Tax Evasion & Tax Avoidance:Tax evasion refers to the illegal act of

suppression or understatement of the income. Tax avoidance on the

other hand is an arrangement by which the taxpayer reduces his true
tax liability by legal methods. The difference between evasion and
avoidance is only of degree as in both the cases there is leakage of
revenue which increases the burden of tax on other taxpayers who
do not resort to such practices. This leads to black money which is
utilized secretly in illegal transactions for earning more and more
money. This vicious circle of tax evasion breeds into cancerous
growth of black money.
Tax evasion include claiming of fictitious deduction,improper utilization may be made of temporary taxpayers status,fleeing the
country to avoid payment of tax,failure to pay or keeps records or adequate records,failure to pay over the revenue estimated
tax;interference with the tax administration through bribery and corruption and any otherunlawful means employedwhich seeks
to with hold tax which is otherwise payable.
Causes of Black Money
Several sources of taxes are identified as causes. The major
problem areas are smuggling, under-invoicing, over-invoicing,
contractual cuts and commissions, tender monopolization, graft
extortion, rent seeking, loan defaults so on and so forth. It would be
relevant to discuss some of the factors so that a correct
understanding about the origin, growth and expansion of black
money can be possible.
Smuggling : Smuggling is one of the sources of tax evasion. Due to
the rigid system of exchange control gold, jewelry, electronic goods
etc. constitute ripe ground for smuggling.
Over-invoicing of Import : Goods imported into the country are
often over-invoiced by arrangement with the foreign supplier. This
enables the importer to remit excess fund to the supplying country.
The excess amount of money is either deposited by the importer in
some foreign bank or is brought back to the country through
unofficial channels with an -additional margin of profit arising due to
the difference between the official and unofficial exchange rates.
Over-invoicing of imports results in the inflation of purchases.
Under-invoicing of Export : Export are also under-invoiced for the
same purpose of acquiring foreign exchange outside the country.
Under-invoicing of exports causes reduction in the value of sales and
the book profit is unduly reduced to the extent of under-invoicing.
The difference between the actual income and such reduced book
profit escapes tax and swells the black money.
Shortage of Goods : Controls are often introduced to check
shortages. As controls become rigid or are extended to wider areas,
the premium in the black money increases. Controls on scarce goods
are necessary for poorer sections of society. Those who administer
the controls have enormous scope for corruption. This results in the
generation of black money.
Licensing : The system of licensing is associated with maldistribution
of commodities in short supply which results in the generation of
black money. Licensing prohibits new entries from creation of
additional supplies. Businessmen who secure licenses can charge a
hefty premium in black from helpless common men. Huge payments
made to grease the palms for gratification and unlawful favour result
in black money.
Construction Industry : There has been rapid expansion of
construction industry. It is estimated that the rate for getting
necessary sanction is above 10 to 15 percent of the estimated cost.
Naturally, construction industry has been contributing considerably
to black money.
Industrial Sector : Industrial sector has been the major contributor
to tax evasion. Controllers of public limited companies buy low and
bill high and pocket the difference personally.
Inflation : Prices rise higher than income. People caught between
these two forces find it difficult to meet the both ends. When people
think that black money can be earned going unpunished they are
tempted to resort to it.
Election : Political parties need huge amount of money above the
ceiling on expenditure officially allowed for election. The parties try
to obtain this excess amount from businessmen, industrialists,
smugglers and the like. Businessmen have by now learnt that they
have to pay a certain charge out of the black money to the coffers of
the political parties. This in turn induces them to follow malpractices
to accumulate black money.
Demonstration Effect : Black money provides an opportunity to
lead a luxurious life beyond the normal standard. There is a desire to
emulate the higher standard of living of the affluent people. This
demonstration effect tempts people to earn more money by illegal
means.
Ineffective Enforcement of Tax Laws : An important reason for the
existence of black money is that no serious action is taken against
people when black money is detected. Justice is slow and often
results in mild punishment.
Standard of Public Morality : Deterioration of moral standard of the
people is another important cause for the growth of black money.
