Narrowing the direct and indirect tax revenue gap

The National Board of Revenue (NBR) has been trying to be bold so far as its collection of income tax is concerned. In the last few fiscal years (FYs), it had set income tax targets that prompted sceptics to raise their eyebrows. But the Board in most cases achieved the targets and even surpassed those on a number of occasions. Though the gap between the collections from direct and indirect taxes respectively is still wide, there has been substantial progress in narrowing down the same during the last decade (2001-2010). At the end of the immediate past decade, the ratio stood at around 70:30 compared to that of 90:10 four decades back.
The tax men intend to narrow the gap between direct and indirect tax revenues to 50:50 at the end of the current decade (2011-2020). With this end in view, they are reportedly mulling fixation of income tax target revenue at Tk 650 billion for the next fiscal (2014-15). The target, which is 35.41 per cent higher than that of the current fiscal, would constitute around 44 per cent of the aggregate tax revenue target likely to be set for the FY '15. There is no denying that the tax authorities have been demonstrating a sort of, what some quarters term, coercion towards collection of income tax revenue in recent years, notwithstanding the persistence of all the weaknesses and holes in the existing taxation system.
In fact, the tax men have little option. Generation of enough revenue from indirect tax sources has become all the more difficult in recent years. The import duty that once was the main source of government revenue has stagnated for both domestic and external reasons. The import tariffs have been revised downward and the process of such revision would continue in order to comply with the provisions of the multilateral trade deals. The other major source of government revenue is the value added tax (VAT). As far as its application is concerned, the NBR has almost exhausted all its possible sources. However, with the expansion of the economy and the related activities, tax revenues from VAT would continue to pour in to the public exchequer always in the years to come.
Against this backdrop, the income tax remains to be a most potential source of government's revenue collections. But that source has remained the least exploited one. Its optimum use would not only reduce the worries of the government about collecting enough revenue but also help mitigate the societal ills through public spending of a larger part of the same for the benefit of the poor and the underprivileged section of the population. However, the tax men, apparently, have chosen the easiest way of collecting higher income tax revenues. They have reportedly decided to make the maximum possible use of advance income tax (AIT) to boost revenue. The AIT helps the NBR get at least a part, not the full amount, of the income tax recoverable from a potential taxpayer. But that is not anyway an ideal choice.
The NBR, in fact, would derive far more benefit if it, in addition to the application of AIT mechanism, puts in greater efforts to collect taxes from the eligible taxpayers and reduce the current extent of tax evasion by individuals and companies. Here, persuasion and imposition of penalty would work better than any sort of 'coercion'. Besides, to present itself as a fair tax administrator the government needs to make tax rates indexed to inflation and devote more revenue funds to prudent public spending. The likely income tax target of the government is not anyway big, given the potential. But the tax men would be required to employ their sincere and honest efforts to reach the target and go beyond it.