Bangladesh needs to reduce tax rates, simplify collection
Thursday, 11 June 2009
Badrul Ahsan
THE budget for the next fiscal year, with new tax proposals would be placed in parliament today (June 11). Successive finance ministers maintained that tax collection in Bangladesh was too low compared to other countries. But there could be a question whether there should be more money with people or the government. The question is relevant because government-sponsored spending tends to be inefficient and unproductive. Money with the private sector circulates to keep the economy moving. Government spending, with no corresponding rise in productive activities, can contribute to inflation.
A pertinent question is how the tax rules and rates in Bangladesh compare with those in neighbouring India, with a higher per capita income than that of Bangladesh?
The taxable annual income in Bangladesh starts at Taka 165,000. For women and those above 70 it starts at Taka 180,000. In India it starts at Rupees 150,000. For women it starts at Indian Rupees 180,000 and for those above 65 at Rupees 225,000. Considering the rate of exchange of about Indian rupees 47 to a US dollar or Taka 69 to a dollar, the annual taxable income in Bangladesh should start at Taka 220,000. For women, it should be at Taka 264,000 and for those above 65, at Taka 330,000.
The higher tax rates in Bangladesh show that the Bangladeshis pay more tax than the Indians. The gap in the tax rates for men and women is also narrower than that of India.
For the computation of taxable income, the Indian income tax law excludes many items. The examples are as follows:
The rules in Bangladesh about exclusion of house rent and conveyance allowances are similar to those in India. But the Indian tax law allows deduction from the education expenses of up to two children which is not permitted by the Bangladesh tax law.
Unlike in India, Bangladesh's tax law does not allow exemption of provident fund contribution, life insurance premium, investment in savings instruments and the like. The Bangladesh law restricts the exemption on investments up to 25 per cent of total income and allows only 10 per cent tax credit.
The maximum tax rate in Bangladesh is set at 25 per cent, while India set its maximum tax rate at 30 per cent. Bangladesh's process of tax credit complicates the tax computation. The simplified process in India due to straight exclusion of investments from income, up to Indian Rupees 100,000 a year with no relation to the percentage of income, makes the calculation easier.
The Indian system provides incentives for home ownership. To encourage home ownership, India excludes home loan repayment from income for the payment of tax. Bangladesh's tax law does not permit it. Home Loan interest payment in India is also excluded under another head.
Apart from exemption of Indian Rupees 100,000 per year in investments, the Indian tax law allows other items to be excluded from the taxable income, before levying tax. They include expenditure on dependants, disabled relatives, higher education, charities and the like.
The examples of the exemptions are as follows:
- Medical insurance premium up to Indian Rupees 15,000 per year (80D),
- Medical and other expense of disabled dependants up to Indian Rupees 50,000 per year (80DD, 80U),
- Actual Medical expense of dependants up to Indian Rupees 40,000 per year (80DDB),
- Interest on higher education loan for seven years (80E),
- Charitable contributions (80G, 80GGA, 80GGC),
But, medical expense and telephone bill reimbursements attract fringe benefits tax on an employer at 6.8 per cent.
The Bangladesh tax law should incorporate liberal tax incentive to encourage home ownership, education for children and better medical facility for the elderly. These incentives are given extensively by the developed economies.
Bangladesh's tax law allows house rent allowance only to salaried persons. The self employed persons living in rented houses are denied the benefit. The Indian tax law allows exclusion of rent expense incurred from income by only taxpayer.
Tax Collection procedure and filing of tax returns: In recent years, India has automated its tax return filing and tax payment process. It is a must for the companies as well as tax deduction at source. Direct interaction between tax payers and the tax department has been eliminated. The tax payers are required to file tax returns and pay the taxes online sitting at home. Online tax filing websites offer the option of digital signatures too. The entire filing cost on such sites is a maximum of Indian Rupees 350.
