In an imminent fiscal upheaval, whispers grow louder that the government is poised to resurrect the once-discarded opportunity of clandestinely whitening black money, transcending all doubts. Murmurs suggest that individuals harboring wealth from clandestine origins may soon have the chance to legitimize their ill-gotten gains by a mere 15% tax levy, as per the forthcoming annual budget.
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Rumors swirl that those eyeing this window of opportunity will be granted amnesty, shielded from scrutiny regarding the murky origins of their wealth. This clandestine endeavor, whispered among the corridors of power, is purportedly confirmed by insiders within the Finance Ministry and the National Board of Revenue.
Fiscal Integrity vs. Temptation
Recall the previous fiscal year, where a similar scheme beckoned black money holders with a tantalizing 10% tax amnesty. Records reveal a staggering Tk20,600crore of illicit wealth laundered into legitimacy, enticing 12,000 taxpayers to seize the opportunity. Yet, the scheme’s demise ensued due to lackluster engagement from the black money hoarders.
In an attempt to combat economic turmoil wrought by the pandemic, the government had slashed the highest individual income tax rate from 30% to 25% in FY 2020-21. However, despite ongoing fiscal ramifications, murmurs hint at a potential reinstatement of the 30% tax threshold.
Current Corporate Tax Rates:
- Publicly listed companies: 20% to 22.5%
- Non-listed companies: 27.5% to 30%
If the government reopens the gates for black money whitening, individuals with illicit wealth could evade scrutiny by paying only a small fraction of their hidden funds. Last fiscal year, a 7% tax amnesty for repatriated laundered money saw no takers, despite the Income Tax Act-2023 allowing black money legalization, but not on a wholesale basis.
As the government weighs this contentious policy, a dramatic conflict looms between fiscal integrity and the temptation of untaxed wealth. Current legislation allows any taxpayer to legalize black money by paying up to 25% in tax plus a 10% fine. The law also permits black money whitening through real estate purchases, with taxes varying by property location and size, though government agencies can still investigate income sources in these cases.
Despite provisions, the black money whitening scheme has shown limited benefit to the mainstream economy. Holders can legitimize funds by paying a 10% tax if they invest in economic zones or hi-tech parks, enjoying amnesty.
In FY 2020-21, 11,839 individuals legalized their black money, resulting in Tk 2,064 crore in taxes for the National Board of Revenue (NBR). This group included doctors, government employees, garment exporters, bank directors, and gold traders. Of them, 7,055 legalized Tk 16,830 crore in cash or deposits, while others invested in housing or the stock market.
Previous Fiscal Year’s Scheme:
- Tax Amnesty Rate: 10%
- Maximum Tax Rate: 30%
- Amount Legalized: Tk 20,600 crore
- Number of Taxpayers: 12,000
Current Legislation for Black Money Legalization:
- Maximum Tax Rate: 25%
- Additional Fine: 10%
- Option for Black Money Whitening through Real Estate Purchases
Proposed Amnesty Aims to Address Corporate Tax Disparities
Corporate taxpayers may soon have this groundbreaking opportunity to legalize their undisclosed income, commonly known as black money, without facing tax scrutiny. Endorsed by Prime Minister Sheikh Hasina and set to be integrated into the Income Tax Act 2023, this move signifies a significant shift in fiscal policy. The aim is to regularize financial statements through the Document Verification System (DVS), easing the burden on corporate taxpayers.
Tax experts anticipate enhanced transparency in corporate accounts, notorious for manipulation. To address disparities between past and present financial statements, tax authorities plan to implement a ‘Grandfather clause,’ offering general amnesty for corrected tax returns.
With an estimated two-thirds of corporate-tax returns potentially requiring amnesty, the proposed system aims to streamline financial reporting. Under ICAB’s mandate, companies will maintain a single financial statement approved by a chartered accountant, further enhancing accountability.
If implemented, the opportunity for corporate taxpayers to legalize undisclosed income shouldn’t be compared to similar individual amnesties on ethical grounds. This could significantly impact banks, which would struggle to justify loan approvals based on questionable financial statements.
Initially, the government might lose 5% to 10% in revenue. However, long-term benefits and improved financial governance could outweigh these losses, according to experts.
Currently, publicly listed companies pay a corporate tax rate of 20% to 22.5%, while non-listed companies are taxed at 27.5% to 30%. Many companies allegedly maintain multiple sets of books to evade taxes and secure bank loans.
Designated sectors for undisclosed income investment may include cash, bank deposits, savings certificates, real estate, and the capital market. While CA-audited financial statements are obligatory for corporate tax returns, previously, only 10,000 to 12,000 statements were certified annually out of 30,000 received by tax authorities.
Legal Barriers Hamper Corporations’ Return to Local Economy
The Document Verification System (DVS), introduced by the ICAB on December 1, 2020, aims to enforce transparency. Tax experts recommend general amnesty for corporate taxpayers, as tax authorities now require DVS-verified financial statements for returns.
Since 1971, an astonishing Tk 308.24 billion of undisclosed income has been disclosed, channeling taxes worth Tk 39 billion into the public exchequer. The progression is stark: Tk 22.5 million until 1975, followed by Tk 507.6 million from 1976 to 1980, Tk 458.9 million from 1981 to 1990, and a staggering Tk 1.50 billion from 1991 to 1996. The tide surged with Tk 9.50 billion whitened from 1997 to 2000, Tk 8.27 billion from 2001 to 2006, Tk 16.82 billion from 2007 to 2009, Tk 18.05 billion from 2009 to 2013, and a monumental Tk 111 billion from 2013 to 2020.
The urgent need to bolster the economy has reignited debate over whitening undeclared or black money, offering tempting concessions. Billions of Taka have long been stashed in offshore accounts by corporations, hampered by legal barriers preventing their reinjection into the economy.
Breakdown of disclosed income over the years:
- Tk 22.5 million until 1975
- Tk 507.6 million from 1976 to 1980
- Tk 458.9 million from 1981 to 1990
- Tk 1.50 billion from 1991 to 1996
- Tk 9.50 billion from 1997 to 2000
- Tk 8.27 billion from 2001 to 2006
- Tk 16.82 billion from 2007 to 2009
- Tk 18.05 billion from 2009 to 2013
- Tk 111 billion from 2013 to 2020
Authorities Turn Blind Eye to Massive Yearly Outflows
Mis-invoicing and money laundering have flourished unchecked, with profits diverted abroad amid political and economic instability. Authorities turned a blind eye to the massive yearly outflow, allowing the informal economy to overshadow the formal one. Asset managers adeptly navigated global markets, frustrating financial tracking efforts.
Overlooking that undisclosed funds are often invested abroad, policymakers may have missed the uncertainty of repatriating assets to Bangladesh. What does this mean practically? Are those involved in laundering billions abroad being given a second chance to legalize gains? While encouraging private sector investment is rational, it risks overlooking major players engaged in illicit activities. Balancing this with efforts to increase the tax-GDP ratio is crucial, as turning a blind eye to such activities undermines fiscal integrity.
While the adage “desperate times call for desperate measures” may apply, skepticism remains about addressing systemic loopholes facilitating capital flight. If enacted, this provision could inadvertently encourage further evasion instead of fostering tax compliance.
