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Political Economy of Black Money:

Undisclosed Economy, National Budget and Resource Mobilization

Understanding and initiate discourse on existing shadow economy and its practices and implications in Bangladesh

economy

Draw recommendations to reduce the size of black economy and augmenting the revenue mobilization

Overview of Bangladesh Economy a) Bangladesh is a low-income economy of South Asia

b) Bangladesh aspires to become a middle income economy by 2021 according govt. declared “Vision-2021

c) In FY 2011-12, Bangladesh had a GDP of Tk.9,14,784 crore.

- Agriculture - 19.29 %- Industry - 31.26 %- Service - 49.45 %

d) GDP growth rate is about 6% and per capita GDP is US$ 818

e) National budget was tk.1,61,207 crore (17.6% of GDP and 135% of revenue mobilization) where deficit budget was tk.41,862 crore (FY2012)

f) Annual Development Program (ADP) Tk.41,080 crore (4.5% of GDP and 25% of national budget)

The accumulation of income which does not figure in books of accounts

It is the aggregated of incomes which are taxable but are not reported to the tax authority

As a result black money can not be used for honest business transactions in the economy

It is mainly used for illegal transactions giving raise to black market operators

Understanding/our perception about shadow/underground

economy

Source of Underground Economy

Illegal economic activities

Bribery, gambling, smuggling, extortion, drug dealing, black marketing, corruption, manipulations in import, exploitation of loopholes of laws, tax evasion, land & building registration, extraordinary professional fee, adulterate food production and sales, not refund the bank loan, illegal arms business, loss of govt. companies, domestic and international tender agreement, govt. purchase, money laundering & hundi business, terrorism activates, housing business etc.

Legal but not reported in national accounts

Tax evasion , Tax avoidance, etc.

Scenario of Global Shadow Economy

[Source: Study by Prof. Freidrich Schneider in association with WB, July 2010]

- In Bangladesh

Year % of GDP as black money

2000-01 35.7%

2001-02 35.5%

2002-03 35.6%

2003-04 35.7%

2004-05 36.0%

2005-06 36.7%

2007-08 37%

Scenario of Global Shadow Economy

In South-Asian

Country % of GDP as black money

India 23%

Bhutan 31.1%

Mal dips 32.1%

Nepal 37.5%

Pakistan 40.1%

Srilanka 47%

Scenario of Global Shadow Economy

In Other Regions

Country % of GDP as black money

Latin and Caribbean 42.1%

Sub-Sahara, Africa 41.3%

Europe and Mid-Asia 40.5%

South Asia 34%

East-Asia and Pacific 33.3%

Middle-East and North Africa

28.5%

How the shadow economy is creating or expanding?

Over & under invoicing

Weak & complicated Taxing system

Tax exemption (EPZs , Agriculture, ITPC, tax free car import etc)

Corruption (bribery, tax, purchase etc) and illegal involvement (smuggling, extortion, drug dealing, black marketing etc)

Large number of non-banking transactions (cash transaction /exchange/trade)

Not refunding of bank loan.

Bank account Real estate Stock and shares Savings investments Investment in foreign countries Cash, gold, jewelry etc.

Under-values assets.

Forms of Black Money

Black money is kept in different forms and shapes. It is not easy to classify them in clear language. Some common forms in which black money is kept are,

Loosing revenues due to shadow economy (Impact)

Illegal economic activities % of Black economy on GDP

Bribery and Smuggling Tk.12,000 crore

Illegal income through corruption on legal activities.

Tk.58,000 crore

Custom duty Tk.25,000 crore

Excise duty evasion by private banks, insurance and industries,

Tk.16,000 crore

Income tax Tk.7,000 crore

Export and Import duty Tk.6,000 crore

VAT evasion Tk.500 crore

Stamp, Land and Registration Tk.1,000 crore

Source: Study report by Dr. Abul Barakat

Illegal Investment for further benefiting by vested group

- Political Expenditure- Share Market and Real State

Spreading Inequality (income, asset and consumptions)

Loosing revenues due to shadow economy (Impact)……. Continue

Factors Contributing to the Underground Economy:

Large number of taxpayers maintains no formal accounts

Large number of non-banking transactions (cash transaction /exchange/trade)

Miss pricing of invoicing in respect of goods and asset.

Illegal income remained unreported Enormous national election cost by the candidates Donation to political parties. Transfer of fund to foreign countries. Inequality of income. Weak execution and complicated of laws.

Capital Flight due to Shadow Economy A total of $14.059 billion (Tk.1,12,472crore) had been siphoned off from Bangladesh in 10 years since 2001 through trade mis-invoicing, corruption, bribery and tax evasion [Global Financial Integrity (GFI, USA), report 2009-10].