Middlemen Between Taxpayers and Revenue Authority : The
middlemen who intermediate between tax payers and revenue
authority are responsible for tax evasion.
Urban Real Estate Sector : Black money transactions are almost
universal in urban real estate section. The state of affairs in real estate
turns even an honest citizen a tax evader if he participates in this
market.
Moral and Psychological Factors : People in general do not realize
their duties to the state to pay the correct amount of taxes.
Shortage of Experienced Personnel : The taxes department should
consist of experienced and efficient personnel to cope up with the
assessment and investigation work. The factors relating to income,
wealth and expenditure are known only to the taxpayer and if he
does not disclose all of them to the assessing officer the task of the
later determining the correct tax liability becomes very difficult.
Forms of Black Money
Black money is kept in different forms and shapes. It is not easy to
classify them in clear language. The most common forms in which
black money is kept are stated below -
Bank Account : Black money is kept deposited in local or foreign
banks either in own names or in the names of relatives or trusted
men of the black money holders. Normally, a number of such
accounts is maintained in different banks and the types of the
accounts vary, eg. saving account, fixed deposit, short term deposit,
long term deposits etc. These accounts, it is needles to mention, are
not disclosed to tax authority.
Real Estates : Black money is utilized in acquiring land, apartments,
buildings, shops etc. These are often acquired in the names of
relatives, friends or trusted men of the black money holder.
Stocks and Shares : Blank money is often invested in the purchase
of shares and stocks either in own names or in the names of relatives,
friends or trusted men of the black money holders.
Savings Instruments : Black money is invested in the purchase of
different saving instruments issued by directorate of National
Savings.
Investment in Foreign Country : Black money is sometimes
transferred through unofficial channels and is invested outside the
country.
Cash, Golds, Jewelry etc. : Black money is also kept in the form of
cash, gold, jewelry etc.
Under-valued Assets : Investments in personal assets are shown at
values much less than their actual cost.
Consequences of Black money
Black money is ruinous for a number of reasons. It causes lavish
expenditure and conspicuous consumption. Shortage of
commodities, inflationary rise in prices, unhealthy speculation are all
due to black money. Some of the consequences of black money are
briefly discussed below :
Loss of Revenue : Black money results in a huge loss of revenue to
the government. It is often said that a deficit budget would become a
surplus budget in the absence of black money.
Distortions of Resource Allocation : Black money distorts resource
allocation and often leads to wasteful use of money.
Inequity Among Taxpayers : Tax evasion through which black
money is generated creates great inequity among the honest and
dishonest taxpayers. The position of the salaried perjons is the worst
because they have little chance to avoid taxes. Professionals and
businessmen are able to make use of several means to evade taxes.
This has developed a black money culture in the business world.
Donation to Political Parties : As black money cannot be used for
honest transactions, it results in conspicuous consumption and
donations to political parties. All these lead to accumulation of more
black money.
Misinformation About the Economy : The most obvious
consequence of black money is misinformation about the actual
state of the economy. We tend to get lower national income
estimates. Saving, investment data are distorted. This results in a
faulty diagnosis of black money problem, inappropriate policy
actions, widespread tax evasion as well as loss of revenue to the
government. Leakage from public expenditure affects the efficiency
and effectiveness of fiscal policy and planning.
Distortion of Economy : The availability of large black money
creates distortion in the economy. Black incomes often mean easy
money which finds an outlet in non-essential articles of conspicuous
consumption. This has a demonstration effect on all classes of
people. In reality conspicuous consumption pattern is tilted in favour
of the rich at the cost of encouraging the production of articles of
mass consumption. A rise in the overall consumption leaves less
resources for investment in priority areas. These distortions in the
product mix in favour of non-essential consumption have adverse
effect on production and thus they distort the objectives of planning.
The extent to which scarce resources are used for higher
consumption decides the reduction in savings.
