The Dark Of The Mainstream-II

Government allows entry of black money,
Ignoring concern voiced by many.
Job creation, innovation, budget financing,
Are the goals such entry failed to bring.

The budget for FY 2021-22 retained the provision for legalizing the undocumented money. The parliament approved the budget. Before the bill was placed before the Parliament, the issue had been highlighted in the press. Repeated pleas for discontinuing the provision , as the advocates of transparency and egalitarian taxation rules made on various platforms, fell into deaf years. However, government raised the bar of retributive tax from 10 % to 25%. In addition, owners of undocumented money have to pay 5% penalty on the retributive tax. Flat purchase, land purchase, investment on savings certificate, investment on stock market are specified as means of legalizing the black money. Owners of clandestine wealth can also purify their money by investing in special economic zone and Hi-tecch park and paying a retributive tax of just 10%.¹

The decision will have impact on liquidity of the bank, flat price and land dispute. Clearly such provisions have pros and cons. No gainsaying that it would hurt consumer rights and honest tax payers.

Prof M A Taslim of Dhaka University and Ahsan H Mansur of Policy Research Institute wrote an article for Financial Express stressing emptiness of continuing legalization the black money. They wrote: "From an economic point of view, the essential difference between white and black money is that the latter is earned by paying taxes while the former evades taxation altogether. The profitability of a business enterprise that pays tax will obviously be less than that which evades taxation. The taxpaying business enterprises become less competitive compared with non-taxpaying business enterprises. The former may be then obliged to evade taxes in order to compete and survive. In the event they do not resort to such business practices, many of them would be forced out of business due to unfair competitive pressures. This will result in the economy having more non-taxpaying business enterprises and fewer taxpaying ones in the long run. To paraphrase a famous saying :'bad business will drive good business out of circulation'. The tax base of the govt will decline, leading to a secular decline in revenue collection. The process may be already in work as indicated by poor revenue collection, which is one of the lowest in the world." ²

It is indeed puzzling and hard to grasp that a legal business entity will pay a corporate tax of 40% or 35% meanwhile owner of black money will legalize their wealth by paying a retributive tax of 25%! Such policy measures leave no incentive for honest business men and legitimate holder of wealth. Inevitably, in this kind of situation Gresham's law will become true. Since 2004, if I am not wrong, this whitening scheme has been going on. But it did little to address government's woes of financing the budget. In 2013, tax revenue as percentage of GDP was 9.74% and budget deficit as percentage of GDP was 4%. In 2018, tax revenue(% of GDP) rose to 11.42% while budget deficit(% of GDP) widened to 5%.³

Another objective behind such decision is to bring investment in industry and create jobs. But if the motif of clandestine wealth owner is to whiten as much black money as possible, this kind of money plays little role in job creation, professional exposure in business dealings or any innovation in management or technology. On the contrary this kind of untreated money promotes corrupt practices in business. Embezzlement of export subsidy and misuse of back-to-back letter of credit are more prevalent.

One of the obvious signs of presence of clandestine wealth is a criminalized society. In one of my earlier posts I elaborated it at great length.⁴

An alternative way to accommodate this wealth is to create an alternative environment for it. So that stigma-free money can enter economy. We need a special place where these pollutants will end and go through a treatment process and then the processed money will reenter economy. Think of a specially administered region that has its own financial institutions and own rules to govern them. Undocumented money of all hues could meet here. People in possession of such wealth should not be banned from channelling funds to such administered region. Special kind of financial institutions could be formed in this region and depositors will be allowed transfer, reinvest or open bank account in the mainland with the interest they earn and part of their money one year or a fixed-time later. Bank statements from these institutions vouch for whitening black money. Moreover, fund of these specialized institutions will be reinvested in mainstream economy and in research activities. At the same time, undesired leverages of black money owners in decision making and governance could be eschewed. Remember problems often creep up when such untreated money are invested in the economy strings are attached to them.

We have special economic zones , cantonment boards where special laws regulate conducts of individuals and business entities. By the same token, we can set up special administered region in a remote corner with restricted entry. In the island of Moheshkhali where a deep sea port is being built, such region could be set up as there is no short of land . Access to the island is not easy. At the same time, accountability of administered region will have to be ensured. And all the state organs that are still not accountable to parliament and judiciary should be held accountable to such institutions, or else culture of no-accountability will jeopardize all the good initiatives. This is another reason for the presence of clandestine wealth in our society.

As we do not draw water from sewer for consumption, we should not allow untreated black money in our economy. It is better to allow sin-city in the remotest part of the country so that mainstream economy is left unperturbed. Many regional countries have such cities and they are just a plane-ticket away. A specially administered city will reduce the incidence of capital flight as well bring black money from other transnational owners offsetting to some extent laundering of money. To address the maladies in our society and economy,stemming from parallel economy, there is no alternative to setting up a treatment plant.

---------------------------------------------------------------------------------------- Notes and References:
1. "Kalo Taka Thaklo, Barlo Korer Har ( Whitening Continues, Tax Rises)", Daily Prothom Alo, June 30, 2021.
2. "Black Money And Investment", M A Taslim and Ahsan H Mansur, Daily Financial Express, April 16,2009.
3. Bangladesh Economic Review 2019.
4. "The Dark Of The Mainstream", Rezaul Hoque,https://hoquestake.blogspot.com Link here