Issues of taxation
Thursday, 26 May 2011
Enayet Rasul Bhuiyan
The country's annual budget for the next fiscal year, 2011-12, is round the corner. Now is the time for finalising the tax-related measures for the next fiscal. All kinds of suggestions have earlier been received by the National Board of Revenue (NBR) for consideration by the policymakers or budget makers about taxes to be levied on people and institutions in the new fiscal year. For taxation is one of the critically important areas for budget-making and the budget's implementation. The amount of taxes to be collected will determine the amount of resources to remain in the hands of the government to undertake various tasks. Shortfall in revenue collection will mean that these tasks will suffer. But higher taxation may lead to loss of motivation on the part of the taxpayers leading to lower than the projected tax collection. Therefore, the government's policies must be both delicately framed and executed to collect more taxes but without rupturing relations with taxpayers, existing as well as potential ones. Writing on tax issues, the first point that comes to mind is the present unfair nature of taxation of people. Presently, the greatest amount in taxes is paid in the form of indirect taxes, i.e. taxes attached to prices of commodities or chargers for services paid by all classes of consumers as part of the prices of goods purchased or part of charges given for services rendered like the value added tax (VAT). It is impossible for the consumers to avoid paying them. Thus, the indirect taxes are paid by the rich and the poor alike. But for the 40 per cent of the poor and the very poor in the population, the paying of the indirect taxes can be a source of torment, specially when the indirect taxes are adjusted upward. Nor are they consulted when such adjustments are made but the opposite is the case in relation to interest groups like traders, industrialists, etc. They are able to sit with government's representatives and have taxes adjusted considerably in favour of their businesses or enterprises. There would be fairness in the taxation system if people in the upper income categories were progressively made to pay direct taxes such as income tax proportionate to their earnings or profit. But this is not the case in Bangladesh. In a country of over 150 million people with a good number of rich people and a bulging upper middle class of no less than 30 to 40 million people with a huge number among them having the ability to pay income tax or wealth tax, not even a million presently pay such taxes or pay them far disproportionately compared to their wealth or income. Thus, there is indeed potential and justification involved in obliging this very large number of people not paying taxes or paying them very leniently to be involved in paying taxes regularly and properly. Everyone knows about the huge untaxed income of specialist doctors, lawyers, operators of coaching centres and other service providers. They earn millions of taka a month in many cases. But has any government made any attempt to tax the fees that doctors, lawyers and coaching centre operators or the likes of them take from their clients? The answer must be in the negative although the government's coffers could be substantially filled from bringing such highly deserving eligible high taxpayers under the tax net. The present system of collection of income tax can be a skewed process. People of middle class origin with earnings very small compared to the rich or the very rich, are being exploited through paying double or triple income tax. Even after paying his income tax on earnings from a job or a small business, a person is obliged to pay another so-called income tax for maintaining a car. Beside, if he or she has savings certificates, then too, he or she has to pay an income tax on their interest accruals. Under the present circumstances of high inflation, such incidence of multiple taxation on income must be seen as unfair to the majority of the eligible but not rich taxpayers. An amount of Tk 210 billion which is about 2.8 per cent of the national income and one-third of the tax revenues collected in 2010, was lost from tax evasion or defalcation activities, according to Transparency International, Bangladesh (TIB). The amount is certainly a huge one and shows the extent of the loss to the state treasury from such evasive and defalcating activities. However, it is also true that this is not a first time stunning experience. The fact that different groups of taxpayers have not been paying taxes in proportion to their earnings or income, have been known for a long time. But the present mode of taxation that allows the eligible taxpayers to plead, appoint and take help of so-called tax advisers, also contribute legitimately to this process of tax evasion and defalcation. Then, there are also in-built institutional weaknesses in the taxation machinery. For example, the value added tax (VAT) has emerged as a major source of revenues during the last two decades. But VAT offices are present only in about half of the country's districts which means that the government is losing much revenue from the sheer lack taxation officials over vast areas where various income-earning enterprises have cropped up. Even in the areas where the taxation departments, there is noted a serious dearth of personnel to run the same. The National Board of Revenue (NBR), for instance, did not recruit for any post during 2010. New recruitment to that body has been stalling year after year due to court cases. But the court-related hassles could be addressed with special initiative by NBR long ago along with other measures to streamline the tax administration such as automation, a reward structure to motive well intentioned employees, putting in place an efficient search and discover team to find tax dodgers and bring them under the taxation net without undue harassments, etc. But none of these things were attempted in an integrated and satisfactory manner as these should have been over the years with the result that government's yields from taxation