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White Money: Black Money

Asjadul Kibria

Ignoring all urges and arguments, finance minister AMA Muhit makes the provision tolegalise undisclosed incomes more flexible. The budget for the next fiscal year (FY13) provides an opportunity to bring almost all previous undisclosed incomes under the tax net.The provision is popularly dubbed as whitening the black money.

Interestingly, in his 150 plus pages budget speech, Muhit doesn't mention even a single wordregarding the provision but skillfully keeps it in the finance bill. So, at first it is not possiblefor anyone to understand that such a tax scheme is there. And as the finance bill is written inlegal-technical term, it is also very difficult for most people to understand the meaning of any

provision.

In brief, the provision provides a scope to legalise previously undisclosed income by allowinga person to pay applicable income taxes along with a 10 percent penalty. The rate of penaltyis 10 percent of tax proportionate to such income. For instance, if somebody wants to legaliseTk 15 lakh he earned five years back, but didn't show in his income tax return, first theapplicable income tax for that income has to be determined. Then a 10 percent penalty will beimposed on the tax. In this case, if the person's income tax, according to tax-slabs, is Tk 3lakh, he has to pay an additional Tk 30,000 as penalty. The actual calculation is, however,more complicated.

Whatever the method of calculation may be, the main question is necessity and rationale for such room to legalise the undisclosed money. The arguments placed by finance minister aswell as the government to justify the measure are highly misleading and ill-conceived.Moreover, if the finance minister believes that such a measure is right and valid, why does heskip it in his budget speech?

In his post-budget press briefing, the finance minister claims that such a measure would bringinvestment and prevent cash from going out of the country. He also states that the amount of undisclosed money in the economy is something between 41 and 82 percent of the country'sgross domestic product (GDP). In his language, We have given scope to bring theundisclosed money to the market because we want the undisclosed money invested in theeconomy. We want to utilise the money.'

Such claims actually reflect an inadequate understanding of the nature of black money. Thementioned estimate of black money in the country is also very misguiding. The huge rangefrom 41 to 82 percent itself is enough to illustrate that the figure is untrustworthy. How can aresponsible finance minister depend on such a figure? No doubt that estimating the amount of

black money is very difficult. But, before doing so, one has to have a clear conception of

black money and the nature of its holding.

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To be precise, black money is actually earnings that evade applicable tax no matter whether the earnings are legal or illegal. Actually, incomes that originate from illegal activities (i.e.smuggling) and practices of corruption (i.e. bribe) have no valid reason to come under the taxnet. Such incomes are by nature meant to dodge tax. On the other hand, incomes from

approved activities are subject to tax. When anyone keeps any such income undisclosed totax authority, it becomes undisclosed or black. For instance, when a physician doesn't showhis/her full earnings, originated from private practices, in his/her income tax return, the saidamount actually turns into black money. Such income is not illegal as he/she has governmentapproval for private practice. So, despite having a legal source of income, any one can makehis/her income undisclosed or black by evading due taxes.

Image: Courtesy

Now the question is, where are all these black money held. As M A Taslim and Ahsan HMansur explain: 'Black money may be held in the form of (a) financial or real assets in thecountry and/or (b) financial or real assets overseas.' (Black Money & Investment-UnpleasantEconomics by M A Taslim; p.66; Jagriti Prokashani, Dhaka; 2010.) Thus black money is notkept in cash in a secret vault in a house, drawer or under the pillow. It is already invested inthe economy in several forms. The money holders purchase land, apartments or gold; or invest in bond and shares or stocks; or deposit with banks; or even purchase dollars. Thedifference between the actual purchase value and the deed value of a land is a clear exampleof holding black money as a form of real assets. Thus, a big portion of the country's black

money is already invested in different forms.

One should also keep in mind that income has two components consumption and savings. Itis almost impossible to keep savings idle without investing it in any form. It is the basiceconomics identity (Y=C+S=C+I).

Surely rest of the portion has transferred to other countries in different legal and illegal ways. Now, it is usually transferred to those countries where it is safe to keep. For example,Malaysia and Dubai have legal safeguards for such illegal or undisclosed funds. These fundsare also invested in overseas real or financial assets. According to the Global FinancialIntegrity report, illicit financial flows from Bangladesh are some US$13,976 million during2000-2009 period.

So, the argument of our finance minister that he wants to bring all or at least a good portionof black money into mainstream economy through investment is not valid. Almost all the

black or undisclosed money is already invested in the national economy or overseas. Byallowing the legalisation of the undisclosed money, the mode of investment may be changed.One may invest into stocks or bonds by selling gold, for instance.

Actually, huge amounts of black money is already accumulated by different quarters closelyallied with the incumbent government. Now they need some legal protection of their illegal

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and undisclosed incomes. The finance minister is giving that protection. And definitely agood amount of black money will be invested to set up new approved commercial banks.

But such a practice actually goes against both economic rationale and moral standards. It will

be very disappointing for regular and honest tax payers. Previous record shows that a verysmall amount of black money is actually whitened by using tax amnesty allowed by severalgovernments.

Another gray area is the amount of black money in Bangladesh. The finance minister'sestimate is vague indeed. Several studies, conducted by both local and internationaleconomists during the last two decades, revealed that the size of the underground economyranged between 21 to 38 percent of Bangladesh's GDP. An underground economy is thereflection of generation, flow and activities of black money. Friedrich Schneider, Professor of Johannes Kepler University of Linz in Austria, is one of the few economists around the worldat the forefront of efforts to measure the underground economy. His latest study reveals thataround 36 percent of the Bangladesh's economy consists of underground activities.

In the last month, Indian finance minister Pranab Mukherjee has tabled a 97-pages white paper on the country's black money in the national parliament. Although the paper did notmention any names or provide an estimate of such funds within and outside the country, it

pointed out where the money is parked and suggested some legal measures to detect existing black money and also curb the future flow of black money. A M A Muhit should follow suchan initiative before allowing a wholesale opportunity to legalise undisclosed income or

whiten the black money.