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Black money whitening scheme - ethical issues


Black money whitening scheme - ethical issues

A debate is now on about the budget proposal allowing 'undisclosed income' for investment in industry and real estate to become 'disclosed'. It is an official facility to 'whiten black money'. The budget for FY20, placed in the national parliament on Thursday last, basically opens a five-year scheme to convert black money into white. According to the proposal, people having undisclosed income will be able to invest the money in special economic zones (SEZs) and high-tech parks by paying a flat rate of 10 per cent tax without any question being asked. Anyone can seize the opportunity until June 30, 2024. Moreover, they will also be allowed to invest such income on purchasing land, flats and apartments. For this, they have to pay tax ranging from Tk 500 to Tk 15000 per square metre. The provision to invest in real estate for whitening black money was already there, however, the latest budget has widened the scope by adding land and reducing the tax rates.

There are some grey areas on the definition, scope and amount of black money or undisclosed income. Generally, two types of undisclosed incomes are there. One is legally earned income but undisclosed for some reasons. For instance, some professionals and businesses earned good amount of money through their legal activities but failed to declare some parts of the incomes either intentionally or unintentionally. Another is illegally earned income.  Those who earned through illegal and criminal activities like smuggling and rent seeking have no scope to declare such incomes. There is also no legal provision to do so.

The latest finance bill made it clear that only 'legally earned but undisclosed income' will be eligible for tax benefit in investing on land and real estate. But the same thing is not applicable for investment in SEZs and high-tech parks as the bill said that 'no question shall be raised as to the source of any sum invested' in any economic zone or any high-tech park. It thus indicates that both legally and illegally earned undisclosed incomes can be invested in SEZs and high-tech parks to make the incomes legal. The government believes that allowing such legal scope to disclose the hidden income will check capital flight from the country and the money will enter the mainstream economy from black or shadow economy.

A working paper of the International Monetary Fund (IMF), prepared by Leandro Medina and Friedrich Schneider, showed that the size of shadow or black economy in Bangladesh increased by more than three times in 25 years but its ratio to Gross Domestic Product (GDP) declined. According to the estimation, the ratio of shadow economy came down to 27.60 per cent of the country's annual GDP in 2015 which was 36.65 per cent in 2003. The size of black economy thus stood at around US$58 billion or at least Tk 4532.71 billion in 2015. Researchers, however, avoided 'illegal or criminal activities, do-it-yourself, or other household activities,' and only considered legal economic and productive activities hidden from official authorities for monetary, regulatory, and institutional reasons. If recorded, these activities would have contributed to formal GDP, the paper pointed out.

A critical question in this regard is: where all the black money or hidden incomes are accumulated. Black money holders are not sitting idle with their undisclosed incomes. They have parked major portion of it in different places in forms of investment and also spent on consumption. Be it in the country or outside, black money has already been invested in different financial instruments, stock market, real estate and other ventures. In this way, black money has already entered into the formal economy. 

Thus, bringing the black money into the mainstream economy thorough money whitening scheme is probably an improper approach. The investors may opt for transferring their investment in new areas only if there exists higher return. Again, they will bring back the money from abroad if they find the new opportunity safer and highly profit-making. Interestingly, country's foreign direct investment (FDI) statistics indicates that a portion of money, illicitly flown out, is coming back to the country. It is reflected in the inflow of FDI from the tax havens.

Statistics available with Bangladesh Bank showed that FDI from tax havens stood at $2.58 billion in between FY11 and FY18 which was around 18 per cent of the total inflow of net FDI during the period. Not all FDIs from tax havens like Bermuda, British Virgin Island or Mauritius actually originated from Bangladesh. Many multinational entities (MNEs) are also incorporated in these territories and some of them invest in other countries like Bangladesh. But proxy indicators like 'Panama Papers' showed that at least a few FDIs from tax havens have their origin in Bangladesh.  The whole process is known as 'round-tripping FDI.' It refers to the capital belonging to a country that leaves the country and again comes back or is reinvested in the form of FDI.  As there is a long-list of incentives for FDI in the country, proposed black money whitening scheme has little to do with foreign investment.

Many believe that the proposed money whitening scheme is quite unethical as it encourages black money and discourages honest tax payers. It will also distort  morals of society in the long run.

But the most critical message from the proposed money whitening scheme is that there is a surge in black money in the country mainly due to rise in cronyism and rent seeking. Over the years, rent seeking has become a booming business thanks to lack of transparency and accountability in different development activities. Rise in corruption, bribery and financial irregularities are adding to rent seeking.  All these are generating black money. Accumulation of maximum resources at a few hands is another indication of the rise in undisclosed incomes from both legal and illegal sources. Major beneficiaries of the black money are politically-backed rent seekers. The new proposal ultimately provides a legal tool to keep their ill-earned assets protected in the long-run. 

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