Mobilising taxes in the next fiscal year

Income tax collection in last few years has shown impressive progress. In last year's budget projection, this sector was targeted to make maximum contribution to the national exchequer exceeding VAT (value-added tax) and customs duty. However, projected revenue collection for the current year was ambitious and it may be interesting to see actual performance at the end of the year. Income tax collection figure up to March 24, 2015 does not reflect an encouraging achievement and collection target may need a review.  Meanwhile, the Ministry of Finance and the National Board of Revenue (NBR) must be full of activities now preparing budget for the next year. So this may be the appropriate time to make  a few suggestions regarding possible measures in the area of income tax.
While discussing income tax, the area that affects maximum number of people is taxation on individuals. The current rate varies from 10 to 30 per cent which seems to be reasonable and comparable with rates in our neighbouring countries. Income up to Tk. 220,000 is exempt from taxation. This benchmark seems to be insensitive to low-income group. Taxpayers deriving income from business and profession can suppress their income in an environment of lax tax administration. But the victims are fixed income group who have no forum to voice their grievances and suffer silently. To give some relief to this helpless segment of taxpayers, tax exemption limit may be raised to at least Tk 300,000.  This will not have any significant impact on tax collection but can give immense relief to this section of taxpayers.
It appears from newspaper reports that the government is contemplating to exempt the senior citizens from payment of income tax. It is not possible to verify credibility of such reports. However, if this is in the agenda, possible consequences should be carefully assessed. It must be ascertained that this is not misused for legalising black money and fictitious change of ownership do not take place for avoidance of taxation. Besides, there is no justification for exempting richer section of senior citizens from taxation. The best option may be to raise the exemption limit substantially for taxpayers above the age of 65 years.
Many senior citizens, who depend on profit from savings certificates for a living, face practical problems for their tax assessment. Most of these persons think that tax deducted at source is the discharge of their tax liability. They are not aware that this deduction is not final settlement and they are required to submit tax return and pay the balance amount of tax, if any. This has often become a possible source of their harassment by the low-level tax officials. Deduction or collection at source is the final settlement in a large area of economy including exports, commercial imports, contract business, transport sector and so on. Why cannot this be done for savings certificates to protect a large number of senior citizens from harassment? This should be done this year even by raising rate of tax deduction, if necessary.
In most countries, rate of corporate tax is very simple - it is a single flat rate on corporate income. In Bangladesh, however, corporate tax structure is complex and, often, baffling. In case of non-listed company, the rate is 35 per cent while listed companies may have to pay tax at different rates varying from 35 per cent down to 24.75 per cent depending on fulfilment of different conditions. Banks, insurance companies and financial institutions pay tax @ 42.5 per cent while merchant banks pay @ 37.5 per cent. Rate for cigarette manufacturing companies is 45 per cent. Mobile phone operators may have to pay at different rates varying from 36 per cent to 45 per cent depending on fulfilment of certain conditions. This kind of complex corporate tax rate structure is, perhaps, rare anywhere in the world. This needs to be rationalised and simplified this year.
Apart from complexity of corporate tax structure, the rate of taxation appears to be high in Bangladesh. This kind of corporate tax rates may discourage expansion of domestic corporate sector. High corporate tax rate may not also be encouraging for foreign investment. India recently declared gradual reduction of corporate tax rate to 25 per cent in next four years mainly to woo foreign investors. Bangladesh may take similar steps to reduce rate of corporate tax gradually to encourage investment. This may have a temporary effect on revenue collection. But, in the long run, this is likely to have positive impact in accelerating economic activities and, consequently, on revenue collection. This may also have a positive effect on the sluggish stock market because companies will have more funds at their disposal for declaring higher dividends.
Inter-corporate tax rate is another area that calls for serious reconsideration. Currently the rate is 20 per cent. This kind of high inter-corporate tax rate is not conducive to formation of subsidiary companies. It is generally admitted that there is an element of double taxation in taxing dividends. However, there are counter-arguments for taxation of dividends. In most countries, dividends are taxed in one form or another. It can be taxed at the hand of individual share holders as in the case of Bangladesh. In some countries, the company is taxed on distributed income which, in effect, is a tax on dividend. However, in case of subsidiary companies the problem is more complex. The subsidiary company is taxed, and when the parent company receives the same income as dividend, it is taxed again. This is taxation of inter-corporate dividend. Finally, when individual share holders receive dividends, they have to pay tax on dividends. In the absence of the concept of holding company in our country, the problem becomes serious and may discourage formation of subsidiary companies. Tax policy that discourages formation of subsidiary companies cannot be termed as business-friendly. While a policy on this issue needs to be formulated, inter-corporate tax rate may be reduced to 10 per cent as an interim measure.
During the last few years, opportunities were not given to legalise black money by paying tax at a lower rate as was the practice for a long time in the past. This policy is in the right direction. However, it is also disappointing to notice that in certain selective sectors, black money was allowed to be invested without declaring source of income. This practice should stop altogether. But this is not enough. Black money will continue to grow in Bangladesh environment unless Taxes department is equipped, strengthened and motivated to control tax evasion. Adequate allocation of fund for modernisation of the department, together with uncompromising political commitment, will be necessary for this. It needs to be remembered that with economic development, importance of direct taxes in revenue collection will continue to grow and increased fund allocation for improved direct tax administration can no longer be ignored.
Budget is being prepared in the backdrop of an extremely depressed stock market. Budgetary measures do not really have much effect on our stock market. Our market is yet to develop that kind of sensitivity. But market manipulators often make a big issue out of it to misguide the inexperienced investors and manipulate trading. So, under the current situation, the government needs to ensure that nothing adverse, actual or perceived, to stock market interest will be done.
It is also suggested that the 10 per cent gap of tax rates between listed and non-listed companies be restored. It is a justified argument that exemption limit in respect of dividend income be raised substantially. But mere moving of exemption limit up hardly benefits the investors. Taxes on dividends are deducted at source by the respective companies regardless of the amount of dividend. It is known to everybody how complicated it is to get refund from taxes department. The BSEC (Bangladesh Securities and Exchange Commission) may sit with the NBR to find a way of arranging refunds where it is due without hassle.
Finally, the government would do well not to expand the list of items for deduction or collection of tax at source. Every year NBR officials hunt for new areas for collection of tax at source because that is a relatively easy option for collection of tax without much effort.  Perhaps the list of such items has already exceeded forty five. To make things worse, such deduction or collection is the final settlement in some of the most important areas of the economy. Thus, it is now tax on commercial import or export, tax on contract work, tax on buses and trucks and so on. It is very likely that these taxes are passed on to consumers just like indirect taxes. So, in many important areas, income tax is no more a tax on income. We better not talk about bringing social justice, equity, income redistribution etc. through this kind of income tax.
     faruqasiddiqi@yahoo.com