Large-scale black money whitening option questioned. Because it didn’t work before

Finance Minister AHM Mustafa Kamal has reignited an old debate when he proposed in the budget that undisclosed assets can be legalised through investment by paying taxes.

Offering the option to whiten so-called “black money”, however, did not succeed, except during the 2007-08 stint of the military-controlled caretaker government.

The option was given in the outgoing fiscal year for investment into apartments, buildings, Economic Processing Zones and Hitech Parks.

Kamal now wants to put the flagging capital market on the list of possible destinations of undisclosed income.

If an owner of undisclosed house property including land, building, flat, and apartment wants to legalise it, he or she will have to pay tax at a particular rate on per square metre of the said asset.

Besides cash, owners will be able to legalise undisclosed house property, including land, building, flat, and apartment, and bank deposits, savings certificates, shares, bonds or any other securities on paying certain amounts of taxes.

Policy researcher Ahsan H Mansur says never before had he seen the option given on such a large scale. “Even the people who have hidden money after earning through bribery, corruption, theft and robbery can also avail the option,” he said.

In 15 fiscal years when similar options were available, altogether Tk 140 billion have been legalised and the government earned Tk 15 billion from the process.

Most of this “black money”, Tk 90 billion, was legalised during the 2007-08 caretaker government. The National Board of Revenue or NBR collected over Tk 12 billion in taxes from the money in the two years.

There is no recent estimate on the untaxed income. A finance ministry study in 2011 said the amount was 62.75 percent of the GDP. The World Bank put the ratio at 7 percent of the GDP in 1973, just after independence, and 37.7 percent in 2002-2003.

It identified drug trafficking, illegal trade, bribery and corruption as the sources of undisclosed income.

“I think the government should not give such an option on a large scale. It wasn’t a successful move before. Honest taxpayers faced injustice instead,” Mansur said.

The “black money” is smuggled out through under- or over-invoicing and many other means. “It must be stopped. We need to toughen the laws for this,” Mansur said.

Finance Minister Kamal admitted government failure to monitor the channelling of such money and proposed a 50 percent tax on the proven amount of over- or under-invoicing, or false declaration of investment in the new budget.

After presenting the budget, he also said the government will toughen laws to catch money launderers if the current legislations allow them to slip through legal loopholes.

Defending the “black money” option, he said Bangladesh needed to generate more revenue to finance bigger public spending to stimulate demand in the economy amid the coronavirus crisis.

Like Mansur, former NBR chairman Abdul Mazid also thinks the “black money” option betrays a disparity between honest taxpayers and dishonest earners.

He said a citizen requires paying around Tk 300,000 in taxes against an income of Tk 2 million while a corrupt person can legalise the same amount earned through bribery by paying Tk 200,000.  

“Now even the honest citizens will stop paying taxes. It will affect the government’s revenue,” he warned.  

Mazid believes the move will yield results if the government sets a deadline and threatens to crack down on owners of undisclosed assets.

Many of the businesses were equally critical of the decision.

Nihad Kabir, the president of Metropolitan Chamber of Commerce and Industry, described the option as a “punishment” for honest taxpayers.

She urged the government to scrap the plan.