How to simplify income tax laws
Monday, 4 January 2010
Faruq A Siddiqi
ABOUT seven hundred sixty thousand (0.76 million) tax returns were submitted this year in a nation of 160 million people. This means that only about 0.5% of the population submitted their tax returns. However, there are nearly 2.3 million TIN holders in the country. Only two thirds of them submitted their returns. It can perhaps be said without fear of disagreement that a large number of eligible tax payers remains outside the tax net. In spite of various efforts, there has not been any substantial breakthrough in this area in the last few years. It may be pertinent here to compare this figure with Pakistan in view of similar size of population. Tax returns submitted in Pakistan last year were over 2.1 million (21 lakh) in spite of the fact that large scale non-compliance is supposed in Pakistan too.
Collection of income tax is a complicated job. A large number of people do not want to part with their hard earned money. Payment of tax does not bring any direct advantage to them. There is no particular social security or privilege for the tax payers. There is also lack of confidence that taxes paid by them will be genuinely and efficiently spent for the welfare of the nation. And who wants to pay tax if he can get away without paying? Even those who sincerely want to pay find it difficult to do so for a variety of reasons. Many of them find tax laws too complicated and can not fill in tax returns without professional help. Many of them may be afraid that once they are in the tax net, they may have to face harassment by the tax officials in the subsequent years. Through experience they have learnt that it is possible to remain outside the tax net without fear of being fixed. In short, we have not been able to develop a culture of tax payment.
Inefficiency of tax administration is a leading cause for such a dismal situation. Lack of adequate manpower, logistics, training facilities and management support are some of the deficiencies of administration. There is practically no IT support. Who will chase TIN holders who do not submit tax returns? A proper data base and IT support could have helped tax administration in pursuing the delinquent TIN holders. In fact, tax administration is one of the most uncared for areas of administration. Successive governments practically invested nothing towards development of an effective tax administration. To cite an example, the tax department has no office building of its own in Dhaka or elsewhere. Hundreds of tax offices are located in different lanes and by lanes in rented houses without minimum amenities. The entire environment in tax offices is depressing.
It is often said that complexities in income tax law is a major factor for non-compliance by individuals. There is a general consensus that income tax law needs to be simplified. Perhaps all the Finance Ministers since 1972 promised to simplify income tax law in their annual budget speeches. But most of the Finance Acts/ Ordinances resulted in further complications. This shows that simplification of income tax law is not an easy job. In most of the countries, including our neighbouring countries, income tax law is no less complex. A number of factors contribute to these complexities. We are often trying to attain different social and economic objectives through tax laws. We want to achieve social equity, accelerate industrial growth, promote agriculture, remove regional disparity, support export, encourage investments and so on. The list is quite extensive. In order to achieve these objectives, tax law allows different kinds of tax holidays, exemptions, concessions, rebates etc. One is often perplexed and do not understand these complexities. In many cases, these objectives are hardly achieved. Probably we have to understand that desired objectives cannot be achieved through policy tools where the execution machinery is so inept.
Frequent change of tax laws is another contributing factor. About twenty to thirty amendments of income tax law are made almost every year through Finance Acts. Changes are also made through SROs. There are a large number of SROs through which changes have been made and probably even the NBR officials are not sure about the exact number and their current status. There is no denying the fact that some changes are necessary to keep pace with the changing economic scenario. But the bulk of the changes could perhaps be avoided. Frequent changes do not allow tax law to stabilise, and add to complexities. It often becomes difficult even for the professionals to say which law relates to which year. Frequent change of policy for taxing profit from saving certificates is just one such example.
There is a growing list of collection of income tax at source. There is nothing wrong with tax withholding or collection at source. This is done in most countries. But in some cases such collection at source is the final settlement of liabilities. This is a major distortion of the very concept of income tax. When advance income tax is collected at import point and is considered the final settlement, it is no longer a tax on income and can be passed on to the consumers like import duty or VAT. This kind of settlement of income tax liabilities at a flat rate regardless of subsequent profit or loss is against the basic principle of equity or justice. It also creates confusion. For a common tax payer it becomes difficult to understand which advance collection is the final settlement and which collection is required to be adjusted after proper assessment procedure. However this policy of final settlement continues presumably to avoid subsequent hassle of the tax payers and to reduce the opportunity of corruption. This is just one example of how an attempt to simplify tax law can go against fundamental policy of ensuring equity and social justice.
