Bangladesh
Bangladesh: Black money, corrupt people and a parallel economy
Updated:Jun 18, 2012
Abdullah A Dewan
The June 29, 2011 Economic Times of India writes, “Bangladesh is among the world’s most corrupt and impoverished countries. Only an estimated one million of its 150 million populations pay any taxes. Tax evasion here is widespread with a new study by the finance ministry finding that undeclared income or ‘black money’ could account for up to 80 per cent of Gross Domestic Product — some $110 billion. In recent years, the government has offered tax evaders a string of amnesties to encourage them to declare their money as it seeks to boost the state’s income from revenue collection.”
One of the things that have changed since the publication of this article a year ago is more tax evasion and more accumulation of black money by depriving the exchequer of the much needed tax revenues while creating larger budget deficits and slowing down infrastructure developments. Controversies about whitening black money and outcries from honest tax payers have become a platitude around this time of the year surrounding the cancerous growth of “black money” with no hope to its end.
All quarters are of the opinion that whitening black money (WBM) on payment of minimal tax as proposed in 2012-13 budgets may give rise to anarchy in governance. In the National Press Club Programe on June 18, Communication Minister Obaidul Quader emphasised, “If the polls are not freed from the influence of black money, then democracy will be crippled.”
The irony is that the government is willing to let black money holders (henceforth called “black people”) breed black money and evade taxes on their income while proposing to diversify tax net on new sources. For example, proposal for tax deduction at source on mobile phone calls, and deduction of 15 per cent tax on bank interest without TIN. The former will adversely affect millions of poor in rural areas while the later will affect people like students, farmers or micro entrepreneurs.
At a BRAC Business School discussion “Bangladesh Budget 2012-13” last week attended by many experts on budget and tax issues, Bangladesh Institute of Development Studies (BIDS) Research Director Binayak Sen argued that housing sector has seen one of the most visible growths. “…why only Tk 450 to Tk 500 million is earned as tax and why the number of people having above Tk 200 million property is only 4000?...... It should not be less than 20 to 30 million if the valuation is calculated at market rate and not at the source rate,” said Binayak.
Economists hold the view that black money breeding can become a major factor behind persistent inflation through misallocation of resources and shifts of resources from productive investment to current profligate consumption. The parallel economy of black money slows down infrastructure developments and anti-poverty programmes. It is now well known that tax evasion creates great inequities between the honest tax payers, who cannot evade taxes — and tax evaders — those in influential positions to evade taxes.
Several experts have suggested that high taxes and intricate laws and regulations in India could be the primary causes for tax evasion and piling up of the black money. However, this nexus is untenable if past experiences are any indications.
In his article “Black money and its disastrous influence on Indian economy” (publishyourarticles.org) Gisish Sharmaa argues that if the link between high rates and tax evasion is true, then the volume of black money would have gone down steeply — not increased. In India the rate was close to 98 per cent in 1971 when the black money was 7 per cent of GDP, whereas the rates have been brought down to around 30 per cent but the black money is peaking at 50% of GDP.
What are the recourses to deter tax evasions and reduce the breeding of black money? They all are known to the government and tax experts. However, for the sake of some readers’ some of these may be revisited here:
It must be recognised that controlling black money would require curbing corruption and hence strengthening the anti-corruption commission (ACC) and its modernisation. But this is unlikely to happen in Bangladesh any time soon.
A bill should be passed in the parliament requiring all politicians filing a return of their assets and incomes which should be subjected to scrutiny by the ACC and NBR. The same must apply to government officials, businessmen, and political leaders country-wide. In an administration in which a minister is alleged of indulging in corruption is removed only to be assigned with another ministerial portfolio cannot be trusted to fight corruption.
It’s a fact that tendency to evade tax creeps in when tax rates are high. Therefore, the government can try if lowering the tax rates would lessen tax evasion —although I doubt it will.
Capital gains tax should be set at a level comparable to SARC countries. The same should be applicable to property taxes, registration fees in relation to property and all other real estate ownerships.
Government controls, fees on licences and permits should be reduced to minimum.
Deterrent punishment must be given to those who are found guilty of money laundering, profiteering, black-marketing, and smuggling.
Not too many people except Prime Minister’s Economic Adviser Mashiur Rahman and some politicians are seen to be lining up defending the WBM process. On a Bangla TV talk show on June 9, participated by former Bangladesh Bank Governor Salehuddin Ahmed and FBCCI President AK Azad, Adviser Mashiur wished that all black money be eliminated, if possible. He should have been reticent without saying another word but he did not.
Whether by inadvertent gaffe or deliberate diligence Adviser Mashiur claimed that black money is not sitting idle – they are doing something — being used somewhere such as investment in the capital market. I am sure he knows well that investment in capital market and invest in capital goods are two different matters — the former does not guarantee to lead to the later but assures proliferation of black money.
Sadly though, another prominent defender of black money investment is Professor Abul Barakat, president of Bangladesh Economic Association. In his June 14 Press Conference, he suggested the mainstreaming of undisclosed money. He said, “We want such a system which will debar the ACC and NBR from asking questions about the sources of money.” Did he really mean it or it was an unguarded gaffe?
Successive governments dared not to enforce the existing laws and regulations because it would hurt their own “black people”. They may try to bring down the government while crippling the economy. So, every government has been flirting with whitening black money at some nominal tax rate — well below the statuary rate applicable to honest tax paying citizens, thereby perpetuating the breeding of black money and a corrupt- people driven parallel economy.
The writer, formerly a Physicist and Nuclear Engineer, is a Senior Fellow at the Policy Research Institute, Dhaka and Professor of Economics at Eastern Michigan University.
The Daily Sun, 18 June 2012
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