Bloated tax-related expenditure outstrips actual collection of direct tax from corporates in Bangladesh.
The latest official count shows a tax expenditure of Tk 853.14 billion in the 2020-21 fiscal while receipt was Tk 852.24 billion.
The due amount the exchequer lost out on account of the tax expenditure (TE) shown by the corporations was equivalent to 2.41 per cent of country's gross domestic product (GDP) in the financial year 2020-21.
The share of tax expenditures made on account of corporate taxpayers was 68 per cent of the total tax benefits worth Tk 1.25 trillion enjoyed by all taxpayers in the 2020-21 fiscal, a recent estimate of the TE by the revenue authority revealed.
Direct tax expenditure is defined as rebates, discounts, exemptions, cut-down taxation, and the exclusion of income from computing total taxable income. It is termed 'a form of tax subsidy', which, if collected as tax, would have augmented the total tax-revenue.
Tax expenditures, instruments of public policy, ate up 3.56 per cent of the country's GDP in 2020-21.
Such revenue report, titled 'Tax Expenditure in the Direct Tax of Bangladesh', of the National Board of Revenue (NBR) is first of its kind in Bangladesh.
The tax collection-expenditure account has been prepared under supervision of Income Tax Policy member Sams Uddin Ahmed. Principle contributor to the analysis was Lutfunnahar Piki, Additional Commissioner of Taxes, while a team of expert income taxmen were other contributors.
Talking to the FE on Wednesday, Ms Piki said the estimation of TE would be helpful to assessing why country's tax-GDP ratio is low and how tax incentives are paying off to accelerate growth of local industries.
"Bangladesh has conducted the TE analysis and published the report for the first time on direct tax while other neighbouring countries, including India, Pakistan and Bhutan, have long been preparing the TE analysis," she added.
She thinks a comprehensive TE on both direct and indirect taxes may reveal more details on the state of tax incentives in Bangladesh.
In the budget document for the current fiscal year, the NBR disclosed a concise preliminary data of direct-tax expenditures.
However, the recent report has compiled sector-wise TE data with details of tax benefits enjoyed by both CIT and personal income taxpayers (PIT).
In Bangladesh, some 30,000 corporate taxpayers submit tax returns annually while the number of individual taxpayers submitting return is 3.4 million.
The NBR report says microfinance sector enjoyed the highest tax benefit worth Tk 153.15 billion in FY2020-21, accounting for 18 per cent alone of the total TE offered to the corporate sector.
On personal tax, remittance earners enjoyed the highest tax benefit worth Tk 112.87 billion that occupied 18 per cent of total tax exemptions provided to the individual categories of taxpayers.
The country's estimated aggregate direct tax expenditure was Tk 1.25 trillion in FY21, equivalent to 3.56 per cent of GDP.
Of the tax benefits, corporate taxpayers availed Tk 853.14 billion, equivalent to 2.41 per cent of GDP, while personal income tax Tk 404.98 billion or 1.15 per cent of GDP.
Apart from microfinance, power and energy sector availed tax benefit worth Tk 83.80 billion followed by economic zones and hi-tech industries Tk 46.11 billion in the category of corporate taxpayers.
Garment, textile and accessories sector shared Tk 34.37 billion, ICT sector Tk 14.77 billion, and poultry-fisheries Tk 1.43 billion.
On PIT, poultry and fisheries businessmen availed Tk 29.85 billion in tax benefits while capital-market investors Tk 9.65 billion in the form of capital gains derived from investment in shares.
Corporate-tax expenditures account for 68 per cent as CIT contributes major share or 60 per cent of income-tax collection.
However, there is a clear distinction between the other subsidies under governmental safety-net scheme and direct-tax expenditures. Direct tax expenditure ensures a pivotal role in stimulating the economy, supporting industries, creating employment, and maintaining social balance.
"The estimation suggests that in the corporate income tax, about 40 per cent of the estimated tax expenditure comes from a few businesses," the report reads.
There are examples of both developed and developing economies which show that excessive tax expenditures can destabilize fiscal balance and sustainability.
Bangladesh's tax-to-GDP ratio is one of the poor in the world, around 8.0 per cent, due mainly to high TE that has contributed to budget deficit and increased government debts.
The report has recommended eliminating sunset ineffective expenditures, limiting or capping expenditures, refining eligibility criteria, reviewing and adjusting tax-credit rates, enhancing reporting and transparency, conducting periodic evaluation, creating new tax incentives, evaluating distributional impact, assessing revenue implications, and seeking stakeholder inputs.
The actual income-tax-return data for the income year 2020-21 (assessment year 2021-22) were collected from the tax-circle office under administrative divisions of 30 tax zones, as stratified based on geographic location, income source, level and other criteria. The sample consists of 21,664 individuals, 381 firms and 1930 companies.
Reporting TE is part of general fiscal reporting for a long time in developed countries while it is absent from many of the developing countries as there is no legal requirement for annual publication of TE in 30 per cent of the countries.
The NBR has prepared the TE report following conditions of the International Monetary Fund (IMF) against disbursement of its credit support from a US$4.7-billion package that prescribes reforms deemed overdue.
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