Flying blind on tax policy

Taxation is usually discussed as a matter of rates, exemptions and revenue targets. Rarely is it discussed as a matter of information, of whether the people setting policy are sufficiently informed about the markets they are taxing. Too often they are not. Fiscal pressure, administrative convenience and the influence of powerful industries tend to guide tax policy more than any real analysis of how those industries work. That is an expensive blind spot, because taxation is never only about revenue. It also decides who competes fairly, who invests and where economic activity ultimately flows.

To be sure, the National Board of Revenue has made undeniable progress in recent years. Income tax and VAT returns are now filed online. Risk based audits have begun to replace a system built on manual discretion. All of this makes compliance easier and shrinks the room for the kind of face-to-face interaction that used to invite abuse. But automation only solves the mechanical half of the problem. Technology can process information, but it cannot create the information policymakers need to make sound decisions.

That missing information is market intelligence. Tax authorities cannot spot a suspicious declaration, still less design a sound policy, without knowing the industry behind it. They need a working knowledge of who the real players are, their approximate size, their production and consumption trends and how all of that should translate into tax revenue. Without that grounding, tax collection becomes reactive rather than informed, making enforcement far less effective than it should be.

A dedicated research wing can easily fill that gap. Its task would be to study industries across the economy on a continuous basis, estimating sector size, analysing production and consumption, tracking import and export trends and comparing all of this against tax collections. Over time that accumulated knowledge becomes the evidence base which both policy and enforcement currently lack.

Every industry carries a market share and a revenue share, and while the two will never match exactly, they ought to move together. When a company commands a large slice of its market while paying a strikingly small slice of the tax, that gap deserves attention. Likewise, if an industry experiences rapid growth without a corresponding increase in tax payments, the tax authority should immediately ask why. The research unit would be built to notice these things, turning audits from a matter of instinct into a matter of evidence.

Such an approach would also improve fairness. Businesses competing in the same market should carry roughly the same tax burden. When one pays honestly while its rival benefits from a loophole or slips outside the tax net altogether, the honest business is punished for its honesty. Over time that punishes compliance itself, teaching businesses that following the rules is what makes them less competitive. Research will not end evasion outright, but it makes unequal treatment far harder to disguise as an accident.

Research is at its most valuable before a policy exists rather than after. Every regulatory order, duty adjustment or exemption reshuffles incentives in ways that are rarely neutral. Some encourage investment, others quietly strangle it. Some protect a domestic industry while others expose it to unexpected pressure. These consequences deserve to be understood in advance. Too often they are only understood in hindsight, once the damage has already settled in.

The dispute over the higher wastage allowance under the bonded warehouse facility is a good example. The measure was defended by some and criticised by others, particularly domestic textile manufacturers who argued that it created opportunities for misuse and undercut local production so much so that it caused many mills to shut down. Whether either side was entirely right is beside the point. The more important question is whether the likely consequences had been studied thoroughly before the policy was introduced. If market data had been analysed carefully, policymakers might have concluded that a different wastage rate would better balance the interests of exporters, domestic producers and the government's own revenue objectives. Even if the final decision remained unchanged, it would have rested on evidence rather than competing demands.

The same principle, of course, applies to the economy. Pharmaceuticals do not behave like steel, and steel does not behave like cement or consumer electronics. They have different cost structures, different risks and different opportunities for tax avoidance. A single tax approach applied uniformly across all of them will always fit some badly.

By the same token, better research would also help expand the tax base. Bangladesh's tax-to-GDP ratio has stayed low despite years of economic growth, and closing that gap should not simply mean asking existing taxpayers to pay more. It should mean finding the businesses, the economic footprint of which has outgrown their tax contribution and pointing enforcement there, rather than spreading it evenly across an economy where the real problems are concentrated in a few places.

Credibility follows naturally from this kind of rigour. Businesses are far more likely to accept difficult tax decisions when they believe those decisions are supported by credible analysis. What unsettles them is unpredictability and a policy that appears without visible reasoning behind it reads as unpredictable no matter how sound it actually is. Publishing at least part of the research behind a major tax decision would also do good for investor confidence while also turning policymaking more credible.

Fortunately, the government's plan to split the NBR into separate policy and enforcement bodies is an opportunity to address this longstanding weakness. If that reform proceeds, the new policy body could be built with a permanent research wing inside it, sitting alongside the people who actually write tax policy instead of at a distance from them. If the current structure survives instead, the case for building that wing within the NBR loses none of its force. What matters is not where the wing sits but that it exists at all, and that its work is routine, not occasional.

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