Distortion of Investment Pattern : Black money distorts investment
pattern by pushing it in unproductive uses. It encourages investment
in gold, jewelry, bullion etc. This has adverse effect on growth. Black
money encourages diversion of resource in the purchase of real
estate and investment in luxury houses. Large scale under valuation
of property results in conversion of black money into white. There
has been astronomical rise in the price of land because of speculative
purchase of land by black money operators. As a consequence the
middle classes are priced out in the purchase of land for houses. In
short lot of national savings are used in making inputs available for
luxury housing.
Black Liquidity : A large part of black money is held in cash, gold,
silver etc. As a result there is an abundance of liquidity which may be
termed as black liquidity. This causes to rise in price of commodities
and services.
Transfer of Funds to Foreign Countries : Black money results in the
transfer of fund? from Bangladesh to foreign countries through
secret and illegal channels. Such transfer is done by violating foreign
exchange regulations through the under- invoicing of exports and
over-invoicing of imports.
Parallel Economy : Black money provides a fertile field for anti-social
elements. Economists say that over the years the unrecorded
transactions have grown in size and dimensions and created parallel
economy operating simultaneously and competing with the official
economy.
Black Money Prevents the Planning : Growth of black money
prevents the benefits of planning from reaching the poor. Rich
conceal their incomes by not paying taxes. They become richer as
black money grows. Government fails in its goal of achieving an
egalitarian society.
Black Money Dwarfs the Growth : Black money distorts the pattern
of the saving and investment, thereby dwarfs the legitimate growth.
It diverts the energy of the people from productive to nonproductive
activities. The resources are used for the production of
luxurious goods. Due to black money the demand from such good
increases. But at the same time the country faces the shortage of
resources for the implementation of development schemes.
Black Money Effects Monetary and Fiscal Policies : The
unprecedented growth of black money affects the effectiveness of
monetary and fiscal policies. Black money has a tendency to grow
faster than GDP. Government fails as her policies are based on GDP
estimates.
Unauthorized Transaction in Foreign Exchange : Avenues of black
money leads to unauthorized transactions in foreign exchange just
like 'hoondi', bribes, bonus, benami accounts, tax free government
securities, contribution to charity in anonymous names.
Black Money Deposits in Foreign Banks : Black money is kept
outside the country as deposits in foreign banks which deprive the
country of a part of its wealth which could have been put to
productive use.
Inequality of Income : One of the worst consequences of tax
evasion is inequality of income which has its origin in black money.
Existing Tax Amnesty Schemes to Entice Black Money :
The Income-tax Ordinance, 1984 offers several tax amnesty schemes
to entice black money. Some of the important schemes are as follows:
Section 19A. Exemption in Respect of Investment in New
Industry : Any sum invested by any person in a new industry during
the period between the first day of January 1997 and the thirty first
day of December, 1999 shall be exempt from tax and no question as
to the source of such sum shall be raised.
Section 19AA. Special Tax Treatment in Certain Cases of
Investment : No question as to the source of any sum invested by
any person in the expansion of balancing, modernization, renovation
and extension of an existing industry or in the purchase of stocks,
shares of a public limited company listed with any stock exchange in
Bangladesh or any sum used for repayment of industrial loan during
the period between the first day of January, 1997 and the thirty first
day of December, 1999 shall be raised if the assessee pays, before the
filing of the return for the relevant assessment year income tax at the
rate of seven and half percent on such sum.
Section 19AAA. Exemption in Respect of Investment : Any
investment made by an assessee being an individual, firm,
association of persons or a private limited company between the first
day of July 2002 and thirtieth day of June, 2005 in any trade,
commercial or industrial venture, engaged in production of goods, or
services shall be exempt from tax and no question as to the source of
such investment shall be raised.
Section 19B. Special Treatment of Tax in Respect of Investment in
House Property : No question as to the source of any sum invested
by any person in the construction or purchase of any building or
apartment shall be raised if the assessee pays, before the assessment
is completed for the relevant assessment year, tax at certain rates on
the basis of the plinth area of such building or apartment.
Section 46A. Exemption From Tax of Newly Established Industrial
Undertakings : Profits and gains of an industrial undertaking, tourist
industry or physical infrastructure facility set up in Bangladesh
between the first day of July 1995 and the thirtieth day of 2005 shall
be exempt from payment of tax.
