Feeding the underground economy

In the first 10 months of the outgoing fiscal year, Tk 14,459.40 crore of undisclosed wealth was legalised in the country—as reported by The Daily Star citing data from the National Board of Revenue (NBR)—which, the government says, will play a big role in kick-starting the economy by injecting cash flow amidst the pandemic-induced financial struggles.

However, this record-breaking whitening of illegal cash raises some important questions about its social, economic and political implications.

To begin with, this practice is contradictory to the constitution. "The practice of providing such opportunities is unconstitutional. Article 20(2) of the constitution prohibits unauthorised income," said Dr Iftekharuzzaman, Executive Director of the Transparency International Bangladesh, while discussing the issue with this writer. The said Article of the constitution states: "The State shall endeavour to create conditions in which, as a general principle, persons shall not be able to enjoy unearned incomes, and in which human labour in every form, intellectual and physical, shall become a fuller expression of creative endeavour and of the human personality."

Unfortunately, for Bangladesh, whitening black money has rather become a norm. This is not the first time such an opportunity has been granted to illegal money owners to legalise their assets. Since 1975, there have been 16 instances when this opportunity has been provided during the tenures of various governments, with the assumption that it would boost cash flow in the economy and prevent money laundering. The current government itself has offered this opportunity a total of eight times since the 2012-13 fiscal year.

In most of those scenarios, the reaction from illegal cash owners had been limited. Between 1971 and 2017, according to the NBR, a total of Tk 18,372.13 crore had been legalised, from which the government received Tk 1,529.46 crore in taxes. Of this amount, Tk 9,683 crore had been whitened during the army-backed caretaker government regime during 2007-09.

Despite this low volume, this provision has been provided to the owners of black money time and again. The sudden increase in legalisation of black money in FY 2021 can be attributed to two factors. First, the provision that no authority will question the source of the money—including the NBR and the Anti-Corruption Commission—has given the tax evaders and corrupt individuals the opportunity to leverage this chance to whiten their illegal wealth without having to be accountable for how they earned it. The NBR chairman, Abu Hena Md. Rahmatul Muneem, himself had been quoted by Prothom Alo as saying that "if any organisation raises questions regarding this matter, that will be unjust and that should not be. We've talked to the organisations that could raise questions about legalising untaxed money, and asked them not to do so." 

Secondly, experts have suggested that since Covid-19 has impacted economic activities across the world, many individuals found it difficult to transfer their cash to other countries. Thus, they had to resort to whitening their money taking advantage of the wholesale opportunity provided by the government.

And it seems this practice cannot be stopped. It is puzzling why this year—even after stating earlier that the wholesale money whitening opportunity will not be offered in FY 2022 budget—the finance minister himself had to backtrack on his words, saying this provision might be extended to this fiscal year as well.

The practice of offering opportunity to legalise black money itself is ethically wrong. And even the tax—a meagre 10 percent—that needs to be paid to whiten illegal money is a blatant demonstration of social injustice. While an average law-abiding taxpayer pays around 20-25 percent in taxes, a person in possession of black money can whiten it by paying only a 10 percent tax. This practice is exclusive in nature, and serves to punish the law-abiding citizens for being compliant with local laws. It essentially discourages the people from paying their taxes, feeds the corrupt system, encourages non-compliance and crime, and aggravates social and economic inequities.

Bangladesh's tax-GDP ratio—one of the lowest in South Asia, hovering around 9 percent on average and dropping to 7.9 percent in FY 2020—should be a concern for the policymakers. The fear is, such discouraging policy decisions by the government will be further detrimental to the NBR's initiatives to drive tax collection and improve this ratio in the coming years.

Moreover, this practice of offering a window to legalise black money will hamper the government's measures to fight corruption and reduce the size of the country's dark economy. A 2013 study commissioned by Bangladesh government estimated that the size of the underground economy in the country stood at a staggering 62.75 percent of the nominal GDP in 2010. More recently, an IMF study in 2018—which mostly covered legal activities and tried to exclude illegal activities such as gambling and prostitution—suggested that the size of the underground economy is around 30 percent. One can only imagine what the figure would look like if the IMF study was more holistic in nature.

And these shady, illegal schemes, recurring with increasing frequency, directly aid corruption.

"This is discriminatory in nature as it forces the common people to pay a tax of around 20 percent while the corrupt earners of black money pay only 10 percent to whiten their illegal wealth. This continuous opportunity being provided by the government to whiten black money is sending a very wrong message to the people, one that promotes and protects corruption," said Dr Iftekharuzzaman.

He added: "From a social perspective, the implication of this practice is grave. The government is flaunting the fact that more than Tk 1,445.94 crore has been earned in taxes as a result of whitening black money. However, compared to the opportunity cost of it—the ethical and moral compromise that it requires—this sum is very insignificant."

The U-turn the government has taken with the suggestion that this opportunity might be extended after June 30 is disturbing, to say the least. A budget is a serious document that cannot be changed overnight. It is a major policy issue. The sudden change in government stance indicates external pressure from vested quarters to legalise black money. One wonders, how does this move comply with the government's zero-tolerance policy towards corruption?

Instead of facilitating the whitening of black money, the government should focus on taking measures to stop the underground economy from growing. It needs to look into the source of this significant volume of black money that is strengthening our underground economy, and take punitive actions against those working to sabotage the economy and hurt the poor and middle-class for their own selfish, illegal gains.

This practice is only creating an artificial bubble of illegal money flow, which will burst anytime and cause widespread social and economic instability that will be difficult to manage. It's a disaster in the making. It would be very unfortunate and detrimental to the growth of the nation if the government succumbs to external pressures to offer this provision again. It is unconstitutional, ethically wrong, and cannot be justified with any excuse. Immediate measures should be taken to not only punish those people who amass money illegally but also to contain the size of our booming underground economy. This is no time for a U-turn—it's time to act to make things right, to promote social and economic equity. And the government needs to demonstrate strong political will to ensure this.

Tasneem Tayeb is a columnist for The Daily Star. Her Twitter handle is: @tasneem_tayeb