Tax evasion: A guesstimate

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Shamsul Huq Zahid
A news item, published in a local Bengali financial daily quoting a report prepared by the British research organization Tax Justice Network (TJN) early this week, might have made the National Board of Revenue (NBR) people happy.
The TJN report said the incidence of tax evasion is the highest in the world's wealthiest nation, the United States. The situation, according to the report, is far better in the case of Bangladesh which is placed at 65th position out of 145 countries, well below India (13th) and Pakistan (49th).
The report, prepared in 2011, has also estimated that one out of six dollars remains out of the tax net across the globe. It has also found the incidence of tax evasion is the highest in Europe where one out of five euros goes untaxed.
However, the finding that the incidence of tax evasion is the highest in the USA might come as a surprise to many for regulatory watch in that country is known to be one of the toughest in the world. If the finding was based on the amount of money remaining outside the tax net than it might carry some weight because of the huge size of the US economy.
No less surprising is the finding about Bangladesh. Even some serving and former high tax officials have expressed reservation about the TJN finding on the incidence of tax evasion in the country. The report estimated the loss of revenue due to tax evasion in 2011 at Tk 214.50 billion in Bangladesh.
A former top bureaucrat, who was known as a 'straight talker' while he was in-charge of the NBR during the rule of the military-backed caretaker government, has dismissed the TJN finding about the rate of tax evasion in Bangladesh. He claimed that the TJN estimate about tax evasion in 2011 was even less than the amount of tax evaded by the people having tax identification numbers (TINs). Beyond the TIN holders, there are millions of people who despite having taxable income do not pay any tax to the government.
The actual annual loss of revenue due to tax evasion is difficult to estimate. The size of the black or grey economy could be an indicator. But all the estimates, varying widely, on its size are based on perception.
The TJN report estimated the size of the black economy in Bangladesh at 35.30 per cent of its gross domestic product (GDP), valued at 100 billion US dollar. But the finance ministry sometimes back came out with a puzzling estimate of the black economy. It had put the size of the black economy in between 44 per cent and 80 per cent.
If one takes into cognizance the finance ministry's estimate about the black economy to make a perception-based estimate about the loss of revenue due to tax evasion, it, despite varying widely, would be a substantial amount, far greater than what has been mentioned in the TJN report.
No matter who estimates the black money and tax-evaded income in Bangladesh and how, both, without any iota of doubt, would be quite large in their respective sizes.
With less than 1.0 per cent of the population remaining under the tax net and tax-GDP ratio at only 10 per cent, one can guess well the scale of tax evasion in this country.
The affluence that many people demonstrate publicly and their lifestyle do not match with the tax returns they submit every year. Many of them even do not bother to have TINs. The tax administration is yet to become strong and effective enough to reduce incidence of large-scale tax evasion.
Tax, in fact, is the most sustainable source of finance for development. A poor developing country like Bangladesh must have the goal to reduce its foreign aid dependency with self-sufficiency in tax revenues. A 10 per cent tax-GDP ratio is a very poor one when in many rich countries the ratio is as high as 40 per cent.
However, the issue of efficient and optimum use of tax revenue is an important one. It is hard to ignore the fact that the taxpayers get discouraged if they witness their money is being wasted or misused. The efficient and productive use of tax revenue has a demonstrative value as it encourages people to pay tax.
If the people see that their tax money is wasted on sustaining inefficient and corrupt public officials and embezzled by dishonest politicians, they have reasons to skip payment of tax to the government. Tax, in fact, is the link between state and citizens. When the affairs of the state are in good hands, the citizens are found more inclined to pay tax.
Zahidmar10@gmail.com