Sustained opportunity for black money conversion will send the wrong signal

Much of the recent discourse regarding the reinvigoration of the real estate industry revolves around the overwhelming influx of untaxed money. At least Tk3,200 crore of such investment has been funnelled into the real estate sector from July-November, particularly because of a flat 10  percent tax rate on the investment of previously undisclosed money. Taxpayers are also not required to disclose the source of their income.

On face value, the outcome of this policy has been promising and have led some policymakers to argue in favour of further relaxation of regulations in order to encourage investment in other sectors as well. 

However, such recommendations, while fruitful under special circumstances may have deleterious consequences in the long run. A bit of clarification is required here to avoid foreseeable predicaments. 

When a certain economic sector is in trouble, particularly during an economic recession, it may be recommended, and it may even be wise to permit the conversion of black money into white money. Because there exists a sheer dearth of aggregate demand during recessionary periods, allowing such investments encourage consumers to invest in the respective sectors, generating demand and revitalising the economy. 

Such investments may bring about an economic enhancement in the short run, regardless of the nature of the money being invested. Therefore, increased investment of untaxed money will probably rejuvenate other stagnant sectors and ensure increased employment opportunities for thousands of people.

For instance, the global economy remains stagnant because of obvious disruptions in the supply chain as well as a demand shock, attributable to massive unemployment triggered by the pandemic. Bangladesh is no stranger to these dire circumstances as well. The year 2021 is unanimously being considered as the year of recovery for the economy and thus the integration of untaxed money into the aggregate capital inflow may not be such a bad idea during this period. But such opportunities must not be extended beyond the aforementioned timeline. 

That is, the government cannot afford to pursue such policies in the long run and under no circumstances, can allow the conversion of black money for a prolonged period of time, at least not under the current arrangement. 

Firstly, the tax rate on the investment of untaxed money is a flat one at 10 percent, which is much lower than what most of the taxpayers would have to pay (15 to 30 percent of their personal income) under natural circumstances. Therefore, sustained opportunities to convert black money may discourage them to disclose their income tax payments in due time.

Nazneen Ahmed. Illustration: TBS

Essentially, any taxpayer with an income of over Tk5 lakhs would be better off if they withheld their income for a period and then converted the undisclosed money into an investment in real estate or some other sector. Such arrangements send a wrong signal throughout the economy and may wreak havoc in terms of fiscal management in the long run.

On top of that, taxpayers are not even required to disclose their source of income under the current system, which essentially grants impunity to culprits with earnings from illegal activities. However, under-invoicing or over-invoicing is punishable by a 50 percent tax rate under the current law, and it makes very little sense.  

Finally, if one is asked about the source of black money, he/she will not feel encouraged to whiten the money; to the contrary, if one is not asked about the source of black money, that would encourage illegal earnings. Thus the continuation of such opportunities year after year  will encourage illegal activities and normalise the black market economy, which may have damaging consequences on the overall socioeconomic sphere of Bangladesh. 

Some may argue in favour of normalisation citing Bangladesh's historically low tax to GDP ratio and its reprehensible record in terms of money laundering. As mentioned earlier, such an influx of capital is temporary in nature and involves considerable opportunity costs in the long run. 

Just because the institutions in Bangladesh have historically failed to minimise corruption, money laundering and tax evasion, it does not necessarily mean its institutions should endorse more illegal activities. Instead, Bangladesh should gradually shy away from excessive reliance on black money.

While some may recommend  to declare all black money holders as criminals, such an abrupt  decision will do more harm than good. Instead, there should be a gradual transition through which regulatory institutions are strengthened with robust monitoring mechanisms. Money-laundering laws must be strictly implemented as well. 

There must also be a particular timeline beyond which all such untaxed money will be considered illegal. Furthermore, the tax rate for undisclosed money should be much higher than the standard tax rate to avoid a possible moral hazard on the part of the taxpayers. 

In fact, there are penalties which under extant law for the delayed payment of taxes. Similar treatment should be realised in terms of black money as well. Finally, taxpayers must disclose the source of their personal income when converting their black money into white in order to avoid the inclusion of illegal earnings from criminal activity. 

To summarise, the influx of previously undisclosed money into the capital inflow for real estate as well as other sectors should only be allowed under special circumstances (e.g., the economic downturn brought about by Covid-19) and must be time-bound with a considerably higher tax rate and accountability. 

The government should undertake policies to revamp its regulatory institutions and evolve beyond their present dependence on untaxed money.