Section 83A. Self-assessment : A new assessee who derives income
from business or profession can declare any sum of initial capital and
for this no explanations to the sources of such investment shall be
required if the assessee in his return shows income which is not less
than fifteen percent of the declared initial capital.
Exemption in Respect of Income From Fishery, Poultry, Dairy etc.
Any income from fishery, poultry, dairy etc. is exempt from tax if the
assessee invests 10% of the said income, when the declared income
exceeds Tk. 1,00,000, in the purchase of bond issued by the
government.
Conclusion and Recommendation
With foreign assistance drying up, domestic debt creeping up and
revenue earning showing no significant improvement, there is no
way out but to increase internal resources to formulate development
budget and accelerate economic growth. We therefore recommend
following measures to entice black money back to formal economy.
Collection and Distribution of Information : Information should be
collected from banks and other financial institutions import and
export offices, custom and VAT offices, City Corporation Municipalties,
Sub-Registrar Offices, Bangladesh Road Transport Authority, Post
Offices, all private and public limited companies. Commissioner
should be provided with secret service fund to buy information. The
information collected should be distributed among the concerned
offices and be properly used. The information gathered about the
existing taxpayers should be placed in their respective files and
follow-up action must be taken. The information gathered on those
who are not taxpayers should be examined and new cases should be
registered in the appropriate case. Effective enforcement must be
based on suitably comprehensive reliable information system. The
important attributes to information system are : the degree of
computerization system, sources and nature of different kinds of
number (TIN) in transactions, tax withholding systems, methods used
to store, process and retrieve information and the use of information
in audits. TIN should be used to collate all information gathered
regarding major transactions entered into by taxpayers, matching it
with corresponding TIN and transmit it to the concerned assessing
officers for use in assessment proceedings.
Survey for Broadening Tax Base : According to a newspaper report
there are about 5 million eligible taxpayers in Bangladesh. (Prothom
Alo, 7 July, 2002) At present about 1.3 million taxpayers are registered
for income tax. Survey work should be conducted round the. year
with the objective of broadening tax base not only by netting new
taxpayers but also by detecting evasion by existing taxpayers.
Encouraging Voluntary Compliance : It is this area that Australia
might have some lessons for others. One matter that causes
taxpayers to evade is what will help them to comply voluntarily. In
this respect the Australian Tax Administration, over recent years, has
undergone a fundamental change in approach, from one of trying to
detect and penalize non-compliance to one of encouraging or
improving voluntary compliance. One of the present day themes of
the Australian Tax Administration is helping tax payers to 'get it right
the first time'. To encourage voluntary compliance it should be made
a law that no penal proceeding shall be taken against a new
taxpayers because the long run success of a tax system depends on
the cooperation of the tax payers rather than enforcement of tax
laws. This will to a great extent solve the problems arising from the
non-filing behaviour of a large number of potential tax payers.
Tax Audit : Tax audit should be designed to minimize evasion; audit
should be random : Incomes corresponding to lower taxes should be
audited with higher frequency. Those taxpayers who are verified on
audit to have reported truthfully ought to be rewarded.
Internal Audit : Internal audit and inspection system must attain
efficiency of international standard.
Penalty Policies : Penalty policies should also be designed to
minimize tax evasion. Detection of evasion by itself is not sufficient,
detected evaders must be effectively penalized. This may fail to be
realized that in the absence of follow-up prosecution effort evaders
are all to avoid or postpone punishment through appeals, judicial
delays, amnesty and out of court settlement programmes.
Monitoring of Tax Administration : Tax administration must
continuously be monitored to ensure that it is not contributing to its
own failure.
Record-Keeping Requirement : Where taxpayers fail to keep
adequate records, it is difficult to establish their proper tax liability.
Tax system should encourage good record keeping and discourage
poor record keeping. Good record keeping might be encouraged by
advising taxpayers that if they keep good records, they are less likely
to be audited. Poor record keeping might be discouraged by thereat
of greater chance of being audited.
