and money in excess corrupts excessively.

Also Read: Important Tips you know before Investing in Startups


The problem of  black money should be solved in a real sense and in a very intelligent manner.

  • First of all the problem is to be dealt morally. The moral of the people in the society must be raised.
  • The tax system should be realistic in nature.
  • The authority which is responsible for the collection of taxes should be honest, without any corruption.
  • Various different incentives should be given so that people voluntarily agree to disclose their real income.
  • Economic Intelligence unit must be maintained thoroughly and should be looked after.
  • Corruption in the administration at all levels must be stopped at any cost.
  • Startups should be aware of individuals who ask for a higher credit in the company.
  • Limited kin involvement should be allowed.
  • The accounts must be looked after by the team and not the angel investors.

The government alone cannot curb this issue completely from society. Making different policies, laws, acts and legislation will not work alone. For the implementation of these laws, policies each and every citizen has to work on this. People should understand why it is important to pay tax and should stop evading their income and should not lead to the generation of black income. Each and every citizen should make some contribution to the development of the country in the form of paying taxes.


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