Financing the budget: Harnessing internal resources

Over the last few years Bangladesh has been relying heavily on import duties for its revenue income. Understandably, the development partners had been pressing to reduce dependence on import duties and concentrate more on income tax and VAT for revenue. But in the event of further liberalisation of trade, import duties will fall down by a sizeable margin. On the other hand, in view of increasing demand for consumption and expansion of the middle class, VAT network is likely to expand further. Setting up large units of taxpayers and collection of higher revenue by encouraging the business class could prove more effective.
The highest rate of personal income tax in Bangladesh is 25.0 per cent. Every year non-taxable income ceiling is being raised, while rate of tax has not been increased. As a result, a large section of tax payers remains out of the tax net and the country has to depend entirely on the tax paid by corporate institutions and professionals. Corporate tax is slightly over 38.5 per cent. The tax rate for about 175 public companies enlisted with the stock exchange is 27.5 per cent as fixed by the revenue authorities. While there are about a hundred thousand local and foreign companies who are not enlisted with stock exchanges, they are required to pay corporate taxes at the rate of 37.5 per cent. Corporate tax rate for non-listed mobile phone companies is 45.0 per cent and for the listed ones, the tax rate is 40.0 per cent. For non-listed tobacco companies the tax rate is 45.0 per cent and that for the listed ones is 40.0 per cent. For Banks, insurance and financing institutions the corporate tax rate is 42.5 per cent. Furthermore, if net profit of banks, insurance and financial institutions exceeds 50.0 per cent, they are required to pay an additional tax @15.0 per cent.
Non-listed companies are to pay taxes on shareholders' dividends at a rate of 10.0 per cent. On the other hand, the listed companies enjoy 10.0 per cent tax relief on dividends at a rate of 20.0 per cent or even more. A few years ago, the rate was applicable for a dividend of 25 per cent and above. Individual income from corporate ownership is under personal income tax rule and is to be paid once. In contrast, income by corporate organisations is subject to double taxation - first as corporate tax on company's total income and then on dividends paid to the shareholders. The taxable amount may further rise if a company becomes a shareholder of another company. Each time each company has to pay as tax 37.5 per cent of its income. Companies, therefore, prefer to rely on credit rather than equity to avoid high rate of taxation.        
Tax on the corporate sector is generally not changed. In early nineties, tax rate for publicly traded companies was 40.0 per cent, 45.0 per cent for non-publicly traded companies and 55.0 per cent for banks and financial institutions. The rates were reduced to 30.0 per cent, 35.0 per cent and 40.0 per cent respectively in 2002. In 2003-04 the tax was revised as 30.0 per cent for publicly traded companies, 37.5 per cent for non-publicly traded companies and 40.0 per cent for banks and financial institutions. In 2007-08, the caretaker government kept the corporate tax rate for traded companies constant at 30.0 per cent, but raised the same for non-traded companies to 40.0 per cent and to 45.0 per cent for banks and financial institutions. Corporate tax for cell phone companies was fixed at 45.0 per cent. The rate for publicly traded companies was reduced to 27.5 per cent and that of non-publicly traded companies to 37.5 per cent in 2008-09. But the tax rates for banks and financial institutions, and non-listed cell phone companies were kept unchanged at 45.0 per cent. For listed cell phone companies, the rate was fixed at 35.0 per cent. In 2012-13 tax rate for banks and financial institutions was reduced by 2.5 per cent to 42.5 per cent. To narrow the tax gap between listed and non-listed companies, tax rate for listed cell phone companies was raised to 40.0 per cent.
Corporate tax rate in Bangladesh is higher than other countries in the region. According to NBR sources, it is 30.0 per cent in India, 35.0 per cent in Pakistan, 25.0 per cent in Nepal, 28.0 per cent in Sri Lanka and 30.0 per cent in Bhutan. In many countries of the world, the rate of personal income tax is higher than corporate tax rates. Undoubtedly, high tax rates work as disincentive for local and foreign investors and entrepreneurs and a stimulant for underground or black economy.
The size of our economy is known to be worth US$150 billions, while the size of our informal economy is about 62.75 per cent of it, according to various reports. Different reviews of the period from 2002 to 2011 reveal that on an average US$1.6 billion has been smuggled out of the country every year during the period. Businessmen purchased cars for personal use and recorded it in company's name to avoid taxes. All their expenses were included as company's expenses with the same intention.  
Since a large portion of tax comes from banks and financial institutions, cell phone and tobacco companies, the revenue authorities feel a reduction in corporate tax rates will result in a reduction in total revenue collection. That is why they are often hesitant to reduce corporate tax rate.
Of late, policy makers have realised that lower tax rate and a strong revenue authority can do wonders in collecting revenues. Most non-listed companies tend to record losses in their books of accounts to evade high taxation. In the same way, large companies can not borrow from international market due to artificially made weak financial situation. Despite every intention of people who matter, including the Finance Minister himself, the Financial Reporting Act is yet to be approved.   
In this age of globalisation, Bangladesh needs to keep pace with others and determine its economic policies accordingly. The informal economy will have to be associated with the main stream economy and equitable distribution of resources will have to be ensured. New ideas will have to be injected in economic management.
Newer possibilities have emerged and new businesses have sprung. Despite multiple challenges, new investments are being added. Bangladesh has gone ahead in harnessing internal resources which have been amply reflected in the budget for 2015-16, wherein income tax occupies the top spot in internal resource collection. Extent of VAT net has been stretched all over the budget. At the same time, attempts have been made to reduce extent and rate of duties to keep pace with global market and ensure capacity building of the local entrepreneurs. The overall revenue collection target has been fixed at Tk.2087.70 billions out of which NBR will collect Tk.1763.70 billions. The revenue income will come from mainly four sources: income tax, VAT, supplementary duty and import duty. This means that NBR will have to register an increase of 30.62 per cent in revenue collection over the previous year, which will be the biggest challenge for NBR in the coming financial year. The Finance Minister hopes to increase the number of active tax payers to 3.0 millions in 2018-19.
The biggest challenge now, and as always has been, is to achieve the target. Another area of discomfort is a deficit of Tk.866.57 billions which is about 30.0 per cent of the total budget, to be met mainly through foreign aid and grants. The task is without doubt daunting in view of past experience and present state of affairs.
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