Income tax law is basically complex. But there certainly are areas where it can be simplified. But more important than this is strengthening of the NBR, particularly income tax administration. Nothing significant happened in improving income tax administration since 1922 when the tax was first introduced in this part if the world. Perhaps the only visible reform has been the establishment of a large tax payers' unit (LTU). Training is grossly neglected. Taxes Training Academy is just an apology. It does not have the bare minimum facilities. It has no permanent building, and just like the rest of the department, moves from one rented house to another. There is no modern curriculum, no whole-time faculty and no logistic support worth the name. Officers posted there are often dissatisfied and try to move out as soon as possible. As a first step towards administrative reform, the Academy needs to be reorganised with its own campus, full-time trainers and proper academic surroundings.
The tax department immediately needs to be equipped with proper IT support. Exchange of information with other government departments and among various tax circle offices is crucially important for detecting tax evasion. This can be done through IT support. It can also be very useful for preparing data base of the tax payers and their current status. Needless to say, tax calculation, assessment procedure, record of demand and collection can be more efficient and faster with proper IT support. Electronic filing of returns and payment of tax can be very convenient to the tax payers.
Regular out-door and in-door surveys are required to be strengthened for identifying new tax payers. In view of shortage of manpower and to reduce corruption, surveys may be conducted through outsourcing. In the past, number of door to door surveys was conducted. But these were not very successful. Reasons of such failure should be analysed to develop future strategy. City corporations and municipalities are not particularly efficient organisations. But they are generally successful in bringing most of the houses under the municipal tax net. Why is the Taxes department failing to bring house property income under their tax net? It should be easier for them to do it because records are available with city corporations and municipalities.
Taxes department needs to be strengthened and reorganised. There has not been any meaningful expansion and reorganisation after 1992 although collection of tax has increased manifold since then. This has put pressure on the existing administrative machinery. We hear of the departmented and extend would be expanded up to Upazilla level. Taking income tax offices to Upazilla level may perhaps wait for a while. Collection of additional revenue from Upazilla level is likely to be marginal and this may extend corruption and create hassle for marginal tax payers. The focus should be on Dhaka, Chittagong and few other major cities. Real tax evasion is taking place in these areas and adequate manpower needs to deployed there.
Current assessment procedures may be reviewed. The department may perhaps move towards selective auditing. 95% of the submitted returns may be accepted without any question and only about 5% returns may be selected on the basis of transparent criteria. Auditing and subsequent assessment may be made by a team and not by an individual officer. Team work may help reduce corruption and discretionary power of an individual officer. A separate audit wing with specially trained staff is necessary for carrying out this responsibility.
Opportunity for declaration of untaxed income should be stopped once for all. Nothing tangible was ever achieved through such declarations. This policy only helped vested interest group and demoralised honest tax payers. The argument that opportunity for declaration of untaxed money brings fresh investment is a misleading notion. Black money is already there in the economy. The vested interest group just uses the opportunity for legalising their invested money without paying proper taxes.
Notwithstanding the complicated nature of tax laws, their are areas where simplification is possible - especially in case of individual assessees. But this cannot be achieved just by organising seminars or casual discussions. It cannot be achieved either through conventional budget exercises of the NBR. With the declared objective of simplification, Income Tax Ordinance, 1984 replaced Income Tax Act, 1922. But this was mere redrafting and did not touch policy issues at all. It reorganised the chapters and simplified the language! But simplification of tax law involves policy issues. This is a job for the policy makers and not just of a draftsman.
A committee may be formed for simplification of income tax law and the committee should be headed by a person who can influence policy decisions.
