Personal tax gets regressive for marginal taxpayers

The finance minister in his budget speech wishes to uphold the principle of horizontal equity in taxation among salaried taxpayers of both public and private sectors. He proposes to introduce similarity in calculating taxable income for public sector employees adding their bonus and festival allowances that is now practised in the case of private sector employees. It will bring many public sector employees, even with lower basic pay, into the tax net in fiscal year 2015-16 because an increase of Tk. 30,000 in tax-free income slab is an amount lower than two festival allowances for an individual with taxable salaries. Moreover, equality will be brought in floor income tax among taxpayers of different locations. The floor tax is raised to Tk. 4,000 irrespective of dwelling places of taxpayers for the fiscal year 2015-16 which was Tk. 1,000 for rural, Tk. 2,000 for urban and Tk. 3,000 for city dwellers in the outgoing fiscal. In addition, the minister has proposed larger income slabs aligned with progressive tax rates. Will his changes ease burden on personal income taxpayers?     
The income tax system in Bangladesh is progressive with six income slabs up to 30 per cent tax rate where tax amount for current fiscal is assessed on the income of previous fiscal year. It is in general designed as the taxable income slabs of (i) initial Tk. 250,000 to be tax-free, (ii) additional Tk. 400,000 to be charged at 10 per cent, (iii) next Tk. 500,000 at 15 per cent, (iv) next Tk. 600,000 at 20 per cent, (v) next Tk. 3,000,000 at 25 per cent and (vi) the rest amount at 30 per cent in the proposed budget for 2015-16. The finance minister has raised the slabs several times in his seventh consecutive budgets but did not adjust the incremental tax burden at zero. This tax burden can be calculated using the consumer price index (CPI) through a comparison of loss in disposable income over time. There was 45 per cent increment in tax burden into the income slab of 10 per cent tax rate, 29 per cent in the slab of 15 per cent tax rate and 19 per cent in the slab of 20 per cent tax rate between assessment year 2008-09 and 2014-15. However, the burden will come down to 17 per cent, 10 per cent and 6.0 per cent respectively, in assessment year 2015-16 compared to the same base year. Though slab adjustment would reduce incremental tax burden, will that lessen the burden on all taxpayers?
While paying tax, a salaried person calculates his taxable income and also his tax amount as per the tax rate against various income slabs. The higher is one's income, the higher will be his accounting tax. However, two persons with monthly basic pay of Tk. 17,860 and Tk. 37,660 will settle their tax liabilities with the same amount of floor tax if they do not have any other income sources. It is calculated that a person with a monthly basic pay of Tk. 37,660 can take a tax rebate of Tk. 23,726 for investment and can settle his tax liability with Tk. 4,000 in 2015-16. The rate of rebate is 15 per cent on the maximum permitted limit of investment that equals 30 per cent of taxable income. However, almost two-thirds of the total taxpayers have lower amount of taxable income and they pay the amount of floor tax without any or with partial benefit of rebates. Why will a marginal taxpayer pay so high floor tax of Tk. 4,000 against his accounting tax of Tk. 40? How can it be justice to put same burden on someone with an income of even lower than half of others?
The government has fixed a target of realising Tk. 659 billion in income tax with a growth rate of 30 per cent in 2015-16. In this regard, the chairman of the National Board of Revenue (NBR) has argued in  favour of horizontal expansion using increased in-built capacity of the National Board of Revenue (NBR). There is a scope of bringing 4.5 million business houses with good economic standing within the tax net, according to the statistics of the Bangladesh Bureau of Statistics (BBS). Won't the 1.08 million income taxpayers be happy if their tax burden is shared by new taxpayers? However, so high a floor tax would allow potential taxpayers to remain out of the tax net. On the other hand, in-net taxpayers have no option but to pay whatever is charged.
The NBR has continued with its efforts to make tax documentation and payment system easier over time. Meanwhile, it has shortened the return submission form to two pages, introduced online tax calculation and made payment system easier. Lately, it has proposed for considering the realised tax at source as the final tax liability on interest income of the national savings certificates. Moreover, larger income slabs aligned with different tax rates will cut incremental tax burden. However, a larger burden will be imposed through a hasty rise in floor income tax from Tk. 2,000 to Tk. 4,000 in last two years. Is it so urgent for a country to realise about Tk. 1.0 billion additional revenue from an incremental tax of Tk. 1,000 per taxpayer? Such an increase in floor tax would create a psychological burden on marginal taxpayers. It will be rational to keep floor tax as minimum as possible but not more than that of the outgoing fiscal year.
Dr. M. Aminul Islam Akanda is
Associate Professor,
Department of Economics, Comilla University.
[email protected]