Black money and vibrancy in economy

Asjadul Kibria | Thursday, 14 January 2021

Finance minister AHM Mustafa Kalam believes that black money can create vibrancy in the economy if it is given the scope to whiten. His belief is reflected in his recent reaction on the latest statistics that some 7,650 individuals whitened black money worth Tk 102.20 billion during the first half (July-December) of the current fiscal year (FY21). The National Board of Revenue (NBR) released the statistics in the first week of this month, adding that the board has also earned Tk 9.62 billion as income tax in the process. During the pandemic, when economic activities became sluggish, finance minister found it encouraging that the money whitening scheme has contributed to pace up economic vibrancy.

REAL ESTATE IS THE MAIN DESTINATION: No detail, however, is available on how the whitening of black money or declaring the undeclared money by paying only 10.0 per cent income tax has created economic vibrancy. According to media reports, finance minister mentioned that the budgetary scope to invest untaxed income in the housing sector without any question was the key to increasing whitening a fair amount of black money within a short period.

In the national budget for FY21, the government has allowed individual taxpayers to disclose any type of undisclosed property including land, building, flat, and apartment by paying tax at a particular rate per square metre of the said assets.

Of 7,650 individuals, 7,445 declared their undisclosed properties by paying income tax worth Tk 9.34 billion. This figure is not surprising as real estate is always the top destination of black money. A puzzle is also there. Purchasing a piece of land or a flat or apartment requires TIN. Relevant financial transactions like price, registration fee and tax also take place through banks. Thus, the entire transaction is officially recorded. The only thing that keeps the window open for black money is the difference between deed value and actual price. The official rate, also known as mouja rate, of land, is generally accepted for the registration as a base price through paying fees and taxes. The rate is quite low compared to market price or actual price. Higher registration fees, coupled with taxes, also discourage many from showing the land's real value.

Though the government had finally halved the land registration fees in July last year, total registration cost is still high and it is acknowledged by the finance minister himself. He told the media that the government is not getting revenue since people avoid showing the real price of a property to skip paying the high registration fees.

FINANCIAL ASSETS: Again, some 205 people whitened black money by investing Tk 2.28 billion in the country's stock market during the period under review, and the authorities received Tk 0.23 as tax revenue against the investment. The budget opens the provision to whiten black money by investing in the stock market on condition that investors have to pay 10.0 per cent tax for such investment. 

The budget also allowed money legalising opportunity showing undeclared cash, bank deposits, savings certificates, shares, bonds or any other securities without facing any question. The option is available up to June 30 of 2021 and only by paying 10 per cent tax on the value of declared amount.

Any amount of money deposited to banks or invested in bonds, shares, savings certificates or any other securities is already in the formal economy. The depositors and investors are also paying taxes on interests and profits at sources. That's' why, no individual declared any such 'hidden' financial asset during the period under review.

By allowing such provision, tax authorities are probably acknowledging that many depositors and investors are not showing a good amount of their bank deposits and investments in bonds or securities in the income tax returns correctly. If this is the case, it reflects a significant flaw in the taxation system. Tax authorities are also not adequately able to track half of the TIN holders who are not submitting tax returns correctly.

To overcome the flaws, they are now trying to find out undeclared or hidden financial assets by providing an amnesty for the time being. The presumption is that at least some individuals will disclose their deposit and investment as there will be no question on the fund sources. Thus, the provision's intention is not necessarily to whiten any black money but to make any undeclared asset declared in the income tax return. It will make the life of taxmen easy as they don't need to put extra effort to find such financial assets of taxpayers.  

One thing is clear now. Though some individuals did not disclose their incomes, deposits and investments earlier, these were mostly in the formal channel except the portion kept in cash. So, what actually happened is a declaration of assets coupled with some transfer of investments. For instance, some people might invest in the stock market by transferring their bank deposits.

Thus, the claim of bringing the hidden income or black money into the formal or mainstream economy is a misnomer. The money already invested and circulated in the formal economy can't get into the mainstream further. It can only be reinvested by transfer. The government has, however, earned a tiny amount of extra revenue by allowing the tax amnesty.

The authorities are also aware of the limitation of such schemes as indirectly hinted by the finance minister. He mentioned that the revenue system's full automation is the only tool to address tax evasion, which creates black money and fuels capital flight.

MORAL QUESTION: Legal scope to whiten black money is highly criticised, and mostly on moral ground. When regular taxpayers are paying income tax at the rate of 15 per cent or more, tax evaders or black money holders are getting immunity by paying tax at only 10 per cent rate. This is an indirect punishment for honest taxpayers.

Nevertheless, by allowing whitening of black money, the government acknowledges that corruption and irregularities are widespread. Several incidents and media reports over the years made it clear that a section of politicians,  government employees, as well as some businessmen and other professionals have accumulated an immense amount of properties and financial assets through illegal incomes.  All these assets are generally hidden or undeclared, and some of the assets have already been transferred overseas. Then there are smugglers, drug dealers and criminals who have accumulated such assets using the illegal incomes. Finally, some people also build-up some assets by their legal incomes but somehow failed to declare them properly. All of these incomes and assets have turned black or undeclared.

Now, compelling them to disclose their hidden assets requires a legal provision for whitening money for the time being. To make it useful in the long-run, the government now requires conveying the message that those who will not take the opportunity will face  hefty financial penalty, after the termination of the amnesty. Simultaneously, the government also needs to contain sources of corruption that fuels black money.  An easy money whitening scheme must not continue for ever and the government needs to discontinue it after the deadline.

[email protected]