Govt allows wholesale whitening of black money

The government has widened the scope for a whitening of black money in almost all sectors – from stocks, real estate to bank deposits – in the proposed budget for the iscal year 2020-2021.

Untaxed money holders will not face any question about the sources of their income while whitening their undisclosed money, paying a flat 10 percent tax to invest in the capital market, deposit into banks, and invest in savings certificates, bonds or any other securities. 

Undisclosed house property can also be legalised by paying a certain amount based on the size and location of the property. 

This provision will be effective for one year starting from July 1, 2020. 

While the government aims to enhance cash flow and attract more investment, and thereby boost the pandemic-hit economy by allowing a legalising of black money in wholesale manner --- with the business fraternity as a whole appearing to have been cheered by the move --- economists and civil society organisations have raised questions about the legality and ethicality of the decision.    

While Finance Minister Finance Minister AHM Mustafa Kamal termed this scope as an "incentive", experts have criticised it as unconstitutional, immoral and discriminatory. 

The privilege will set a bad example in institutionalising corruption instead of removing it from society, Dr AB Mirza Azizul Islam, who was adviser to the last caretaker government, said, adding, "Honest taxpayers will be discouraged and corrupt persons will be encouraged by this move."

"While the provision to legalise black money is already much criticised, loosening the grip further is a sign of the government's leniency towards corruption," he added.

It will negatively impact the national economy too, he added, pointing to no notable yield being there from such facilities in the past.

Currently, untaxed money can be legalised by paying a 10 percent tax and without disclosing its source if it is invested in manufacturing-oriented industries in economic zones, high-tech parks and in purchasing apartments.

According to the new budget proposals, individual taxpayers will be able to make any disclosure of undisclosed cash, bank deposits, savings certificates, shares, bonds or any other securities between July 1, 2020 and June 30, 2021 through paying taxes at a rate of 10 percent on the value of the declaration.

Any individual can invest money in the capital market in the same period and show it in his or her tax returns on paying tax at a rate of 10 percent on the value of the investment subject to satisfying certain conditions, including a lock-in period of three years.

Any individual also can disclose any type of undisclosed house property including land, building, flat and apartment in the new fiscal year by paying tax at a particular rate per square meter of the asset.

The finance minister said this move will increase the flow of money into the mainstream economy, generate employment and enhance the collection of tax revenue.

Currently, the real estate sector is enjoying investments of untaxed money only on buying apartments. In the next fiscal, the sector will get the benefit expanded to the purchase and development of land. People have to pay different amounts of taxes ranging from Tk500 to Tk20,000 per square metre depending on the locations of the purchased lands.

The lowest tax rate will be applicable for remote village areas, while the highest rate will be applicable for Gulshan and Banani areas of the capital. For municipal areas, the minimum tax will be set at Tk5,000 per square metre.

On the other hand, Tk500 to Tk4,000 per square metre will be payable as taxes for buying buildings or apartments in different areas. 

The highest tax rate will be applied to purchasing buildings and apartments in Gulshan Model Town, Banani, Baridhara, Motijheel Commercial Area and Dilkusha Commercial Area of Dhaka city. In this case, the area of the purchased building or apartment must not exceed two hundred square metres.

Alamgir Shamsul Alamin, president of the Real Estate and Housing Association of Bangladesh (REHAB), said, "The government decision will help the real estate and other allied sectors recover from the rampage of the coronavirus." 

Over 35 lakh people are directly involved in this sector and they have been going through hard times as there are no sales right now, he maintains.

Meanwhile, the stock market will enjoy the benefit of investments from undisclosed income after more than two decades. Earlier in 1998, two years after the devastating crash of the stock market, a similar facility was offered by the then finance minister Shah MS Kibria for three years.

People who will avail the facility to invest in securities such as stocks, mutual funds and bonds will have to pay only 10 percent tax within 30 days of their investments without any penalty.

Arif Khan, former commissioner of Bangladesh Securities and Exchange Commission and Managing Director of IDLC Finance Ltd, told The Business Standard that this decision will play a positive role in making the capital market vibrant during the pandemic period. However, he was confused about how much money will flow into the market.

Cash flow will increase in the mutual funds and bonds sector but the regulatory body has to ensure monitoring in this regard, said Shahidul Islam, president of CFA Society Bangladesh.

"The capital market will get a new life if the decision is implemented," says Md Rakibur Rahman, a director of Dhaka Stock Exchange (DSE).

He said that stock market investors who have been affected badly by the impacts of the coronavirus pandemic will also benefit from the move. 

"It will usher in a new era in the market," he hoped.

"This is the best solution to the current crises in the stock market," says Shakil Rizvi, another director of the DSE and president of DES Brokers Association.

Meanwhile, talking to The Business Standard, former NBR chairman Dr Abdul Mazid said the revenue board should have special tax treatment in respect of investment to help money circulation in the economy.

The NBR may also reduce corporate tax to help businesses accumulate funds for further investment and generate employment to offset the economic fallout of the Covid-19 pandemic.

Although some people think the disclosure of undisclosed cash may bring more cash into the banking system, bankers say there are some legal limitations. 

Rahel Ahmed, managing director of Prime Bank, told The Business Standard that there are some confusion regarding this. "Customers have to fill up a KYC form while operating a bank account and they have to declare their sources of income. The anti-money laundering act is related to it. So, I am confused about how much money will flow into the banking sector," he said.

Dr Nazneen Ahmed, senior research fellow at the Bangladesh Institute of Development Studies (BIDS), thinks this scope questions the philosophy of the government regarding its anti-corruption stance. 

"There is no gain from providing this type of scope, because those who earn huge illegal money or asset launder it overseas. Furthermore, genuine taxpayers become de-motivated by such decisions," she said.

Dr Iftekhruzzaman, executive director of the anti-graft watchdog Transparency International Bangladesh, (TIB), said, "Whitening of black money as proposed in the national budget is against the spirit of Article 20(2) of the constitution. So I urge the government to backtrack on this move."

Allowing people to legalise wealth earned through corrupt means is not only contradictory to the prime minister's declaration of zero tolerance of corruption, but encourages corruption as well. 

In fiscal 2015-16, taxpayers legalised undisclosed money worth Tk450 crore, according to the latest NBR data.

The revenue authority has not added any data of the following two fiscal years (FY17 and FY18) to the tally as the amount of tax realised during this period from black money holders was very small.

According to finance ministry data, responses to the provision for whitening black money by successive governments since the country's independence have not been significant.

In the 41 years from 1972 to 2013, a total of Tk13,808 crore was whitened, while the NBR got in taxes only around one-ninth of that amount.

Meanwhile, the government has no accurate data as to how much black money is there in the country at present. According to a 2010 report of the finance ministry, the amount of black money is around 37 percent of the GDP.

Meanwhile, according to US-based research organisation Global Financial Integrity (GFI), Tk5.3 trillion black money has been siphoned off from the country in the period between 2005 and 2015, with an average of over Tk50,000 crore per annum.

A major part of the money has been laundered in the guise of importing goods, it said.