Tax laws: Towards revolutionary reforms

Internal tax-revenue is the largest source of budget income of the government. Budget size for is fiscal year (FY) is Tk 4.00 trillion. Of the amount, tax-revenue target is Tk 2.48 trillion. As foreign-aid dependency of the country declined in recent years, need for internal revenue collection increased significantly. To meet the increased demand and improve taxpayers' services, the government has taken a number of initiatives to bring "revolutionary" reforms in the tax laws.

The National Board of Revenue (NBR) has been working to replace all of its three major laws --- related to income tax, value-added tax and customs --- over few years. All of the laws will be drafted considering international best practice, current business trend and socioeconomic context of Bangladesh. All of the laws will be framed in Bangla, and in a simplified way to make those easily understandable to the taxpayers. However, there will be an English version of those new laws to make it understandable to the foreign taxpayers, including foreign investors.

Of those new laws, the VAT and Supplementary Duty Act 2012 is scheduled to come into force from July 1, 2019 after the government backtracked on its implementation this year. The law, passed in Parliament in 2012, was deferred by two years after budget proposal following resentment of the businesses. The law will replace the existing VAT law, framed in 1991, by incorporating a uniform rate of VAT at 15 per cent for all products. It will introduce a digital account-maintenance system to ensure recorded transaction of business. Once the new law introduced, scope of VAT evasion will be narrowed significantly.

Another major new law is on income tax. Currently, the government imposes income-tax measures under an ordinance. A drafting committee is working on the new income-tax law to replace the existing ordinance of 1984. The NBR aims to frame prospective tax rates for a longer period to facilitate investors. It was a long-cherished demand of the business community to introduce stable tax rates for the sake of proper investment planning. The new income-tax law is likely to be placed before Parliament in the budget session for FY 2018-19. All of the international best practices, base erosion and profit shifting by the multinational companies, merger and acquisition will be addressed in the new law. The NBR is likely to upload the new law by December 2017.

The new customs law is also scheduled to get through parliament in the first quarter of the 2018 calendar year. The NBR started drafting the new customs law in 2014. The new customs law would replace the existing customs act 1969. It would focus the trade-facilitation tool as per revised Kyoto convention.

The new customs law would bring a revolution in the international trade facilitation, the revenue authority expects. A number of new trade facilitation tools including authorized economic operator (AEO), Post Clearance Audit (PCA), advance ruling system would reduce the time of release of goods from the customs ports. Adjudication process of the customs law will be changed. The NBR has also framed a draft of new customs rule for providing implementation guidelines of the new law.

Three of the major laws would bring significant changes in the tax regime after many years. The Income Tax Ordinance 1984, the VAT law of 1991 and the Customs law of 1969 would be replaced by the new laws.

The NBR started a year-long motivation programmes to make people aware on positive outcome of the new laws. The board is sensitizing the taxpayers with huge motivational campaigns across the country.

However, the new VAT and Supplementary Duty Act 2012, which was scheduled to come first, could not be implemented in FY 2017-18 after on two-year motivational programme of the NBR. The tax authorities had eyed Tk 200 billion in additional revenue in the current Fiscal Year (FY) by implementing the new VAT law. Business process and account-maintenance procedure will be changed after enforcement of the VAT law. The NBR had faced resentment when it imposed the VAT law 1991, replacing the excise and salt act. Businesses staged a procession in front of NBR in protest against imposition of the law. However, the businesses are now demanding continuation of that law which they protested in 1991.

Nevertheless, it is difficult to impose any new law by replacing previous one due to mindset of people to accept changes.

Three of the existing laws of the NBR went through several changes every year. Specially, as per NBR, the existing VAT law turned garbage with several changes every year with a number of Statutory Regulatory Orders (SRO) and waivers.

Country's poor tax-GDP ratio, below 10 per cent, can be increased through legal and regulatory reforms. Although tax-revenue contributes almost 86 per cent to the total government revenue, there is huge potential untapped. Only 1.5 million people submit income-tax returns a year out of 3.3 million Taxpayers Identification Number (TIN) holders. Less than 32,000 businesses submit VAT returns every month out of 8.0 million Business Identification Number (BIN) holders.

Overhauling customs law is also important to check capital flight through under-and over-invoicing. The United Nations Development Programme (UNDP) claimed that Bangladesh lost, on average, US$800 million annually in capital flight during the last four decades, driven by balance-of-payments leakages, dubious trade invoicing and unreported remittances.

According to the report of Global Financial Integrity (GFI), Bangladesh has lost as much as USD75.85 billion in last one decade (2005-2014).

Such capital outflow mainly occurs through export-import trade via customs borders.

To plug in the leakages, formulation of new laws with recent and future business practices is imperative. However, the NBR has adopted go-slow policy on implementation of the law. It has been preparing the ground for pushing to laws through.

For the new VAT and SD law, a VAT online project has already introduced online BIN and also automating VAT-return submission, payment, auditing and other systems of VAT. The income-tax wing of the NBR also introduced automated issuance of TIN, online income-tax-return submission and Bitax system for automating income tax-related activities. The Customs started its automation process through introducing Asycuda world system in the customs houses. Major customs houses are interconnected with one another for information sharing.

To promote income-tax culture, countrywide tax fair, introduced in 2010, is another innovative step of the NBR. From the current FY, the NBR also started organizing tax camps across the country to provide services, receive tax returns, issue TIN to the taxpayers.

Such motivational steps of the revenue board are encouraging for the taxpayers and helping in developing tax culture. However, the NBR should be careful before enforcing any regressive tax measure considering its sensitivity. Imposition of heavy tax or harsh measure may push up prices of essentials and increase cost of living. Also, cost of doing business may increase with regressive tax measures.

Before implementation of the new laws on VAT, income tax and customs duty, the NBR should conduct thorough economic impact analysis. Already, the NBR moved to conduct impact analysis of new VAT law, to be implemented in 2019. However, no such steps have been taken yet for the other two laws.

Favorable tax regime with one-stop services encourages both local and foreign investment. The tax authorities should cut discretionary power of taxmen to reduce harassment in the tax-payment process. The new tax laws should pay attention to this matter.

The writer is Special Correspondent of The Financial Express.

[email protected]