Raising domestic resources through taxes
Wednesday, 17 March 2010
The ministry of finance normally holds around this time of the year a series of discussions with various stake-holder groups including the leaders of the trade promotion organisations (TPDs) on matters relating to taxation. This is done as part of the process for finalising the budget for the next fiscal. It will, thus, be relevant now to bring to the attention of all concerned the need for raising the country's tax:gross domestic product (GDP) ratio. Bangladesh's GDP has expanded over the years at an otherwise impressive rate. However, this level of performance could have been much higher if physical infrastructural constraints could be removed, quality of human resources could be raised, the effects of some natural disasters were not as severe as the country had witnessed from time to time and the pace of growth-supportive structural and institutional reforms could be accelerated. Furthermore, Bangladesh has also paid a heavy price, in terms of lost growth, for its confrontational politics over the years. All these factors have led to Bangladesh's overall economic performance below its potential. Yet then, its actual achievement at some plus 5.0 per cent annual GDP growth rate for most of the past one and a half decades or more, has been commendable, in the face of both domestic adversities and external global economic shock-effects.
So far so good. Bangladesh's efforts for domestic resource mobilisation for the government's budgetary operations do not, however, provide much room for optimism. Since tax revenues constitute the main avenue for mobilising such resources, the persistent low tax:GDP ratio does amply bear this out. In all neighbouring South Asian countries, this ratio is higher than that of Bangladesh. The problems here largely relate to its indolent and corruption-ladden tax administration. If effective steps are not taken in earnest to address the long-lingering problems in tax regime and its enforcement mechanism, the situation is unlikely to change for the better in the forseable future.
It is pertinent to note here that the pattern of tax collection is undergoing sea changes, globally and regionally. In most countries having some similarities with Bangladesh's economic conditions and its stage of growth, the emphasis is now given more on collection of direct taxes. In this particular area, Bangladesh shows particularly a dismal performance. The number of individual tax returns is less than 1.0 million; a good number of those who file their such returns (or have no scope for evading filing of such returns) are government or public officials. However, the whole tax burden on account of earnings of income of such officials, in the form of salaries and other perquisites, is borne by the government.
It is difficult to reconcile this situation in Bangladesh with its ground-level realities. A look at the deposit structure of its banks and the classification of such deposits, on the basis of amount kept with the banks and related institutions in various forms, is certain to reveal a startling picture about tax evasion or tax avoidance. Likewise, individual investments in the stock market and seed money related thereto, through the beneficiary accounts, can also provide some interesting clues to the level of tax compliance, avoidance and evasion. There are many other areas to deal with this situation.
Coercion is not necessarily the answer to ensure tax compliance. Here, the potential tax payers have to be made aware, first of all, of the benefits of being tax-compliant. Taxation rates are also relevant for the people to feel encouraged to pay due amounts of taxes on their incomes. Those who are in charge of formulating the tax policy in this country can do a great service to raising the domestic resources to provide the support to the government's budget, if they take a forward-looking approach. They do need to set the tax rates at realistic levels. The tax administration will also have to be revamped for widening the net without causing any unnecessary fear or disconcert among those who have otherwise the means to bear the burden thereof.
So far so good. Bangladesh's efforts for domestic resource mobilisation for the government's budgetary operations do not, however, provide much room for optimism. Since tax revenues constitute the main avenue for mobilising such resources, the persistent low tax:GDP ratio does amply bear this out. In all neighbouring South Asian countries, this ratio is higher than that of Bangladesh. The problems here largely relate to its indolent and corruption-ladden tax administration. If effective steps are not taken in earnest to address the long-lingering problems in tax regime and its enforcement mechanism, the situation is unlikely to change for the better in the forseable future.
It is pertinent to note here that the pattern of tax collection is undergoing sea changes, globally and regionally. In most countries having some similarities with Bangladesh's economic conditions and its stage of growth, the emphasis is now given more on collection of direct taxes. In this particular area, Bangladesh shows particularly a dismal performance. The number of individual tax returns is less than 1.0 million; a good number of those who file their such returns (or have no scope for evading filing of such returns) are government or public officials. However, the whole tax burden on account of earnings of income of such officials, in the form of salaries and other perquisites, is borne by the government.
It is difficult to reconcile this situation in Bangladesh with its ground-level realities. A look at the deposit structure of its banks and the classification of such deposits, on the basis of amount kept with the banks and related institutions in various forms, is certain to reveal a startling picture about tax evasion or tax avoidance. Likewise, individual investments in the stock market and seed money related thereto, through the beneficiary accounts, can also provide some interesting clues to the level of tax compliance, avoidance and evasion. There are many other areas to deal with this situation.
Coercion is not necessarily the answer to ensure tax compliance. Here, the potential tax payers have to be made aware, first of all, of the benefits of being tax-compliant. Taxation rates are also relevant for the people to feel encouraged to pay due amounts of taxes on their incomes. Those who are in charge of formulating the tax policy in this country can do a great service to raising the domestic resources to provide the support to the government's budget, if they take a forward-looking approach. They do need to set the tax rates at realistic levels. The tax administration will also have to be revamped for widening the net without causing any unnecessary fear or disconcert among those who have otherwise the means to bear the burden thereof.