Need for discretionary revenue measures

Complicating the task [to break out of the 10%-11% of GDP level] will be the other structural shift, which is already underway, entailing steady reduction in the share of customs duty with diminishing importance of trade-based taxes in line with global trend. The share of customs duty in total NBR taxes has already come down to about 12% of total NBR revenue, and this will probably decline further to about 9% of total NBR revenue by FY20. Accordingly, reliance of Direct Taxes and VAT would need to increase much more in relative terms. Every year revenue collection from these two sources would need to increase by 0.8 percentage point of GDP, shared roughly equally between the two major sources. The specific reform strategies are discussed in Box 1.

Box 1: NBR Tax Reform Required for Attaining Tax Targets in the Seventh Five Year Plan
Tax Policy Reforms
* Effective Implementation  of VAT and Supplementary Duty Act 2012
* Drafting and implementation of a new Direct Tax Code
* Drafting and implementation of a new Customs Act
Tax Administration Reforms: Income Tax
* Broadening of the taxpayers' base- This will require monitoring of the ownership of all sizable physical and financial assets of taxpayers and determining the income generation out of those assets.  
* Broadening of the tax revenue sources- Traditionally there has been an excess dependency on taxing financial institutions and a few large non-financial corporations. The tax department should explore other smaller organizations in the formal sector as well various corporations.
* Focusing on income from service providers and self-employed (who are difficult to tax).
* Treating all sources of income equally for the tax purpose without discrimination for the households. This would imply taxation of capital gains from land, real estate/housing, and stock market. Wealth accumulation in Bangladesh is primarily happening through accumulation of urban land and real estate, untaxed/low tax income of the rapidly growing RMG sector, and relatively low tax incidence on income through financial instruments. This must change.
* Automation of TIN registration and linking TIN with National I.D.
* Integrated Revenue Management Programmeme: Business Process. An integrated revenue management programme seeks to connect the three departments at transactional level by linking the taxpayer identification numbers i.e. TIN and BIN in the database. The methodology for setting up such an integrated system is to first centralize the database and transaction processing of the three departments at one location and then to build an information system that can mine data in the three databases and thereafter process the same for exception reports. The integrated revenue management programme will enable the desired flow of information and consequent synergy among the three tax wings of the NBR.
* Integrated Revenue Management Programmeme: Digitalisation Programmeme. This programmeme will seek to set up a country-wide integrated ICT platform to capture all tax payment information from tax returns, banks, TDS deductors, third-party collection agencies, etc.  The integrated revenue management system will also receive third party returns i.e. TDS returns, Annual Information Returns (AIR) etc. and generate MIS reports, exception reports etc. Under this programme, a Central Processing Centre is to be set up for processing all Income-tax and VAT returns, whether e-filed or paper filed at one integrated processing centre.
* E-Filing of income tax returns.
* Aggressive imposition and expansion of withholding taxes, particularly on individual taxes which could potentially improve tax compliance, expand the income tax base and address administrative issues pertaining to tax collection efforts through increased transparency and efficiency.
* Strategic Communication and Taxpayer Outreach, Education and Assistance. Bangladesh has a very narrow tax base and a very small percentage of the population bears the burden of taxation. Most of the direct tax revenues come from tax deduction at source (TDS) whereas a large percentage should be coming from corporate tax as well as from businesses and professions through advance tax (PAYE). The logical inference is gross under reporting or non-reporting from various eligible categories. The taxpayer education programme will make available a menu of offerings through remote outlets like websites, internet etc. as well as through customers facing one to one or group interface with the NBR Customer Service Wing.
Tax Administration Reforms: VAT
* Implementation of the new VAT Act.
* Expanding VAT base especially on businesses and organisation.
* Incentivising VAT payment with benefits for small businesses to bring them into the VAT coverage as well as promoting increased formalisation of businesses currently operating in the informal sector.
* Reform of the VAT administration along functional lines
* Automation of the whole tax administration through Central Data base including Central VAT Registration; electronic submission and return processing
* Comprehensive taxpayers' education and information campaign about the new VAT law and Rules.