could not increase much more. The challenge in the Bangladesh context is essentially one of bringing under the taxation net the ones who have been eligible for paying taxes for a very long time. They were either not motivated on their own to pay taxes or found tax evasion easy from a too feeble presence or non-presence of the taxation authorities around them. As it is, compared to the vast population the presence of the tax department is thin throughout the country. Increasingly, governments in the present decade have been declaring bigger and bigger national budgets reflecting the propensity to spend more both for development and meeting administrative needs. Therefore, mobilising of greater resources is becoming imperative to finance the budgets growing ever bigger in size. But the pertinent question which cannot help but arise is: how governments can expect to fulfill ambitious revenue collection targets with NBR suffering from a large deficiency in its capacities? The higher revenue collection can be expected only under circumstances when there are adequate number of revenue collectors and on their efficiency, integrity and motivation. But according to a recent media report, NBR has only 1200 tax inspectors for discharging service against 2100 posts. Understandably, vigorous revenue collection cannot be expected from the NBR suffering a substantial dearth of officials to do the job. The customs administration requires an expansion of its capacities. Reportedly, 600 posts of customs inspectors have been lying vacant for a long time and a large number of the functioning inspectors would go into retirement by two or three years from now. But legal complexities have been stifling the immediate recruitment of basic manpower for this pivotal department. Therefore, these legal hurdles need to be overcome at the fastest to add to the capabilities of the customs department that garners the highest amount of revenues. Taxation ought not to be a one-way street. The principle of fairness in taxation involve both give and take. Citizens have points to raise about government not spending their tax money as efficiently as it should. As it is, the spectacles of corruption and waste of public resources are not helping to establish the perception of taxation leading to improvements in the services delivery of the government. People are likely to feel more persuaded or morally troubled -- if they do not pay taxes -- to go ahead and pay the same, when they would find the government bodies spending the resources obtained from taxation truly efficiently and scrupulously. The efficiency of the taxation machinery also needs to be upgraded in different areas. It depends considerably on retraining the taxmen on modern lines. They can be trained in countries where the tax administrations are efficient. But there should be also recognition that without follow-up, revamping of organisations, procedures and methods of administration, much of the training would be wasted. Specially, the tax administration needs to acquire real capacity in the intelligence and enforcement areas.
The country's annual budget for the next fiscal year, 2011-12, is round the corner. Now is the time for finalising the tax-related measures for the next fiscal. All kinds of suggestions have earlier been received by the National Board of Revenue (NBR) for consideration by the policymakers or budget makers about taxes to be levied on people and institutions in the new fiscal year. For taxation is one of the critically important areas for budget-making and the budget's implementation. The amount of taxes to be collected will determine the amount of resources to remain in the hands of the government to undertake various tasks. Shortfall in revenue collection will mean that these tasks will suffer. But higher taxation may lead to loss of motivation on the part of the taxpayers leading to lower than the projected tax collection. Therefore, the government's policies must be both delicately framed and executed to collect more taxes but without rupturing relations with taxpayers, existing as well as potential ones. Writing on tax issues, the first point that comes to mind is the present unfair nature of taxation of people. Presently, the greatest amount in taxes is paid in the form of indirect taxes, i.e. taxes attached to prices of commodities or chargers for services paid by all classes of consumers as part of the prices of goods purchased or part of charges given for services rendered like the value added tax (VAT). It is impossible for the consumers to avoid paying them. Thus, the indirect taxes are paid by the rich and the poor alike. But for the 40 per cent of the poor and the very poor in the population, the paying of the indirect taxes can be a source of torment, specially when the indirect taxes are adjusted upward. Nor are they consulted when such adjustments are made but the opposite is the case in relation to interest groups like traders, industrialists, etc. They are able to sit with government's representatives and have taxes adjusted considerably in favour of their businesses or enterprises. There would be fairness in the taxation system if people in the upper income categories were progressively made to pay direct taxes such as income tax proportionate to their earnings or profit. But this is not the case in Bangladesh. In a country of over 150 million people with a good number of rich people and a bulging upper middle class of no less than 30 to 40 million people with a huge number among them having the ability to pay income tax or wealth tax, not even a million presently pay such taxes or pay them far disproportionately compared to their wealth or income. Thus, there is indeed potential and justification involved in obliging this very large number of people not paying taxes or paying them very leniently to be involved in paying taxes regularly and properly. Everyone knows about the huge untaxed income of specialist doctors, lawyers, operators of coaching centres and other service providers. They earn millions of taka a month in many cases. But has any government made any attempt to