Should black money be legalised in FY22?

The special tax treatment was given in different regimes since independence. An undisclosed income of about Tk 30,824 crore was disclosed so far, and an amount of about Tk 3,900 crore was collected as tax.

However, the response of voluntary disclosure of undisclosed income was little except for the current fiscal year. The response in this fiscal may be attributed to the legal provision that persons investing the undisclosed income in a specified sector shall not be questioned about the source of undisclosed income by any authority. Moreover, the holders of undisclosed income might have felt safe to disclose their undisclosed income during the pandemic.

In recent times, there have been many discussions as to whether black money should be legalised in the budget for FY22. But most of the discourses have focused on trend analysis of disclosure of undisclosed income in different regimes rather than analysing legal issues of the topic.

The constitution of Bangladesh stipulates that the state shall endeavour to create conditions in which, as a general principle, persons shall not be able to enjoy unearned incomes. So, the constitution does not give any scope for disclosure of unearned income.

While earned income arises from a person's contribution to the production of goods and services, unearned income may accrue from tax evasion, money laundering, informal economy etc.

In the current fiscal year, there is a legal provision for special tax treatment in respect of investment in securities at a 10 per cent tax rate under Section of 19AAAA, and special tax treatment in respect of undisclosed property, cash, etc. at 10 per cent tax rate under Section 19AAAAA of the Income Tax Ordinance, 1984.

The Income Tax Ordinance, 1984 uses the term undisclosed income. By undisclosed income, we mean the income not shown in the income tax return. As per the constitutional provision, the source of income must be legal. But it was not shown in the income tax return due to any reason. Therefore, the question of illegal income (black money) does not come under the purview of voluntary disclosure of undisclosed income.

Usually, black money is earned in cash from various illegal activities and is not declared for paying tax.

Two points may be considered for discussion: source of income and special tax rate. Taxpayers are now able to make any disclosure of undisclosed cash, bank deposits, savings certificates, shares, bonds or any other securities on paying taxes at a rate of 10 per cent. But the legal provision that persons disclosing undisclosed income shall not be questioned about the source of undisclosed income by any authority does not seem to be tenable as per the constitutional provision. This is because the constitution does not allow legalising income from illegal sources (unearned income).

Second, legalising black money at a 10 per cent tax rate in the budget is morally unacceptable as it creates discrimination between honest taxpayers and dishonest taxpayers. Ultimately, it leads to low tax compliance. Therefore, the government does not derive much benefit from this facility. Rather, it gives a wrong message to the society and international community about the state of governance in the country.

In the Income Tax Ordinance, 1984, there is a legal provision for voluntary disclosure of undisclosed income. Under Section 19E (voluntary disclosure of income), if any person fails to show his/her income in the income tax return, there is a provision for disclosure by paying the tax rate to which he/she belongs plus penalty at the rate of 10 per cent tax proportionate to such income. Any taxpayer may avail of this facility for voluntary disclosure of undisclosed income.

In India, the government launched a new black money declaration scheme in 2017. Under the scheme, a black money holder has to pay tax, surcharge and penalty totalling up to 49.90 per cent of the undisclosed amount.

Therefore, the government budget initiative for giving special tax treatment for investing in certain sectors of the economy is neither legal nor moral. If disclosed income arises from high tax rates, high land registration fees, high stamp duty etc., the government may reduce the rates. Instead of creating more distortions in the economy by the special tax treatment, the government may reform certain broad areas and act accordingly.

The Income Tax Ordinance, 1984 is outdated. So, a new income tax code is needed to put in place an efficient and modern income tax regime.

The first issue may include rationalising the corporate tax structure. While India and Pakistan have two corporate tax rates, we have six. So, the time has come to revisit the corporate tax rate structure to attain the dual objectives of reducing the cost of doing business and enhancing government revenue.

Second, the tax net may be broadened by giving emphasis on withholding taxes, reducing tax exemptions and linking different services with the tax system. Third, the digitalisation of the tax system is essential for improving tax compliance.

Fourth, tax administration needs to be strengthened to combat tax evasion and improve tax governance. Fifth, linking bank accounts with the tax identification number and the national identification card is needed to keep track of accounts of citizens.

The author is former chairman of the National Board of Revenue. He can be reached at ahmed.nasiruddin@gmail.com.