Interestingly, Indian tax returns do not have any annexure at all. In contrast, the tax returns in Bangladesh have to be submitted with many supporting documents requiring additional forms for lifestyle statement, wealth statement, reconciliations and more.
Nominated banks in India receive tax payment online on instruction from tax payers. Payments are assigned transaction number by the bank. At the time of filing tax return, the tax payer mentions the assigned transaction number. The tax department can electronically verify the tax payment.
Similarly, taxes deducted at source (TDS) by companies from salaries, suppliers and contractors are required to be deposited online. Each deposit is assigned a transaction number by the bank. Those who file tax return mention the transaction number assigned by the bank on their tax returns and they get the tax credit for the taxes deducted from the payments they head received.
All payment of taxes thus can be verified electronically by the tax department. Neither paper nor scanned evidence of actual tax payments or claims for tax credit are required.
Those who require help in preparing their returns can also get it. Computer training firms with support from the income tax department train certified tax preparers for the purpose.
The tax preparers charge a fixed fee of Indian Rupees 250 for preparing the tax return and filing. As an incentive the government pays them 3.0 per cent of tax (2.0 per cent for the second year, 1.0 per cent for the third year) paid by a new tax payer. For old taxpayers, tax preparers receive the fixed fee.
Automation has eliminated the hassles, fear, corruption and ensured transparency in the entire process of tax collection in India.
Bangladesh's collection process remains archaic. Practically, there has been little change in decades. The archaic process troubles the taxpayers, who also have to pay unnecessary amounts to tax advisors besides the bribes to grease the tax office. The government in Bangladesh has to spend more on tax collection. Too many tax appeals also drain both the taxpayer and the government.
The very low number of tax payers in Bangladesh is attributable to inefficiency and corruption of the tax department.
The tax base needs expansion and has, thus, to be widened. The high tax rate needs to be reduced. The tax collection procedure needs to be simplified and automated. The tax return forms should be simplified and online return filing and tax payment is overdue. This is more so because Bangladesh is now so keen to go digital.
The writer can be reached at: badrul123000@yahoo.com
THE budget for the next fiscal year, with new tax proposals would be placed in parliament today (June 11). Successive finance ministers maintained that tax collection in Bangladesh was too low compared to other countries. But there could be a question whether there should be more money with people or the government. The question is relevant because government-sponsored spending tends to be inefficient and unproductive. Money with the private sector circulates to keep the economy moving. Government spending, with no corresponding rise in productive activities, can contribute to inflation.
A pertinent question is how the tax rules and rates in Bangladesh compare with those in neighbouring India, with a higher per capita income than that of Bangladesh?
The taxable annual income in Bangladesh starts at Taka 165,000. For women and those above 70 it starts at Taka 180,000. In India it starts at Rupees 150,000. For women it starts at Indian Rupees 180,000 and for those above 65 at Rupees 225,000. Considering the rate of exchange of about Indian rupees 47 to a US dollar or Taka 69 to a dollar, the annual taxable income in Bangladesh should start at Taka 220,000. For women, it should be at Taka 264,000 and for those above 65, at Taka 330,000.
The higher tax rates in Bangladesh show that the Bangladeshis pay more tax than the Indians. The gap in the tax rates for men and women is also narrower than that of India.
For the computation of taxable income, the Indian income tax law excludes many items. The examples are as follows:
The rules in Bangladesh about exclusion of house rent and conveyance allowances are similar to those in India. But the Indian tax law allows deduction from the education expenses of up to two children which is not permitted by the Bangladesh tax law.
Unlike in India, Bangladesh's tax law does not allow exemption of provident fund contribution, life insurance premium, investment in savings instruments and the like. The Bangladesh law restricts the exemption on investments up to 25 per cent of total income and allows only 10 per cent tax credit.
The maximum tax rate in Bangladesh is set at 25 per cent, while India set its maximum tax rate at 30 per cent. Bangladesh's process of tax credit complicates the tax computation. The simplified process in India due to straight exclusion of investments from income, up to Indian Rupees 100,000 a year with no relation to the percentage of income, makes the calculation easier.