The need for strengthening of the tax administration, its computerisation and improvement in efficiency is integral to achieving these targets. Expansion of the income tax base and bringing more individuals and companies under the tax net and under the withholding mechanism would be necessary to drive the revenue growth and to achieve levels enjoyed by our neighbouring countries. Initiatives and incentives by the government to formalise the informal sector activities would greatly enhance the tax potential on the domestic sides. Clearly the structural reforms identified in Box 1 are most important and the process must start immediately for sustainable revenue growth as envisaged under the 7th Plan. However, these medium-term reforms will not lead to revenue gain in FY16. Thus the Government would need to consider a series of discretionary measures to implement the fiscal policy underpinning the FY16 budget.
HOW TO ACHIEVE THE REVENUE TARGET IN FY16: Since implementation of structural reforms in the VAT and direct tax areas have not yet gained momentum, we do not expect any revenue gain from the reform initiatives in FY16. In addition to the endogenous revenue growth driven by expansion of economic activity there will be need for sizable discretionary revenue measures if we are to realise the revenue target envisaged under the Plan.  Even with an ambitious autonomous revenue growth elasticity of 1.2, which is above historical average but based on the consideration that revenue growth was depressed in FY15 due to political hostilities, the required discretionary measures would amount to Tk. 131 billion in FY16.



The challenge will be to identify the possible measures which could be revenue yielding, structurally sound and socially desirable and equitable, and in relevant cases enhancing environmental sustainability. Not all measures will be revenue augmenting in the short run, but will strengthen and broaden the economic base for enhanced and sustained revenue collection in future. A number of such measures are briefly noted below, although in some of these cases we have detailed background studies to justify the proposals.
1. Taxation of tobacco products
There is huge revenue potential for sizable additional revenue from taxation of cigarettes and bidi. PRI has recently done a study on "A Review of Cigarette and Bidi Pricing and Taxation in Bangladesh". The study indicates a number of interesting findings and leads to some policy recommendations, some of which are summarised below:
A. Some interesting findings/facts needs to be looked at before we go into specific recommendations
a.Market share of the low segment cheap cigarettes has increased to 63% in 6 years from  36% in FY08, leading to huge loss of revenue.

Figure 6: Share of Segment Volumes in Total Cigarette Volume (In per cent)



Source: National Board of Revenue & PRI Staff Calculations
b. Income-adjusted cigarette prices have not increased much, thus prevalence/consumption of cigarettes has not declined in recent years.

Figure 7: Income-adjusted Cigarette Prices 


 
Source:  National Board of Revenue and PRI estimates
c. Low segment cigarettes expanded at more than 26% per annum at the expense of medium segment.
d. Effective  tax rate on the low segment is one third of the rate on other segments, contributing to lower prices and the growing market shares of the low segment with huge revenue loss
Figure 8: Effective Tax Rate for Cigarettes across Segments



Source: National Board of Revenue and PRI Staff Estimates

e. Tax incidence and price per pack of cigarettes is one of the lowest in the world. Accordingly there is no reason Bangladesh should not increase tax rates on low segment cigarettes.



Source: WHO REPORT ON THE GLOBAL TOBACCO EPIDEMIC, 2013 (World Health Organization 2013) and National Board of Revenue (NBR)
f. Bidi Tax Structure encourages its smoking and leads to huge loss of revenue. The decline in the market share of bidi has also markedly slowed down in recent years.
In volume terms bidi accounts for 47% of total smoking tobacco market in Bangladesh, but it contributes only 2%-3% of revenue collected from this sector. In Bangladesh, bidis are taxed at much lower rates than cigarettes. It is also important to note that bidis are taxed based on "tariff values" set by the government, which are approximately half the actual retail prices. It is interesting to observe that the principle of taxation applied to bidi is very different from the principle of taxation applied to cigarettes. For the most popular size of bidi packs (containing 25 bidis), the amount of tax collected is Tk. 1.87 on a pack of bidi with tariff value of Tk. 4.27 per pack. The effective tax rate is 43.7% of the applicable tariff value. However, actual price of a pack of 25 bidis in the market is about Tk. 8. This amounts to an effective tax of only 23.4% of the actual market price compared with 59% of final price for low category cigarettes.  This tax difference is excessive and helped support demand for bidi among the low income rural households despite the detrimental effects on their health.
Figure 9: Volume of Cigarette and Bidi Production (in percentage)

Source: National Board of Revenue