What is most important is political commitment. How can there be political commitment if there are allegations of tax evasion by the political leaders themselves? There is a general perception -- rightly or wrongly -- that many of our political and business leaders are evading payment of due taxes. If members of the public feel assured that their leaders are paying taxes properly, then compliance is sure to improve. Compliance has to start from the top. The rest will follow. Administrative inefficiency, corruption and complicated tax law may be factors for non-compliance. But, perhaps the most important reason is lack of commitment. This commitment has to come from political leadership.
faruqasiddiqi@yahoo.com
ABOUT seven hundred sixty thousand (0.76 million) tax returns were submitted this year in a nation of 160 million people. This means that only about 0.5% of the population submitted their tax returns. However, there are nearly 2.3 million TIN holders in the country. Only two thirds of them submitted their returns. It can perhaps be said without fear of disagreement that a large number of eligible tax payers remains outside the tax net. In spite of various efforts, there has not been any substantial breakthrough in this area in the last few years. It may be pertinent here to compare this figure with Pakistan in view of similar size of population. Tax returns submitted in Pakistan last year were over 2.1 million (21 lakh) in spite of the fact that large scale non-compliance is supposed in Pakistan too.
Collection of income tax is a complicated job. A large number of people do not want to part with their hard earned money. Payment of tax does not bring any direct advantage to them. There is no particular social security or privilege for the tax payers. There is also lack of confidence that taxes paid by them will be genuinely and efficiently spent for the welfare of the nation. And who wants to pay tax if he can get away without paying? Even those who sincerely want to pay find it difficult to do so for a variety of reasons. Many of them find tax laws too complicated and can not fill in tax returns without professional help. Many of them may be afraid that once they are in the tax net, they may have to face harassment by the tax officials in the subsequent years. Through experience they have learnt that it is possible to remain outside the tax net without fear of being fixed. In short, we have not been able to develop a culture of tax payment.
Inefficiency of tax administration is a leading cause for such a dismal situation. Lack of adequate manpower, logistics, training facilities and management support are some of the deficiencies of administration. There is practically no IT support. Who will chase TIN holders who do not submit tax returns? A proper data base and IT support could have helped tax administration in pursuing the delinquent TIN holders. In fact, tax administration is one of the most uncared for areas of administration. Successive governments practically invested nothing towards development of an effective tax administration. To cite an example, the tax department has no office building of its own in Dhaka or elsewhere. Hundreds of tax offices are located in different lanes and by lanes in rented houses without minimum amenities. The entire environment in tax offices is depressing.
It is often said that complexities in income tax law is a major factor for non-compliance by individuals. There is a general consensus that income tax law needs to be simplified. Perhaps all the Finance Ministers since 1972 promised to simplify income tax law in their annual budget speeches. But most of the Finance Acts/ Ordinances resulted in further complications. This shows that simplification of income tax law is not an easy job. In most of the countries, including our neighbouring countries, income tax law is no less complex. A number of factors contribute to these complexities. We are often trying to attain different social and economic objectives through tax laws. We want to achieve social equity, accelerate industrial growth, promote agriculture, remove regional disparity, support export, encourage investments and so on. The list is quite extensive. In order to achieve these objectives, tax law allows different kinds of tax holidays, exemptions, concessions, rebates etc. One is often perplexed and do not understand these complexities. In many cases, these objectives are hardly achieved. Probably we have to understand that desired objectives cannot be achieved through policy tools where the execution machinery is so inept.
Frequent change of tax laws is another contributing factor. About twenty to thirty amendments of income tax law are made almost every year through Finance Acts. Changes are also made through SROs. There are a large number of SROs through which changes have been made and probably even the NBR officials are not sure about the exact number and their current status. There is no denying the fact that some changes are necessary to keep pace with the changing economic scenario. But the bulk of the changes could perhaps be avoided. Frequent changes do not allow tax law to stabilise, and add to complexities. It often becomes difficult even for the professionals to say which law relates to which year. Frequent change of policy for taxing profit from saving certificates is just one such example.
There is a growing list of collection of income tax at source. There is nothing wrong with tax withholding or collection at source. This is done in most countries. But in some cases such collection at source is the final settlement of liabilities. This is a major distortion of the very concept of income tax. When advance income tax is collected at import point and is considered the final settlement, it is no longer a tax on income and can be passed on to the consumers like import duty or VAT. This kind of settlement of income tax liabilities at a flat rate regardless of subsequent profit or loss is against the basic principle of equity or justice. It also creates confusion. For a common tax payer it becomes difficult to understand which advance collection is the final settlement and which collection is required to be adjusted after proper assessment procedure. However this policy of final settlement continues presumably to avoid subsequent hassle of the tax payers and to reduce the opportunity of corruption. This is just one example of how an attempt to simplify tax law can go against fundamental policy of ensuring equity and social justice.
