Modernising the tax system, making it taxpayer-friendly

There is general perception that the existing Income Tax regulations in Bangladesh are British by birth, too much intricate in attitude and curiously cumbersome for enforcement. Though Taxation, as an influential instrument for revenue income of the state, was very much there in ancient and medieval India in different forms and styles, the modern Tax system, as we know it today, was first introduced by the British rulers in the Subcontinent. The Indian Mutiny had just exploded in 1857. The British government took over ruling power of India from the East India Company. The country was in a bad state financially. James Wilson (1805-1860), the founder of the famous Economist, was posted in Calcutta as Member (Finance) in the Viceroy's Council which is equivalent to the Finance Minister. After taking over his assignment in India, he introduced a Bill in the Indian Legislature to restructure tariff laws. Not only that, he also introduced the budgetary system and paper currency. In his first-ever Budget Speech for FY 1860-61, on April 07, 1860, he introduced the Income Tax Act - the first such Act in India. Two months after historic introduction of income tax in India, Wilson died in Calcutta from dysentery. So many shared a premonition that the novelty of the Tax Act and the inquisitorial methods which its administration would require, would contribute to its failure.
Wilson studied the revenue law laid down by Manu and the version of the ancient Hindu law. The first general income tax was levied for a period of five years in order to meet the difficulties caused by the Mutiny. It was levied, on the English model, on all incomes above Rs 200 per annum and arising from property, professions, trades and offices at the rate of 2.0 per cent, on income between Rs 200 and 500 per annum, and 3.0 per cent on larger income which also bore the additional 1.0 per cent to be used for purpose of local development. One may note with dismay that the basis for income tax calculation was made cumbersome from the start where scopes were embedded for creating and applying discretionary power by tax officials, leading to harassment and revenue dwindling. In fact, the Income Tax laws and methods of collection were framed and formulated by the British political bureaucrats, who themselves were exempted from tax payment and the responsibility of collecting taxes were assigned to another such class of bureaucrats who also got the impression that they will not be liable for paying tax rather they will share commission for collecting more taxes. So the regulations and the methods of calculation and collection as well, all were designed only for imposing taxes on the natives. Unfortunately, this discriminating attitude, as a legacy, still persists in a free democratic society and independent nation-state.
A very close review of the existing rules and regulations is required to reorganise these to fit with present-day demand of social norms and business practices. If these regulations have to be effectively enforced, prudently practised and impartially implemented in a free and democratic environment - unlike the past colonial regime, the Tax Law has to be framed by the lawmakers who should also be within its jurisdiction. Appropriate ownership has to be established. Rules should not turn into a tool for applying discretionary power by the enforcement officials but be applicable for all indiscriminately. Global good practices should be incorporated in the law, and suggestions should be taken from the stakeholders. It has been appropriately argued that the reorganisation proposals should be made in the vernacular of the stakeholders so that they can better comprehend these and suggest modifications.
To be sound, a tax system must be economically efficient, inflicting as little damage as possible on the economy. Every tax system distorts economic decisions and leads to less economic activity than otherwise would occur, resulting in what economists call "deadweight loss." What is more, applying different tax rates to different activities or to different producers exacerbates the distortion of economic decisions and increases the deadweight losses due to the tax system. A sound tax system should be designed to minimise these losses. A sound tax system should be logistically economical. It should impose the smallest possible compliance costs on taxpayers otherwise people will not be encouraged to pay tax, rather they will be inclined to evade tax. Every tax system imposes direct costs on taxpayers in terms of time devoted to tax preparation or money to buy the services of Certified Public Accountant (CPAs). Ultimately, every tax system diverts a portion of tax revenues raised by the tax to pay the cost of administering and collecting the tax and enforcing its provisions. A sound tax system would minimise these costs.
A nation's tax system is often a reflection of its socio-economic and cultural values or the values of those in power. While creating a system of taxation, a nation must make choices regarding the distribution of the tax burden-who will pay taxes and how much they will pay-and how the taxes collected will be spent. In democratic nations where the people elect those in charge of establishing the tax system, these choices reflect the type of community that the people wish to create. In countries where the people do not have a significant amount of influence over the system of taxation, that system may be more of a reflection on the values of those in power to enact law or to enforce collection .

Dr Muhammad Abdul Mazid is a former Secretary to the Government of Bangladesh and a former Chairman of National Board of Revenue (NBR). mazid.muhammad@gmail.com