Lengthy procedures of tax compliances coupled with higher cost and unofficial payments create a web of barriers to bringing businesses onto the tax-net in Bangladesh, an IFC study reveals.
On an average, 339 days are required for resolving tax disputes and 304 hours for tax-compliance procedures, according to the survey done by the IFC (International Finance Corporation), an arm of the World Bank (WB) group.
The findings also indicated that people's perception about the National Board of Revenue (NBR) is below average, obviously because of such inefficiencies in matters of tax collection.
Majority of informal businesses perceive that it costs more to be tax-compliant than to avoid paying taxes.
Some 83 per cent of surveyed firms that were inspected by the tax officials said they had to pay money unofficially.
Nearly half of the respondents or 45 per cent opined that cost of paying tax was more than the cost of tax dodging. A fourth of them thought that these costs were same.
The survey was conducted in some 1,000 formal and 800 informal firms in Dhaka and Chittagong in April-June 2012 period. Last week, the National Board of Revenue unveiled the study titled 'Bangladesh Survey Report on Tax Compliance Costs of the Formal Sector & Perception of Taxation by the Informal Sector'.
Bangladesh Investment Climate Fund (BICF), managed by the IFC, supported the survey in partnership with the UK government and the European Union (EU).
Org-Quest Research Limited (OrQuest), a joint- venture survey research & consulting firm, conducted the survey.
This study presents the baseline status of firms in Bangladesh on tax perception and compliance costs.
According to the survey, overall businesses have to pay seven types of taxes. For a mid-sized firm tax-compliance cost takes 103 hours and 161 hours for paying Value Added Tax (VAT) and Corporate Income Tax respectively.
"It should be noted that although all businesses are subjected to VAT, only 70 per cent had paid VAT in FY11, based on the sample surveyed," the survey report says.
Larger businesses have higher compliance cost in absolute terms. Overall, the average cost of compliance (excluding book-keeping costs) was Tk 104,649.
Sector-wise, cost appeared higher for manufacturing firms, followed by service industry.
In relative terms (cost of compliance relative to turnover), it was observed that smaller businesses incurred higher compliance costs.
The survey found average value of tax-related dispute was Tk 285,083, and it took 339 days on average to resolve a dispute.
"The average cost associated for dispute resolution was Tk 33,064. Firms were not forthcoming in disclosing the amount of unofficial cost or outsourcing fee," it said.
For firms with disputes not resolved, the average unofficial fee is Tk 10,770 and the maximum unofficial fee paid is Tk 50,000.
Further, 52 per cent of firms with difference with the National Board of Revenue (NBR) on tax assessment stated unofficial fee as the major obstacle faced in resolving disputes.
The firms rated NBR neutrally 57 per cent for competency and rated lowest 39 per cent for honesty.
Even the highest score achieved on 'competency and expertise of NBR officials' was less than 60 per cent.
"The lowest score was on 'honesty of NBR officials', 39.0 per cent, that reflects rather poorly on the NBR officials."
The others in descending order were 'overall efficiency' 53.0 per cent, 'politeness' 50.0 per cent, 'helpfulness' 49.0 per cent and 'fairness in assessment' 46.0 per cent.
"The top priority for NBR for the informal sector should be outreach and education. Given limited resources, it may be most effective to build trust among small businesses before attempting more strenuous "enforcement" among informal micro-businesses," the report suggests.
For formal sector, the study recommended the first and most important action should be to improve communications with taxpayers.
"Businesses want a clearer picture of their legal obligations and the expected procedures, and straightforward answers to their tax-accounting questions," it said.
The donor-funded survey recommends more rigorous steps to disseminate information about all tax procedures among taxpayers and information on their rights and obligations. The next most important recommendation is capacity development and sufficient manpower.
Findings indicated unhappiness amongst the businesses about the differences in tax rates.
The study says NBR may review the discriminatory tax rates and harmonize the same.
According to the survey findings, some 40 per cent of businesses found tax registration to be difficult.
Female-headed businesses hardly use computers for book-keeping.
The survey team has found limited-liability companies inspected more than proprietorship businesses.
Although majority (90%) of the firms resolved their disputes by producing the necessary documents, the use of bribe and connections to officials were also noted.
The incidence of tax dispute higher amongst limited-liability companies of large category, mainly in the area of corporate and turnover tax. Based on the firms surveyed, only 51 firms disagreed with NBR tax assessment of which 47 filed for dispute resolution. Only 30% of the firms surveyed were able to resolve their dispute.
Appeals and hearing of an assessment were considered two most complicated procedures,
In the study, trade sector-rated NBR performance was slightly better than the service and manufacturing sector.
In the informal businesses, around 6.0 per cent of the firms surveyed were TIN-registered though none had filed returns in the last three years. Majority of the informal firms surveyed fell under the micro, small and cottage categories.
The biggest advantages cited by both male and female businesses for not obtaining a TIN is 'no compliance cost associated with paying taxes', followed by 'no taxes'.
Only 1.0 per cent of both male-and female- owned enterprises use computers in the informal businesses.
The study shows that the need for computer literacy is imperative for informal businesses, particularly as more and more tax-related processes are set to be automated, including tax payments.
Overall 9.0 per cent of informal businesses faced inspection by tax officials.
Access to information on tax compliance and complicacies of taxation procedures obtained the low rating for both formal and informal businesses.
The other major findings of the study include need for a suitable tax regime for SMEs, easier bookkeeping system, risk-based audit system, expedited VAT refunds and establishing one-stop service centers.
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