The tax regime in Bangladesh is largely marked by low tax revenue and very widespread evasion. The tax/GDP (gross domestic product) ratio stood at 11.17 per cent of GDP in 2016-17, one of the lowest in the world.
It is true people do not like paying taxes and governments also do not like imposing them if they can avoid it. But taxes are necessary to meet public expenditure. Joseph Schumpeter in 1917 said "the modern state is a tax state'', while some others commented that taxes are the price we pay for living in a civilised society. Then there is also the famous saying "paying taxes and death are the two unavoidable facts of life''.
Bangladesh like many other developing countries finds it difficult to raise sufficient tax revenue to provide public goods and services. The one reason is also partly due to the fact that the average income is very low. The problem is further compounded by weak enforcement of tax laws and corrupt tax administration. The mobilisation of domestic resources still remains a key challenge for Bangladesh to achieve its economic and social objectives. The country has a very large informal sector estimated to be around a quarter of GDP. This informal sector is characterised by cash transactions and taxable economic activities are easily hidden, leaving behind no verifiable paper trails. More importantly, tax evaders are rarely caught, let alone punished.
The consequence of such a weak tax collection system inevitably leads to running budget deficits. A budget deficit occurs when current government expenses outstrip current revenue. The available data indicate that the Government of Bangladesh has been going through periods of budget deficits, averaging 3.4 per cent of GDP over the period from 1991 to 2017. These deficits have been financed by the Government through borrowing from domestic and foreign sources. Economic consequences of such borrowings are well documented in the economic literature; it can lead to creating inflationary pressure but more importantly, it causes crowding out of private investment. Crowding out occurs because budget deficits entail public borrowing to bridge the gap between revenue and expenditure and that causes the long-term real interest rate to stay high. The coming budget for 2018-19 envisages a budget deficit equal to 5.0 per cent of GDP.
One feature of the Bangladesh budget deficit is that it obviously requires the government to borrow money to raise cash needed to keep the government operating. The government borrows money by selling government securities and bonds to public and financial institutions and also borrows from overseas. These borrowing then become part of public debt. According to the guidelines provided in the "Public Money and Budget Management Act, 2009", the Government is expected to maintain the budget deficit within sustainable level. However, in some countries a distinction is made on the basis of the "on-budget'' and "off-budget'' deficits or surpluses, but no such distinction is made in Bangladesh in preparing the annual budget. Therefore, the total debt liability in Bangladesh is only what can be described as the on-budget deficit. Only the on-budget deficits require the government to borrow money to keep the government functioning. The public debt stood at US$70,696 million (per capita debt US$434) in 2016 which is equivalent to 32.1 per cent of GDP. The public debt/GDP ratio significantly improved from 44.32 per cent in 2003 to 32.1 per cent in 2016.
A well-crafted fiscal policy plays a very important role in meeting the public expenditure priorities with resources available. Over the last twenty years the economy has averaged an annual growth rate of 6.0 per cent and according to the government estimate, the economy is expected grow at above 7.0 per cent over the next two years. This should enable the country to expand its tax base and achieve higher tax revenue, thus reducing need for borrowing.
But from the fiscal management point of view, there are risks that are beyond the control of the government and that can impact on the country's fiscal aggregates. These risks can be largely macroeconomic in nature impacting on growth, interest rates, exchange rates, current account balance etc. Besides, Bangladesh is very prone to natural disasters such as flooding and cyclones. The massive refugee influx from Myanmar has now added to the risks. Furthermore, fairly regular calls on the government to provide financial guarantee or even recapitalisation of state-owned banks and business enterprises are very common. Weak governance as reflected in institutional weaknesses and limitations at all levels of the government also can cause risks with financial implications. Such weaknesses can lead to policy failures resulting in rising fiscal deficits. Therefore, prudent fiscal management is sine qua non in forestalling such risks, in particular for country like Bangladesh.
A tax regime, which is weak in its enforcement capability, naturally leads to rethink of adopting measures how the tax system can be made capable of raising sufficient revenue to fund the expenditure. There is very high reliance on consumption-based taxes (VAT, SD and import duty) in the country's taxation regime that is in place now. These taxes together accounted for 68.5 per cent of total revenue in 2016-17. Income taxes are mostly collected from corporate profits rather than individual taxpayers. Only close to 2.0 per cent of the population pay income tax. Such a high reliance on consumption-based taxes (i.e. VAT, SD and tariffs) is regressive - the poor lose a higher proportion of their income than the rich. Such a tax violates the very criterion of "fairness'' in taxation and fairness is the means that ensures the distribution of tax responsibilities.
The nature of a country's tax system reflects both the strength of the political institutions in the country to decide on different objectives and their relative weights on the one hand, and on the other, how tax instruments are designed to achieve those objectives. Attempts over several decades to streamline the taxation system in the country always faced unusually very effective and sustained resistance. Even the existing taxation system is seriously compromised due to widespread exemptions including discretionary exemptions which foster corruption. Both private sector actors and the tax administration in the country have developed vested interests in maintaining the status quo. The system that exists now provides opportunities for extracting massive economic rent for the both sides. Furthermore, growing alliance between money and politics in the country enables the system to distribute political patronage, thus ensuring the longevity of the system.
Despite the inherent weaknesses in the taxation system, it also delivers reasonably predictable tax revenue which provides a certain degree of certainty to the government. At the same time, it serves the interests of all powerful interest groups in the country. The tensions over sharing the rent is usually mitigated by bargains based on the distribution of power among the parties involved.
In view of the rising income inequality in the poor country, it is time that the whole tax policy of Bangladesh was put under review to make it fair and equitable. Progressive personal taxation should be the predominant means through which the government can influence the distribution of income. Also Bangladesh has a large public sector and that calls for an efficient and equitable tax system. That will require a complete review of the existing tax laws and rules which include Income Tax Ordnance, 1984; Income Tax Rules, 1984; Value Added Tax Act and Rules 1991; Customs Act, 1969 and Finance Act, 2016. To maintain the momentum of growth, restructuring of the fiscal system and its management including closing the tax loopholes has become an urgent task. This should go hand in hand with fostering a culture of efficiency, diligence and, above all, professionalism in the tax administration of the country.
Muhammad Mahmood is an independent economic and political analyst.
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