Budget 2015-16: The necessity of widening the tax net

What is frequently discussed is how to prioritise sectors in framing a budget instead of doing the job by increasing or decreasing expenses based on some speculations. Unless the sectors are prioritised, the economic potential of the country may be untapped. Sectors' prioritisation means attaching importance in budgetary allocation to those, which have the potential accelerate the economic development of the country. In developing countries like Bangladesh, the budget is mainly focused on poverty reduction. If we see the ultimate goal of Vision 2021, we find that Bangladesh aspires to become a middle income country where poverty will be completely eradicated. A budget focused on poverty reduction is mainly designed to ensure basic needs of life and to scale up the standard of living boosting the sectors prioritised based on the potential and the opportunity that exists. A reform plan of expenses focusing on prioritised sectors needs a sizeable amount of revenue income, especially collection of tax that constitutes a significant part of revenue, to save the country from taking foreign loans for financing a deficit budget. The plan of revenue collection and reform of expenses are not enough, unless the financial management is good and transparent. So, the budget 2015-16 should have a clear strategy on collection of a sizeable amount of revenue and efficiency in fund spending.
Sizeable revenue collection to raise the tax-GDP ratio: As stated earlier, the significant portion of the revenue is tax (about more than 84 per cent). The collection of tax is far lower compared to the Gross Domestic Product (GDP). The tax-GDP ratio in the country is nowhere near that in any developed country. It is the lowest among the comparable countries in Asia like India, Sri Lanka and Pakistan, Philippines, Vietnam and Indonesia. The following chart will give us a clear picture of the tax-GDP ratio of developing and developed countries to figure out our position:
The growth in tax-GDP ratio is not consistent at all with the GDP growth of more than 6.0 per cent over the last 10 years. Widening the tax net instead of raising the tax rates has intensively been discussed ahead of framing the budget for the fiscal year 2015-16. In developed countries as stated earlier the tax-GDP ratio is significantly high, because the people feel encouraged to pay tax in the hope that the paid tax would be back to them with a better value, which they cannot generate or buy with the money they pay in tax. In Sweden, free education up to the university level, subsidies for unemployed people, pension schemes for every taxpayer and free medical services for those below 18 years are provided. Could the people of Sweden get all of these benefits by spending the whole amount of tax payable to the government? So, the government has to ensure the benefits to the people against the tax payment. We are far away from the tax-GDP ratio as in Sweden and other developed countries. We are also far off the mark in providing better and improved services for our citizens and taxpayers.  But we should have made effective efforts to raise the ratio every year to attain a reasonable rate in line with the growth in GDP.
As per annual report of the National Board of Revenue (NBR), the tax-GDP ratio was 9.35 per cent in the fiscal year 2011-2012 against 3.41 per cent in 1972, an increase of 5.94 per cent over the last 40 years. Over the last 10 years, the growth in GDP in the country was significantly higher than the growth in tax-GDP ratio.

  If we see the above charts, we find the growth in GDP was consistently about 6.0 per cent over the last ten years whereas the growth in tax-GDP ratio was insignificant, volatile and either negative or below 1.0 per cent, which is not rational in view of the GDP growth. What does it mean? It means the tax was not collected keeping pace with the GDP growth. It may have happened, as a greater number of people are not coming under the tax net, because the tax rates were not significantly reduced, rather increased. In consideration of the size of the economy, i.e. GDP and its growth, the tax collection, especially the NBR portion, is much lower than it could be. How could this tax collection be increased-widening the tax net or increasing the tax rate? This is now an important issue.

