Black money in stocks to continue, will be taxed much more

The government has finally allowed the whitening of undisclosed money by investing in stocks and other listed securities for the second consecutive fiscal year.

Market people have welcomed the move with some unfavourable opinions as tax for the whitening process has been more than doubled.

"We appreciate the decision to continue the option, but the new conditions will not be effective in drawing black money into the stock market," said Rakibur Rahman, a veteran stockbroker and a member of the Dhaka Stock Exchange's board of directors.

In the 2020-21 fiscal year, the government allowed undisclosed money in the stock market on condition of paying a flat 10% tax on the total amount while regular income tax goes as high as 25%.

This time, the government made the whitening tax a flat 25% on the total and also imposed a new 5% penalty on the total tax amount.

Together, they raised the effective cost of black money whitening through investments to 26.25% from the previous 10%.

This would not work to secure the inflow of undisclosed money in the capital market, said Rakibur.  

"Keeping in mind the poor response over the previous fiscal year, I can say the opportunity will not be grabbed by enough people as they will have to pay much more tax on the total money to be whitened," he added.

The chance given last year was poorly accepted by wealthy people as over the first 11 months of the fiscal year, less than Tk500 crore was whitened by 334 taxpayers.

Most importantly, Rakibur said, all the points that had made the capital market less competitive as an asset class to attract black money are still there.

Like the previous fiscal year, owners of undisclosed money can whiten theirs through bank deposits, savings schemes, real estates, and also merely disclosing cash without investing anywhere.

Whitening tax against each of the options other than real estate was raised similarly this year.

"Why should one buy listed securities with a compulsion to hold it for a year while the lock-in is not applicable in other cases?" Rakibur asked.

The opportunity to whiten black money has long been a debated issue as most experts argue that it discourages honest taxpayers, and lower than regular tax on whitening is an injustice to them.

But the opposite opinion gained momentum too, especially among those who care more about the outcome than principles, as the country is seeing siphoning of funds overseas.

The government during the budget proposal a month ago avoided the topic and later changed mind, responding to some industry recommendations.