Year Taka

2006 Tk.22,224 crore

2007 Tk.18,984 crore

2008 Tk. 6,784 crore

2009 Tk. 5,192 crore

2010 Tk.18,936 crore

NBR member Syed Aminul Karim said, yearly USD 180 crore (BDT.14,400 crore) had been siphoned off from Bangladesh, thus loosing yearly tk.1,000 core as revenue. (Prothom Alo, 19.12.2012)

Reform Tax system through expanding direct tax net

Direct tax payers are few

The population of our country is near about 150 million where direct registered tax payer is only 02 million. Even theses people don’t paying their tax regularly and in accordance with real tax assessment. According to the information of NBR (National Board of Revenue) only 1.4 million people are paying their tax regular basis.

Possible way : Controlling Shadow Economy

Possible way : Controlling Shadow Economy ….. Continue

Type of Taxpayer in Income Tax Structure

Type of Taxpayer No of Taxpayer

%

Corporate 61,998 2.98%

Other Tax payer 7,78,750 37.53%

Minimum Tax payer 3,90,964 18.83%

Only Tax File Holder 8,43,548 40.66%

Total Tax Payer 20,75,260 100%

Source: NBR annual report 2011

Possible way : Controlling Shadow Economy ….. Continue

Government heavily relies on indirect taxThe total tax and revenue mobilization performance is very much dependent on indirect taxes.

Sector wise Tax performance in Revenue mobilization

Fiscal Year % of total revenue % of VAT in total revenueDirect Tax Indirect Tax

2000-2001 19.40% 80.56% 31.56%

2004-2005 19.49% 80.51% 35.00%

2008-2009 27.17 % 72.83% 38.36%

2009-2010 28.09% 71.90% 39.50%

2010-2011 29.49% 70.51% 38.23%

2011-2012 24.42% 75.58% 37.30%

Source: NBR AR 2011

Possible way : Controlling Shadow Economy ….. Continue

Reconsider new VAT policy 2012

- VAT proposed 15% on all product & services in general

and regressive as because;

- The VAT imposed with a uniform rate among the rich and poor at the consumption level.

- A uniform VAT ignores equity, or more specifically, income distributional issues, which are particularly relevant for developing countries like Bangladesh.

- Because low performance of income tax make limit the asset transfer to the poor and high performing VAT is creating income inequality between rich and poor in developing countries

Source: Institute of Fiscal Study-UK

Institute of Fiscal Study, UK comments that VAT always impinge the poor livelihood. The study found that the poor are paying double VAT than the rich based on the proportion of income earnings.

Why VAT is Regressive ?

Possible way : Controlling Shadow Economy …..

Continue

Govt allows India 10years tax exemption of coal-fired power plant under BIFPCL at Rampal, Bagerhat.

In FY 2000-2005 total number of tax exemption cases were 1531 and the estimated loss of revenue was about 3.5 billion US$ that was estimated as about 9.6 percent of total income-tax earning during that period.

MPs have been enjoying the benefit of importing tax free vehicles since 1991, thus country deprived from around tk.1,000 crore in taxes. The finance minister stated that 275 MPs of the last National Parliament (8th) imported tax free luxury vehicles which tax amount would be tk.280 crore.

Recently Govt. has exempted tk.29.85 crore tax out of tk.35 crore in respect of importing machinery by Akiz Steel Mills of Akiz Group.

Possible way : Controlling Shadow Economy ….. Continue

Reconsider Tax exemption policy

Possible way : Controlling Shadow Economy ….. Continue

Cross-boarder information exchange

Under the cross country information exchange agreement, The Director of International Taxation, India has collected taxes from cross-border transaction as per following.

Year Collected Tax by DIT, India

2002-03 INR.1,356 crore

2003-04 INR.1,29 crore

2004-05 INR.4,418 crore

2005-06 INR.8,049 crore

2006-07 INR.9,147 crore

2007-08 INR.11,790 crore

2008-09 INR.15,740 crore

2009-10 INR.16,198 crore

2010-11 INR.21,509 crore

2011-12 INR.27,442 crore

Source: White paper on Black money, India 2012

Strengthening govt. internal audit system.

Weak political system and need strong political will

Reviewing of different lax loopholes.

Strengthening of NBR (man power, transparency, etc)

Strengthen and effective money laundering act for preventing ML

Accountability and punishment provision to accounting audit farms.

To show zero tolerance to undisclosed money.

Reward the taxpayers so that more people are encouraged to pay tax

Collection and distribution of information

Reduce revenue expense & channeling more finance in development

Effective and appropriate utilization of national resources

Need more study on it and to develop national consensus

Country by country information exchange agreement may be done.

Other Challenges

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