The Indian system provides incentives for home ownership. To encourage home ownership, India excludes home loan repayment from income for the payment of tax. Bangladesh's tax law does not permit it. Home Loan interest payment in India is also excluded under another head.
Apart from exemption of Indian Rupees 100,000 per year in investments, the Indian tax law allows other items to be excluded from the taxable income, before levying tax. They include expenditure on dependants, disabled relatives, higher education, charities and the like.
The examples of the exemptions are as follows:
- Medical insurance premium up to Indian Rupees 15,000 per year (80D),
- Medical and other expense of disabled dependants up to Indian Rupees 50,000 per year (80DD, 80U),
- Actual Medical expense of dependants up to Indian Rupees 40,000 per year (80DDB),
- Interest on higher education loan for seven years (80E),
- Charitable contributions (80G, 80GGA, 80GGC),
But, medical expense and telephone bill reimbursements attract fringe benefits tax on an employer at 6.8 per cent.
The Bangladesh tax law should incorporate liberal tax incentive to encourage home ownership, education for children and better medical facility for the elderly. These incentives are given extensively by the developed economies.
Bangladesh's tax law allows house rent allowance only to salaried persons. The self employed persons living in rented houses are denied the benefit. The Indian tax law allows exclusion of rent expense incurred from income by only taxpayer.
Tax Collection procedure and filing of tax returns: In recent years, India has automated its tax return filing and tax payment process. It is a must for the companies as well as tax deduction at source. Direct interaction between tax payers and the tax department has been eliminated. The tax payers are required to file tax returns and pay the taxes online sitting at home. Online tax filing websites offer the option of digital signatures too. The entire filing cost on such sites is a maximum of Indian Rupees 350.
Interestingly, Indian tax returns do not have any annexure at all. In contrast, the tax returns in Bangladesh have to be submitted with many supporting documents requiring additional forms for lifestyle statement, wealth statement, reconciliations and more.
Nominated banks in India receive tax payment online on instruction from tax payers. Payments are assigned transaction number by the bank. At the time of filing tax return, the tax payer mentions the assigned transaction number. The tax department can electronically verify the tax payment.
Similarly, taxes deducted at source (TDS) by companies from salaries, suppliers and contractors are required to be deposited online. Each deposit is assigned a transaction number by the bank. Those who file tax return mention the transaction number assigned by the bank on their tax returns and they get the tax credit for the taxes deducted from the payments they head received.
All payment of taxes thus can be verified electronically by the tax department. Neither paper nor scanned evidence of actual tax payments or claims for tax credit are required.
Those who require help in preparing their returns can also get it. Computer training firms with support from the income tax department train certified tax preparers for the purpose.
The tax preparers charge a fixed fee of Indian Rupees 250 for preparing the tax return and filing. As an incentive the government pays them 3.0 per cent of tax (2.0 per cent for the second year, 1.0 per cent for the third year) paid by a new tax payer. For old taxpayers, tax preparers receive the fixed fee.
Automation has eliminated the hassles, fear, corruption and ensured transparency in the entire process of tax collection in India.
Bangladesh's collection process remains archaic. Practically, there has been little change in decades. The archaic process troubles the taxpayers, who also have to pay unnecessary amounts to tax advisors besides the bribes to grease the tax office. The government in Bangladesh has to spend more on tax collection. Too many tax appeals also drain both the taxpayer and the government.
The very low number of tax payers in Bangladesh is attributable to inefficiency and corruption of the tax department.
The tax base needs expansion and has, thus, to be widened. The high tax rate needs to be reduced. The tax collection procedure needs to be simplified and automated. The tax return forms should be simplified and online return filing and tax payment is overdue. This is more so because Bangladesh is now so keen to go digital.
The writer can be reached at: badrul123000@yahoo.com