tax the fees that doctors, lawyers and coaching centre operators or the likes of them take from their clients? The answer must be in the negative although the government's coffers could be substantially filled from bringing such highly deserving eligible high taxpayers under the tax net. The present system of collection of income tax can be a skewed process. People of middle class origin with earnings very small compared to the rich or the very rich, are being exploited through paying double or triple income tax. Even after paying his income tax on earnings from a job or a small business, a person is obliged to pay another so-called income tax for maintaining a car. Beside, if he or she has savings certificates, then too, he or she has to pay an income tax on their interest accruals. Under the present circumstances of high inflation, such incidence of multiple taxation on income must be seen as unfair to the majority of the eligible but not rich taxpayers. An amount of Tk 210 billion which is about 2.8 per cent of the national income and one-third of the tax revenues collected in 2010, was lost from tax evasion or defalcation activities, according to Transparency International, Bangladesh (TIB). The amount is certainly a huge one and shows the extent of the loss to the state treasury from such evasive and defalcating activities. However, it is also true that this is not a first time stunning experience. The fact that different groups of taxpayers have not been paying taxes in proportion to their earnings or income, have been known for a long time. But the present mode of taxation that allows the eligible taxpayers to plead, appoint and take help of so-called tax advisers, also contribute legitimately to this process of tax evasion and defalcation. Then, there are also in-built institutional weaknesses in the taxation machinery. For example, the value added tax (VAT) has emerged as a major source of revenues during the last two decades. But VAT offices are present only in about half of the country's districts which means that the government is losing much revenue from the sheer lack taxation officials over vast areas where various income-earning enterprises have cropped up. Even in the areas where the taxation departments, there is noted a serious dearth of personnel to run the same. The National Board of Revenue (NBR), for instance, did not recruit for any post during 2010. New recruitment to that body has been stalling year after year due to court cases. But the court-related hassles could be addressed with special initiative by NBR long ago along with other measures to streamline the tax administration such as automation, a reward structure to motive well intentioned employees, putting in place an efficient search and discover team to find tax dodgers and bring them under the taxation net without undue harassments, etc. But none of these things were attempted in an integrated and satisfactory manner as these should have been over the years with the result that government's yields from taxation could not increase much more. The challenge in the Bangladesh context is essentially one of bringing under the taxation net the ones who have been eligible for paying taxes for a very long time. They were either not motivated on their own to pay taxes or found tax evasion easy from a too feeble presence or non-presence of the taxation authorities around them. As it is, compared to the vast population the presence of the tax department is thin throughout the country. Increasingly, governments in the present decade have been declaring bigger and bigger national budgets reflecting the propensity to spend more both for development and meeting administrative needs. Therefore, mobilising of greater resources is becoming imperative to finance the budgets growing ever bigger in size. But the pertinent question which cannot help but arise is: how governments can expect to fulfill ambitious revenue collection targets with NBR suffering from a large deficiency in its capacities? The higher revenue collection can be expected only under circumstances when there are adequate number of revenue collectors and on their efficiency, integrity and motivation. But according to a recent media report, NBR has only 1200 tax inspectors for discharging service against 2100 posts. Understandably, vigorous revenue collection cannot be expected from the NBR suffering a substantial dearth of officials to do the job. The customs administration requires an expansion of its capacities. Reportedly, 600 posts of customs inspectors have been lying vacant for a long time and a large number of the functioning inspectors would go into retirement by two or three years from now. But legal complexities have been stifling the immediate recruitment of basic manpower for this pivotal department. Therefore, these legal hurdles need to be overcome at the fastest to add to the capabilities of the customs department that garners the highest amount of revenues. Taxation ought not to be a one-way street. The principle of fairness in taxation involve both give and take. Citizens have points to raise about government not spending their tax money as efficiently as it should. As it is, the spectacles of corruption and waste of public resources are not helping to establish the perception of taxation leading to improvements in the services delivery of the government. People are likely to feel more persuaded or morally troubled -- if they do not pay taxes -- to go ahead and pay the same, when they would find the government bodies spending the resources obtained from taxation truly efficiently and scrupulously. The efficiency of the taxation machinery also needs to be upgraded in different areas. It depends considerably on retraining the taxmen on modern lines. They can be trained in countries where the tax administrations are efficient. But there should be also recognition that without follow-up, revamping of organisations, procedures and methods of administration, much of the training would be wasted. Specially, the tax administration needs to acquire real capacity in the intelligence and enforcement areas.