How will scrapping the ‘black money white scheme’ impact the economy?
The new decision to scrap the black money whitening scheme may be the first step to ensure the long-term benefits of increased transparency, reduced corruption and enhanced public trust – all this could prove invaluable
The interim government of Bangladesh, under the leadership of Dr Muhammad Yunus, has taken a decisive step to scrap the controversial black money whitening scheme.
The demand has been echoed for a long time. Many believe this marks a noteworthy shift in the country's approach to financial transparency and corruption.
Critics have been calling for an end to this money-whitening scheme, which allowed individuals and corporations to declare undisclosed income by paying a flat 15% tax for a long time.
Economists and members of civil society had dubbed the scheme immoral and unjust. Now the questions arise: Will the scheme help the struggling economy? What will be its implications?
An unjust scheme
Originally implemented to bring undeclared wealth into the formal economy, the scheme was criticised for legitimising illicit wealth and providing a loophole for tax evasion.
Critics further argue that the holders of black money are corrupt individuals, and this scheme was not only protecting them but also rewarding them.
"In the past, the authorities allowed black money to be whitened year after year. So, people did not declare their black money in anticipation for provisions to whiten money to be announced every year," said Muhammad A (Rumee) Ali, veteran banker and former deputy governor of Bangladesh Bank.
"Yet those who properly paid taxes had to pay at a rate of 25% - 30% while people who whitened their black money and were guilty of misrepresentation of income only had to pay 15%.
So there was an incentive to go for black money rather than paying taxes," he added.
Over the years, various governments in Bangladesh have reintroduced the scheme at least 22 times since 1972. Despite these repeated attempts, the effectiveness of the policy has been questioned.
Data from the National Board of Revenue (NBR) shows that between 1972 and 2022, around Tk45,522 crore of black money was legalised, generating Tk4,641 crore in taxes.
No exact data on how much black money exists in our country is available.
However, according to sources, during the discussion with the IMF review mission in May this year, the concerned NBR officials reportedly mentioned that 30% to 40% of the Bangladeshi economy remains outside the formal economy, which amounts to Tk136,000-180,000 crore.
Instead of using the term 'black money' this was described as 'unaccounted for money' by them. Even if it's lower than that, it is obvious that the tax we were gaining in return was paltry.
"The government does not earn much from the provision; rather, it raises questions about values," Syeda Rizwana Hasan, the environment adviser in the interim government, said at a recent press conference.
Similar schemes in other countries
Bangladesh's decision to eliminate its black money whitening scheme invites comparison with similar policies in other countries. Such schemes have existed globally, often with mixed results.
In 2016, India implemented a similar scheme called the Income Declaration Scheme (IDS) to curb black money. The IDS allowed individuals to disclose undeclared income by paying a 45% penalty.
While the initiative brought in significant revenue, critics argued that it disproportionately benefitted the wealthy and failed to address systemic tax evasion.
Indonesia launched a tax amnesty programme in 2016, which became one of the world's most successful, bringing in over $360 billion in declared assets. The programme offered reduced tax rates ranging from 2% to 10% for declared assets and aimed to repatriate funds held abroad.
Ending the facility for legalising black money is a positive step, as it was highly unjust. The availability of this facility has increased injustice, inequality and corruption in society, while also undermining the government's policy credibility.
The success was attributed to comprehensive government efforts and public awareness campaigns, but it also faced criticism for potentially encouraging future tax evasion by offering lenient penalties.
However, when these countries provided the scope to whiten black money, they only did so for a particular period, and it came with the warning that anyone who failed to whiten money within the deadline would be penalised.
Possible impacts
The abolition of the black money whitening scheme in Bangladesh is likely to have several implications.
In the short term, the decision may reduce immediate tax revenues as the inflow of declared assets slows down. But it will not be very significant.
"The impact on the economy will be minimal. The black money whitening scheme was never very popular; not much money was declared anyway. The money-whitening scheme was a discriminatory one that favoured people with black money," explained Muhammad A (Rumee) Ali.
However, in the long term, it could lead to a more robust and transparent economic environment, encouraging genuine investment rather than speculative inflows driven by tax arbitrage opportunities.
Since black money can no longer be legally whitened from the money that is already in the economy, we can hope to see an improvement in our tax/GDP ratio, which will be good for our country.
Dr Yunus's government is positioning itself as a reformist administration focused on integrity and good governance. By taking a hard stance against corruption, it could gain significant domestic and international support.
"Ending the facility for legalising black money is a positive step, as it was highly unjust. The availability of this facility has increased injustice, inequality and corruption in society, while also undermining the government's policy credibility," said Mohammad Abdur Razzaque, chairman of Research and Policy Integration for Development (RAPID).
Eliminating the scheme aligns with public sentiment against corruption and could strengthen the rule of law. It sends a clear message that financial misconduct will not be tolerated, potentially leading to increased public trust in the government.
"This decision reflects the current government's commitment to enforcing compliance. Providing such a special facility is an insult to honest taxpayers and businessmen," said Abul Kasem Khan, former president of the Dhaka Chamber of Commerce and Industry (DCCI).
Emphasising the need to address the black money problem, Kasem added, "The source [of black money] must be eliminated. Additionally, the reasons behind the concealment of funds should also be addressed."
What lies next?
The scrapping of the black money whitening scheme by Bangladesh's interim government marks a pivotal moment in the country's financial history. However, this is only the beginning.
According to Muhammad A (Rumee) Ali, ending the black money whitening scheme is only the first step towards people holding on to undeclared money.
"The gaps in our income tax law that allow people to evade taxes need to be addressed. The practice of not declaring income, an act punishable by imprisonment and fine or both, needs to be stopped as it is one of the weak areas of our economy. Our tax/GDP ratio needs to be improved," he explained.
One way to prevent tax evasion is to move to cashless transactions. All transactions over a certain amount have to be cashless to be legally acceptable. However, this is only possible in the long run.
Our income tax and anti-corruption authorities need to be made more capable so that they can sniff out the black money.
Experts believe since black money can no longer be whitened legally, the black money that is already out there now will be invested in places where it cannot be traced.
"Even black money does not sit idle. This money will be used in some way or another. There are lots of methods to do so. The authorities in charge of detecting black money need to enhance their capabilities," said Muhammad A (Rumee) Ali.
Experts agree that our income tax and anti-corruption authorities need to be made more effective in detection and prosecution, and our laws must also be strengthened. This will ensure the culprits are punished.
While the immediate economic effects might be modest, the long-term benefits of increased transparency, reduced corruption and enhanced public trust could prove invaluable.
As Bangladesh moves forward, it will be critical to implement complementary measures that ensure fair tax compliance and foster a culture of accountability.