Income tax law is basically complex. But there certainly are areas where it can be simplified. But more important than this is strengthening of the NBR, particularly income tax administration. Nothing significant happened in improving income tax administration since 1922 when the tax was first introduced in this part if the world. Perhaps the only visible reform has been the establishment of a large tax payers' unit (LTU). Training is grossly neglected. Taxes Training Academy is just an apology. It does not have the bare minimum facilities. It has no permanent building, and just like the rest of the department, moves from one rented house to another. There is no modern curriculum, no whole-time faculty and no logistic support worth the name. Officers posted there are often dissatisfied and try to move out as soon as possible. As a first step towards administrative reform, the Academy needs to be reorganised with its own campus, full-time trainers and proper academic surroundings.
The tax department immediately needs to be equipped with proper IT support. Exchange of information with other government departments and among various tax circle offices is crucially important for detecting tax evasion. This can be done through IT support. It can also be very useful for preparing data base of the tax payers and their current status. Needless to say, tax calculation, assessment procedure, record of demand and collection can be more efficient and faster with proper IT support. Electronic filing of returns and payment of tax can be very convenient to the tax payers.
Regular out-door and in-door surveys are required to be strengthened for identifying new tax payers. In view of shortage of manpower and to reduce corruption, surveys may be conducted through outsourcing. In the past, number of door to door surveys was conducted. But these were not very successful. Reasons of such failure should be analysed to develop future strategy. City corporations and municipalities are not particularly efficient organisations. But they are generally successful in bringing most of the houses under the municipal tax net. Why is the Taxes department failing to bring house property income under their tax net? It should be easier for them to do it because records are available with city corporations and municipalities.
Taxes department needs to be strengthened and reorganised. There has not been any meaningful expansion and reorganisation after 1992 although collection of tax has increased manifold since then. This has put pressure on the existing administrative machinery. We hear of the departmented and extend would be expanded up to Upazilla level. Taking income tax offices to Upazilla level may perhaps wait for a while. Collection of additional revenue from Upazilla level is likely to be marginal and this may extend corruption and create hassle for marginal tax payers. The focus should be on Dhaka, Chittagong and few other major cities. Real tax evasion is taking place in these areas and adequate manpower needs to deployed there.
Current assessment procedures may be reviewed. The department may perhaps move towards selective auditing. 95% of the submitted returns may be accepted without any question and only about 5% returns may be selected on the basis of transparent criteria. Auditing and subsequent assessment may be made by a team and not by an individual officer. Team work may help reduce corruption and discretionary power of an individual officer. A separate audit wing with specially trained staff is necessary for carrying out this responsibility.
Opportunity for declaration of untaxed income should be stopped once for all. Nothing tangible was ever achieved through such declarations. This policy only helped vested interest group and demoralised honest tax payers. The argument that opportunity for declaration of untaxed money brings fresh investment is a misleading notion. Black money is already there in the economy. The vested interest group just uses the opportunity for legalising their invested money without paying proper taxes.
Notwithstanding the complicated nature of tax laws, their are areas where simplification is possible - especially in case of individual assessees. But this cannot be achieved just by organising seminars or casual discussions. It cannot be achieved either through conventional budget exercises of the NBR. With the declared objective of simplification, Income Tax Ordinance, 1984 replaced Income Tax Act, 1922. But this was mere redrafting and did not touch policy issues at all. It reorganised the chapters and simplified the language! But simplification of tax law involves policy issues. This is a job for the policy makers and not just of a draftsman.
A committee may be formed for simplification of income tax law and the committee should be headed by a person who can influence policy decisions.
What is most important is political commitment. How can there be political commitment if there are allegations of tax evasion by the political leaders themselves? There is a general perception -- rightly or wrongly -- that many of our political and business leaders are evading payment of due taxes. If members of the public feel assured that their leaders are paying taxes properly, then compliance is sure to improve. Compliance has to start from the top. The rest will follow. Administrative inefficiency, corruption and complicated tax law may be factors for non-compliance. But, perhaps the most important reason is lack of commitment. This commitment has to come from political leadership.
faruqasiddiqi@yahoo.com