Legalising undisclosed income: Issues and concerns

---

Shamsul Huq Zahid
The market is rife with speculations that the government would offer yet another opportunity to legalise 'undisclosed' money in the national budget for the next fiscal (2009-10).
Different trade bodies have already put forward demands to this effect and the finance minister and the head of the National Board of Revenue hinted that the next budget might contain such a provision.
But the issues that until now have not been spelt out include (1) whether the opportunity would be extended to money earned through both legal or illegal means; (b) whether penal rates, in addition to normal tax rates would be charged on the funds to be disclosed; and (3) whether the opportunity will be applicable to funds to be invested in specific sectors.
These issues, of course, are expected to be considered by the authorities concerned before finalization of the budget for the next fiscal.
There is no denying that this kind of opportunity offered through provisions beyond normal tax laws gives rise to frustration among the regular taxpayers. Yet the governments in the Third World countries occasionally have to take recourse to such measures with a view to mobilizing revenues and bringing in undisclosed funds in the mainstream economy.
But as far as Bangladesh is concerned, this has become rather a habit than occasional use of the government's discretion to offer opportunity beyond the normal tax laws to the holders of undisclosed money earned through legal or illegal means.
Earlier, opportunities were offered to whiten black money by paying taxes to the government at certain rates. But during the two-year rule of the military-backed immediate past caretaker government, the opportunity was given some semblance of legality. Only the undisclosed yet legally earned funds were allowed to be legalized by paying penal tax, varying from 5.0 per cent to 7.5 per cent, in addition to normal tax rates.
In the first year under the caretaker government, the response from the holders of undisclosed funds was very encouraging. The fear factor might have played a role in this connection since the drive against corrupt elements and tax evaders was in full swing then. As the caretaker government started losing its firm grip on events, the people were less panicky. Hence, response from undisclosed fund holders was lower than expected in the next fiscal.
The NBR arranged a pre-budget discussion with the journalists last Monday where the issue of legalizing undisclosed money was raised. It was suggested, quite rightly, that the NBR in the event of offering an opportunity to legalise undisclosed money in the next national budget must not include any discriminatory provision. Since holders of undisclosed yet legal money had to pay penal taxes in addition to normal tax rates while legalizing the same in the last two financial years, the same method should also be followed in the next budget, the journalists suggested.
There cannot be any exception because the fund thus legalized would be invested in industries or productive activities. Moreover what is the guarantee that the legalized funds would finally be invested in productive sectors? Who will follow it up?
The NBR might consider realizing tax at reduced rates from undisclosed money in post-investment state. But such a proposition may receive cold-shoulders from the businesses.
To be honest, the entire exercise of granting opportunity to legalise undisclosed money has not proved itself to be a worthy exercise, though no pragmatist will contest the logic for providing such a facility in a situation where tax : GDP ratio is low, a large part of the economy remains outside the taxation network and a good number of potential tax-payers do not file any tax return. Now, the question arises as to what good the amount of revenue that the government earns through such a measure does to a fair tax collection system and the economy.
Moreover, what is the use of offering a facility for a few when millions having taxable incomes are paying not a penny to the government exchequer without any official sanctions?
Assuming that that 40 per cent of the households-about 25.5 million, according to the latest Bangladesh Bureau of Statistics (BBS) data, are poor and another 40 per cent do not have taxable income, the rest households, numbering about 5.1 million, representing the middle class and the affluent sections of the society, do have taxable income. But only 680,000 tax returns were submitted in the last fiscal.
The NBR chairman told the pre-budget discussion meeting that the tax net would be extended in the next budget with a view to earning more tax revenue. That should not be a problem for the Board since it carried out surveys across the country, particularly in Dhaka and other major cities, to identify potential taxpayers last year.
However, to bring in the eligible taxpayers under the tax net, the NBR would require additional manpower and improved technology under its command. On the top of everything, the taxmen would have to be cooperative and friendly to the taxpayers. There is no denying that the process of submitting tax returns has been simplified. What is required now is a simple and easy approach on the part of taxmen.