Unveiling Bangladesh's Shadow Economy: Strategies for Revenue Augmentation

1. Political Economy of Black Money: Undisclosed Economy, National Budget and Resource Mobilization www.equitybd.org

2. Objective of this presentation 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

3. 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)

4. Understanding/our perception about shadow/underground economy 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

5. 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.

6. Scenario of Global Shadow Economy [Source: Study by Prof. Freidrich Schneider in association with WB, July 2010] - In Bangladesh

7. Scenario of Global Shadow Economy In South-Asian

8. Scenario of Global Shadow Economy In Other Regions

9. 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.

10. 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, Bank account Real estate Stock and shares Savings investments Investment in foreign countries Cash, gold, jewelry etc. Under-values assets.

11. Loosing revenues due to shadow economy (Impact)

12. Loosing revenues due to shadow economy (Impact)……. Continue Illegal Investment for further benefiting by vested group - Political Expenditure - Share Market and Real State Spreading Inequality (income, asset and consumptions)

13. 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.

14. 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]. 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)

15. Possible way : Controlling Shadow Economy 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.

16. Possible way : Controlling Shadow Economy ….. Continue Type of Taxpayer in Income Tax Structure

17. Possible way : Controlling Shadow Economy ….. Continue Government heavily relies on indirect tax The total tax and revenue mobilization performance is very much dependent on indirect taxes. Sector wise Tax performance in Revenue mobilization

18. 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

19. Possible way : Controlling Shadow Economy ….. Continue Why VAT is Regressive ? 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. Source: Institute of Fiscal Study-UK

20. Possible way : Controlling Shadow Economy ….. Continue Reconsider Tax exemption policy • 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.

21. 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.

22. Other Challenges • 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.

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