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Explainer: Black money — what, why and how

  • Published at 10:51 pm June 13th, 2020
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Representational image Syed Zakir Hossain/Dhaka Tribune

To the common people, the term 'black money' or shadow economy is not always clear

Every year at the time of the announcement of the national budget, the issue of black money being transformed into white becomes a hot topic — with many businesses in its favour while civil society, think tanks, rights groups and prominent citizens dead set against it.

The latter group argues that such an opportunity discourages honest taxpayers from paying taxes and encourages people to earn money through illegal means.

In the proposed budget for the upcoming 2020-21 financial year, the government has gone for allowing a whitening of black money through investments in the stock market and the real estate industry against a certain percentage of tax for one year starting from July 1.

However, to the common people, the term “black money” or shadow economy is not always clear.

What is black money?

There is no official definition of black money.

Black money, in general, indicates the accumulation of income that does not figure in the accounts books. It is the aggregate income of an individual, acquired through illegal means.

On the other hand, it also indicates the income of an individual obtained through legal means which is taxable, but the individual chooses not to pay the tax or report the wealth to the authorities.

That is why it can also be termed as hidden money. As a result, this “black money” cannot legally be used in declared and formal business transactions without the proper green light from the authorities.

This kind of economic activity is also termed as informal, irregular, underground, hidden, unofficial, unrecorded, untaxed or unmeasured. Many also refer to the illegal use of black money as shadow economy, grey economy, cash economy or unofficial or informal economy.

How is black money generated?

In many forms, illegal transactions can help an individual or a business group to generate black money. Black money can come from two broad categories — 1. illegal activities and 2. legal but unreported activities.

Illegally earned money is obviously not reported to the tax authorities, and so it is black money. The second category comprises income from legal activity that is not reported to the tax authorities.

For example, a flat owner sells a flat at Tk1 crore, of which he received Tk70 lakh by cheque, and the rest in cash. In this transaction, Tk30 lakh becomes black money or unrecorded money.

Tax evasion and weaknesses in the tax administration along with corruption among tax officials create a larger scope for the generation of black money.

Prof Frederik Schneider mentioned in his study, titled “Shadow Economies All Over the World: New Estimates for 162 Countries from 1999-2007,” that shadow economy (or black money) is mounting in different countries due to their weak tax administration and policy structure and thus numerous persons and companies have gone beyond the formal economy.

In addition, illegal economic activities that can generate black money also include bribery, gambling, smuggling, extortion, drug and illegal arms trading, work done by illegal immigrants, corruption, tax evasion, information hiding in land and building registration, money laundering and hundi business, terrorist activities and tax free vehicles by MPs, etc.

On top of that, a large number of taxpayers maintain no formal accounts and non-banking transactions.

How is black money generally spent?

The larger chunk of black money is generally transferred abroad and only a little goes into fixed deposit accounts, while the black money owners spend the rest on posh living.

It is, therefore, mainly used for unauthorized and unchallenged transactions which, in turn, boosts black market operations.

For a second home abroad, a huge amount of black money is also laundered in countries that offer citizenship as they do that against a certain amount of investment.

According to a Global Financial Integrity report, $5.9 billion was siphoned off from Bangladesh in 2015.

On the other hand, Bangladeshi nationals' deposits with various Swiss banks rose by 28.34% to 618 million Swiss Francs (about Tk5,347 crore) in 2018.    

Black money in Bangladesh’s economy

Black money is a reality in Bangladesh as it is in many other countries. Estimating the amount of black money in an economy is difficult.

There is no reliable way to quantify black money in any country, be it Bangladesh or some other. However, researchers and intelligence agencies always try to find out the figures.

According to a working paper of the International Monetary Fund, titled “Shadow Economies Around the World: What Did We Learn Over the Last 20 Years,” as of 2015, the size of the shadow economy in Bangladesh was 27.60% of the country's total GDP. It was 37.12% in 1993, the highest since 1991.

How much whitened?

Though governments have been giving tax amnesty to black money holders in different fiscal years since 1971, they have not had a good response from them in terms of the amount of money whitened.

According to the National Board of Revenue (NBR), between 1971 and 2017, a total of Tk18,372.13 crore was whitened by several people. From the amount, the government received Tk1,529.46 crore in taxes.

Between 2007 and 2009, when a military-backed caretaker government was in power, Tk9,683 crore of black money was whitened — the highest amount under any government in the country’s history.

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