If we review the average global rate of tax in accordance with information of www.taxrates.cc, we see the 'Global Average Indirect Tax Rate' (VAT) and 'Global Average Individual Tax Rate' are almost constant, which tend not to increase the tax burden on individuals, rather keep them flexible to spend with an increase in income. On the contrary, the 'Global Corporate Tax Rate' tends to decline. This will ultimately increase the GDP as well as the government's revenue resulting in a higher tax-GDP ratio. There are some examples: (i) President Calvin Coolidge cut taxes drastically in 1929, resulting in growth of 61 per cent in total revenue; (ii) John F. Kennedy significantly cut income tax rates in 1961, leading to GDP growth and increased federal revenues of 62 per cent; and, (iii) Ronald Reagan cut taxes for all classes of the population in 1982, resulting in double federal tax revenue. So, apparently it is not the increase in the rates that can ensure growth in the tax-GDP ratio. Rather, the tax base should be increased in line with the consistent GDP growth. The tax base in Bangladesh is below 1.0 per cent of the total population. In India it is 5.0 per cent. What is the benefit of growth in GDP for the common people, if the additional income does not come under the tax net?
Some problems are associated with bringing all incomes under the tax net in our country. They are-
(i)    Faulty tax policy: Much dependence on indirect tax like VAT that affects the common people and flexibility of higher level taxation like property tax, gift tax etc. The wealth tax act has been repealed. 10 per cent and 15 per cent surcharges are charged on wealth, if the value is above Tk 20 million (2.0 crore) and 100 million (10 crore) respectively. As per report of the NBR two years back the number of such surcharge payers were 4,865. At present, the number may have changed slightly. A wealth or property tax law should be enacted instead of allowing such faulty and unreasonable surcharge. The number of taxpayers could be hundreds of thousands, if we cross check undisclosed assets they possess like luxury cars registered with BRTC (value of each car could be more than Tk 2/3 crore) or the number of luxury apartments or houses. In reality, the wealth owners are paying less tax rationally than the middle income groups who are simply under- employed. Gift tax is a very good practice.
(ii)    Undisclosed income in tax evasion: Income and assets are concealed by both individuals and companies and there is no technical approach to finding out those and bringing them under the tax net. As stated earlier, the surcharge payers having wealth more than Tk 20 million are only 4,865. It has been so because of concealment of income and assets in the IT10B, the list of assets.
(iii)    Weak accounting and auditing: There is a very common tendency to evade tax through accounting engineering. Here auditors could play a more vital role in upholding the professional ethics and assisting the government in realising the accurate amount of tax from every taxpayer. Very recently the Institute of Chartered Accountants of Bangladesh requested the NBR to provide the list of chartered accountancy (CA) firms involved in false auditing for taking punitive action against them on the basis of complaints from the NBR.  
(iv)    Corruption: Evading VAT, income tax, customs duty and other charges is very common in our country because of the corruption in corporations and in the NBR due to the lack of professional integrity. Corruption is the cancer and we need national commitment to fight it.
(v)    Complexity of assessment and law: Assessment process, determination of allowable or disallowable expenses, exemption and taxable income, computation of tax, penalty, interest etc are complex and there are loopholes in making assessment to evade tax.
(vi)    Abuse of laws: In many cases the exemption, deduction and allowable or disallowable expense clauses are abused by taxpayers and the regulator.
(vii)    Cumbersome legal procedures: Appeal process or Alternative Dispute Resolution (ADR) are cumbersome and time-consuming. In order to get better results the appeal wing and the ADR system should be made more effective.
(viii)    Regressive nature of taxation: The same rate of VAT for all means a higher rate of VAT on the lower income group.
(ix)    Low literacy ratio: Generally the educated people of the country are skilled. The tax authority should have a survey on the rate of educated people under employment and under the tax net.
(x)    Improper tax survey and spot assessment: Survey and spot assessment are the way to increase the number of taxpayers. The existing survey and spot assessment systems are not effective enough to bring all the undisclosed incomes under the tax net. Here efficient and effective efforts and professional integrity are needed to do the job effectively without harassing the people.
(xi)    Lack of technical and professional manpower: Irrespective of technical or professional issues, sometimes any whimsical judgment can take place, unless the judgment is fair. This leads the taxpayers to hide income and thus it remains outside the tax net.
In the budget for the fiscal year 2014-2015 some initiatives have been taken but these are not enough in raising the tax collection. Some of those initiatives are: (a) Health development surcharge, (b) Environment protection surcharge, (c ) Surcharge on wealth, (d) Separate highest tax rate for cigarette companies, (e) To reduce tax rate for private limited companies and banks and financial institutions, and (f) reduction of VAT on some specific items. Efforts and efficiency in collection of taxes on a large scale will assist in achieving the massive development target and protecting the government from slipping into debt. As such, the budget for the next fiscal year, 2015-16, should focus on the avenues of tax collection with a plan to address the bottlenecks encountered earlier in widening the tax net.
The writer is an associate member of ICAB.
Email: roy_dipok@yahoo.com