Tax Amnesty Voluntary Disclosure Scheme : There were few takers
of government black money amnesty in 2000-2001. Only a little more
than Taka 10 million made it to the surface from the hidden closets
following a token ten percent taxes required for legalizing such
money. Pakistan tried it out even under military rule but could not
succeed. India too experimented with various measures to mop up
such money but to little avail on the whole. In Bangladesh the tax
amnesty scheme failed due to the fact that there existed several
similar tax amnesty schemes which are less costly and more
convenient for the black money holders. In spite of the apparent
failure this scheme may time to time be offered to allure the black
money holders because whatever may be the quantity of revenue,
the administrative cost involved to collect it* is very minimum.
Corporate Tax Rate Cuts : At present the rate of tax for publicity
traded company 30%. The rates of corporate tax in some other
countries are : United States 11%, Ireland 12%, Hongkong 16%,
Singapore 22%, Russia 24% and Germany 25% (The Daily Star, 4
November, 2002). In view of the worldwide corporate tax cut there is
a need to reduce corporate tax rate in Bangladesh.
Ethical Requirements of Law and Accounting Professions:
Taxpayers usually require help from lawyers and accountants to
avoid taxation. In a seminar organized by the Institute of Chartered
Accountants of Bangladesh (ICAB) the Governor of Bangladesh Bank
blamed some of the audit firms for not disclosing hidden forgeries in
the balance sheets of banks and other financial institutions. He
sought an institutional mechanism to check violation of ethics in
certifying financial statements. (The Daily Star, 1 July, 2001).
Government can ask the professional bodies to make ethical rules
prohibiting members from assisting taxpayers to undertake tax
avoidance arrangements.
Cooperation of Banks : Taxpayers also require help from banks as
they not only keep their black money in the banks but also do major
transactions with the help of the banks. In many cases bankers have
better knowledge of the sources of income of their clients. But they
are extremely reluctant to disclose the sensitive information of their
clients to tax authority even when legally called for. Hence effective
mechanism should be designed to trace all big transactions. Besides,
Government can ask Bangladesh Bank to make rules prohibiting
bankers assisting tax payers to evade tax.
Attitude of the courts : An important factor which will determine
how successful a tax administration is in preventing tax avoidance is
the approach or attitude of the courts. Now we shall quote at some
length from an editorial of Dhaka Law Report which criticizes the
superior Judiciary for liberally granting hundreds of orders of stay of
realization of revenue : "In another area of greater national interest,
exercise of judicial direction suffered similar questions in the recent
times. This is with regard to cases relating to customs, VAT, Income Tax
etc. Thousands of writ cases that cropped up due mainly from
exercise of such power remained undisposed of for years together.
About 10,000 cases most of them pending for years together, still
await disposal. The position is alarming for the reason that every
week no fewer than 40 fresh cases are added to this staggering
10,000 while on an average hardly 10 such cases are disposed of in a
week. This backlog of cases is there with orders of stay of realization
of the assessed government revenue so liberally granted by the
courts in the past mostly even without any form of guarantee or
security for payment by a petitioner if he failed to succeed
Interlocutory orders of stay, status quo or injunction that were
granted so liberally in so many writ cases came at long last under
serious considerations when it was found that cases of government
revenue remained inordinately stalled seriously affecting the
governments budgetary calculations. "The editorial also criticizes tax
administration for not taking the issue seriously:" government
revenue worth crores of taka continue to remain unrealized every
week for indefinite period of time. This chiefly because the concerned
executives of the government go on passing, in many cases careless,
The words black economy are emotive and pejorative in themselves. Other descriptions for the same set of activities include
informal,
irregular, underground, hidden, unofficial, dual, unrecorded, untaxed and unmeasured economy. In different contexts different
terms may
be more or less appropriate. The term black money is adopted here, not necessarily because it is the most appropriate but rather
because it
is the term that has the widest currency. Black money indicates the accumulation of income which does not figure in account
books. It is
the aggregates of incomes which are taxable but are not reported to the tax authority. As a result black money cannot be used for
honest
business transactions in the economy. It is mainly used for illegal transactions giving rise to black market operations. When the
magnitude
of the operation of the black money results in the establishment of a parallel economy this connotes the functioning of an
unsanctioned
sector in the economy whose objectives run parallel with the avowed social objectives. Thus the term parallel economy
emphasizes a
confrontation between the objectives of the legitimate sectors and the illegitimate sectors. There are three aspects of black
money- simple,
compound and administrative. In its simplest form black money refers only to income which arises from tax evasion. Once the
black money
is generated it tends to be channeled into saving and investment in gold, bullion and other unlawful activities giving rise to
further black
money. This is the compound aspect. The administrative aspect refers to a system of cuts, commissions and kickbacks by the
administrative
personnel which cements the link between the first two approaches. Black money is created basically due to the notion that an
acceptable
net rate of return of an individual is far in excess of the permissible rate of return under the law of the land after taxation. As a
result by
methods of tax evasion, tax concealment, smuggling in exports and imports, production of illicit commodities, unlicensed
commodities
and a large variety of devices of over-invoicing and under-invoicing, artificial escalation for the cost of the project white money
is
converted into black money. The inflows into the black section from the white section and the outflows from the black section into
the
white section go on simultaneously. It is widely believed that the inflows into black sectors have been becoming stronger than the
outflow.
