Adverse impacts of indirect tax

The correlation between poverty and tax does not usually figure prominently because the poor are nontaxable. They are dismissed as a social segment which does not generate revenue for the state. But this is a wrong conception. As consumers – much as their individual consumption may be meagre compared to their rich counterparts – they also pay indirect taxes. About two-thirds of revenue in this country is generated from indirect sources. In economies where the higher the indirect tax is, such as value-added tax (VAT), the higher their contribution to the state coffer. Countries like Bangladesh follows the free-market economy but not entirely in its letter and spirit. Emerging economies concentrate more on wealth creation, allowing industries and businesses concessions to enjoy initially. If such privileges continue longer than a certain period and the tax department – the National Board of Revenue (NBR) in case of Bangladesh – is compelled to rely more on indirect taxes, economic disparities go by leaps and bounds. It appears, the concession periods for many industries and businesses have gone overboard.

A study titled 'Assessing the Impact of Indirect Taxation on Poverty and Inequality: A Pseudo-Panel Data Analysis on Bangladesh and Global Insights from Cross-Country Panel Regressions' corroborates the fact that higher indirect tax burden to a large extent is responsible for higher rates of poverty and wider income inequality. On its own, free-market economy is in favour of the rich and when banking and revenue policies are distorted to suit misappropriation of money leaving room for siphoning off unearned funds as well as evasion of taxes, the poor and lower middle class people are doubly exploited in the open market system. The economic system gives rise to business sharks where the small fries are fated to famish due to raging inflation. Jointly conducted by the Research and Policy Integration for Development (RAPID) and the International Growth Centre (IGC), the study discloses that one percentage point increase in indirect tax burden leads to a 0.42 percentage point rise in poverty as also 0.1 percentage point income inequality. Contrarily, 1.0 percentage point increase in income translates into 0.084 percentage point decline in poverty.

In this context, the Bangladesh Economic Association's (BEA's) revelation that 87 per cent of the country's rich and upper-middle class people evade taxes makes a grim reading. If these tax-payable people could be brought under the tax net and the laundered money in billions of taka could be prevented from flight, how spectacular would be the combined socio-economic benefits for the country! Bangladesh has, indeed, missed a golden opportunity to make the economy robust and spread the economic benefits across segments.

That poverty still got reduced by an average of 51 per cent over a decade from 50 per cent in 2000 to 24 per cent in 2016 owes largely to an agriculture revolution. Rural people, courtesy of the agriculture department, has brought about a paradigm shift in farm practices. No wonder, rural poverty is not as starker as that of urban centres. It is time small and medium enterprises (SMEs) of agro-industrial types were extended special financial and technical supports. This would not only strengthen the economy from within but also reduce dependence on import. Some of those can produce exportable commodities to occupy the empty space of the export basket. Reverse migration from urban slums to villages may be a reality with income inequality getting narrowed down.