IMF for extensive reform of local tax system
Friday, 6 July 2007
FE Report
Bangladesh needs to undertake comprehensive and far-reaching reforms of the domestic tax system to broaden the tax base and enhance revenue productivity.
"The tax ratio in Bangladesh appears stuck at one of the lowest levels among developing countries and has improved only marginally," said an International Monetary Fund (IMF) evaluation report.
It came up with a set of suggestions including widening the tax base through the phasing-out of tax incentives, improving structural tax characteristics, and improving administration and compliance including through simplification of the tax system to lift the revenue ratio to a level warranted by developmental objectives.
To succeed, this strategy requires strong and continuous political commitment, in the context of countervailing political lobbies and vested interests, it said.
Despite adoption of numerous tax policy measures during the past few years, policies implemented by the Bangladesh authorities have not been fully successful in lifting the revenue ratio to a level warranted by developmental objectives.
It said fiscal policy has generally been managed prudently with the overall deficit and domestic borrowing being contained at modest levels and with external financing largely limited to concessional terms.
However, it said, there is a pressing need for a higher level of spending to promote growth and accelerate poverty reduction. In this context, the most recent DSA (debt sustainability analysis) conducted by the IMF and World Bank indicates that there is only a moderate risk of debt distress for public debt, but also that efforts to mobilise domestic revenues are the key to ensure improvement in the main debt indicators.
In recognition of the fact that the availability of concessionary external financing is insufficient to finance needed spending, a significant increase in revenue -- 0.5 percentage point of gross domestic product (GDP) annually --was targeted under the Poverty Reduction Growth Facility (PRGF)-supported programme.
In the end, the target was not met, with only modest improvement in revenue taking place, it added.
Tax revenue in Bangladesh has recorded a gradual modest increase, and the tax-to-GDP ratio has shown a small improvement over the last decade, it said adding only in recent years has the tax revenue ratio exhibited some buoyancy owing mainly to administrative efforts (most notably, an introduction of the large taxpayers unit for income tax in 2004).
One of the major tax policy changes in recent years has been to limit tax holidays to 18 industries starting from the FY2005-06 budget and to eliminate them entirely by end-June 2008, but its revenue impact has not yet realised.
The collection of international trade taxes has been largely unchanged relative to GDP since the beginning of the 1990s, and it is expected to remain at present levels or decline as the move toward trade liberalisation continues.
Bangladesh needs to undertake comprehensive and far-reaching reforms of the domestic tax system to broaden the tax base and enhance revenue productivity.
"The tax ratio in Bangladesh appears stuck at one of the lowest levels among developing countries and has improved only marginally," said an International Monetary Fund (IMF) evaluation report.
It came up with a set of suggestions including widening the tax base through the phasing-out of tax incentives, improving structural tax characteristics, and improving administration and compliance including through simplification of the tax system to lift the revenue ratio to a level warranted by developmental objectives.
To succeed, this strategy requires strong and continuous political commitment, in the context of countervailing political lobbies and vested interests, it said.
Despite adoption of numerous tax policy measures during the past few years, policies implemented by the Bangladesh authorities have not been fully successful in lifting the revenue ratio to a level warranted by developmental objectives.
It said fiscal policy has generally been managed prudently with the overall deficit and domestic borrowing being contained at modest levels and with external financing largely limited to concessional terms.
However, it said, there is a pressing need for a higher level of spending to promote growth and accelerate poverty reduction. In this context, the most recent DSA (debt sustainability analysis) conducted by the IMF and World Bank indicates that there is only a moderate risk of debt distress for public debt, but also that efforts to mobilise domestic revenues are the key to ensure improvement in the main debt indicators.
In recognition of the fact that the availability of concessionary external financing is insufficient to finance needed spending, a significant increase in revenue -- 0.5 percentage point of gross domestic product (GDP) annually --was targeted under the Poverty Reduction Growth Facility (PRGF)-supported programme.
In the end, the target was not met, with only modest improvement in revenue taking place, it added.
Tax revenue in Bangladesh has recorded a gradual modest increase, and the tax-to-GDP ratio has shown a small improvement over the last decade, it said adding only in recent years has the tax revenue ratio exhibited some buoyancy owing mainly to administrative efforts (most notably, an introduction of the large taxpayers unit for income tax in 2004).
One of the major tax policy changes in recent years has been to limit tax holidays to 18 industries starting from the FY2005-06 budget and to eliminate them entirely by end-June 2008, but its revenue impact has not yet realised.
The collection of international trade taxes has been largely unchanged relative to GDP since the beginning of the 1990s, and it is expected to remain at present levels or decline as the move toward trade liberalisation continues.