This explains the continuous increase in the size of black money of our economy. In this paper having examined different aspects
of black
economy of Bangladesh attempts have been made to suggest measures to entice the black money back to formal economy.
reckless and non-speaking orders relating to assessment of revenue,
witting or unwittingly and, in no fever cases collusively. [51 DLR
(1999)] The editorial also blames the tax authority for not showing a
sense of urgency to contest the proceedings started against them
and get the same disposed of early. In this connection it is
recommended that a special revenue bench of the High Court
consisting of the Judges expert in revenue matters may be set up for
speedy disposal of the revenue cases.
Discriminatory Treatment : Transport sector, for example, enjoys
special treatment of tax. Such discriminatory treatment for special
groups of taxpayers should be removed.
Income Tax and VAT Close Cooperation : Often high degree of
discrepancy is discovered between the sales disclosed to the income
tax authority and the sales disclosed to VAT authority by the
taxpayers. To solve the problem assessment should be made with
close cooperation between these two authorities.
Complaints Against the Tax Officials : Any complaints against tax
officials should promptly handled to remove the misgivings and
restore the confidence of the taxpayers.
Searches and Seizure : Just two years back, 5674 searches were
made in India and the total value of assets seized was 4.1 billion
rupees (88 million dollars). Last year only 2946 searches were
conducted and assets seized valued at 2.5 billion rupees (43 million
dollars). (The Daily Star, 12 November 2001). In Bangladesh such
searches should be conducted in suspected cases from time to time.
Exemption Limit for Tax Withholding : There should not be any
exemption limit for tax deducted at source.
Tax payers Benevolent Scheme : Since there is no possibility of
introducing social security schemes in the near future, a Taxpayers
Benevolent Scheme for those taxpayers who paid huge money in
taxes to the government exchequer in the past but are now in the
need of government help should be introduced.
Existing Tax Exemptions : various
exemptions allowed by present law
should be re-examined with a view of
their modifications, curtailment or
withdrawal.
Gift Tax by Donee : The liability to pay
gift tax should also be laid on donees.
So all gifts received by a person in a
year should be added up and the total
should be subjected to gift tax.
Wealth Tax : Wealth tax should be
reintroduced.
Tax Holiday : It has been found by
several studies that tax holiday is not
only redundant under existing income
tax law but it also create tax haven. It
should immediately be abolished.
Weak Political System : In most
developing countries the most tax
sensitive groups are also the politically
significant and there is a reluctance on
the part of the politicians and
administrators to act against their interests. Similar is the case with
Bangladesh where the true problems of income tax policy lie in the
weak political system where special interest groups can organise to
block changes that adversely affect them. As a result the tax
administration is neglected characterized by poor training, low status
and poor equipment. The most significant issue pertains to
enforcement is the high level of evasion due to backward state of tax
administration. This has tended to limit revenues from income tax
leading to consequences for both equity and efficiency. r