Reforming tax regimes rationally

Contrary to what the chairman of National Board of Revenue (NBR) claimed a few days ago, the country's tax rates, more specifically corporate tax, still remain very high compared to other middle-income countries (Bangladesh is now categorised as a lower middle-income country). This high rate makes it very difficult to lure or attract local and foreign investments. As Bangladesh has failed to keep pace with the reductions in corporate tax observed in middle-income countries over the past few decades, a large slice of the profits made by the country's entrepreneurs has to be surrendered as tax.
Reduction in corporate tax facilitates ease of doing business, but in Bangladesh this tax is mainly applied for bolstering the country's revenue. Therefore, although there are repeated discussions about likely lowering of corporate tax before budget presentations each year, the NBR ultimately backtracks and remains stuck in its comfort zone of high rates.
It is seen from a recent blog-post of IMF titled 'Corporate Tax Rate: How Low Can You Go' that the average rate of corporate tax has climbed down from 40 per cent to 24 per cent among the middle-income countries during the past three decades. But in case of Bangladesh, the decline in rate has been a mere 2.5 per cent. Any sizeable lowering of corporate tax was brought about in the country only once during the past one and a half decades.
The year was 2015-16, when it was decided that companies enlisted with the stock exchanges would have to pay a corporate tax of 25 per cent. For others, the rate was fixed at 35 per cent. Besides, corporate tax for financial institutions was set at 42 per cent; it was 45 per cent for mobile and cigarette companies; 15 per cent for cooperative organisations and 12 per cent for readymade garments enterprises. The main logic put forward by NBR for sticking to the current high rates is the apprehension that there might be shortfall in revenue if the rates were cut.
The corporate tax rates of companies enlisted with the stock exchanges are usually compared when inter-country comparisons are made. But in Bangladesh, their number is quite few and not at all significant. Only 356 companies are currently enlisted with the Dhaka Stock Exchange (DSE). Therefore, corporate taxes of 35 per cent or more have to be paid by around 150 thousand companies registered with the Registrar of Joint Stock Companies and Firms (RJSC) outside the stock market. And among them, 30 thousand companies filed annual tax returns last year. It is presumed that many enterprises avoid paying taxes because of the high corporate tax rate.
The current and previous finance ministers of Bangladesh have repeatedly said during the past few years that there should be a medium-term plan for reducing corporate tax rates. The leaders of business community have also emphasised the need for lowering corporate tax rate time and again. But this logical demand has not been translated into concrete action because of the apprehension of taxmen that any reduction of corporate would have a huge impact on collection of revenue. The NBR data show that the proportion of corporate tax in the category of income tax has been rising over the previous fifteen years. While 45 per cent of income tax came from corporate tax in 2002-03, it rose to 60 per cent by 2016-17. And one-third of the corporate tax now comes from mobile phone companies, banks, and cigarette producers. But the recent IMF blog claims that the proportion of corporate tax is only 15 per cent of the total tax in developed countries, and 17 per cent in case of low-income ones.
Experts opine that the investors take into account two criteria before making investment decisions. Firstly, what is the corporate tax rate? And secondly, how much profit can be made after paying taxes? Therefore, it is almost certain that investments will rise if corporate tax is decreased in countries like Bangladesh. Formulation of a medium-term plan for lowering corporate tax rate has therefore become quite urgent now in the backdrop of Bangladesh becoming a lower middle-income country. The IMF blog says that the average corporate tax rate of middle income countries was 40 per cent in 1990, but that came down to 24 per cent by 2018. The rate was 38 per cent for high income countries in 1990, which has now fallen to 22 per cent. In case of low-income countries, the rate came down to 29 per cent from 46 per cent.
In fact, the advanced economies have been shaping the corporate tax rules for long without bothering about how these would affect low-income countries. The IMF analysis shows that the non-OECD (Organisation for Economic Cooperation and Development) countries lose around 200 billion US dollars in revenue each year (about 1.3 per cent of GDP) due to multinational companies shifting profits to low-tax locations because of high corporate tax rates. The corporate tax rates, however, vary in case of the countries in South Asia. It is 25-35 per cent in Pakistan, 30 per cent in India, and 28 per cent in Sri Lanka. Even in Afghanistan, the rate is 20 per cent. As for Southeast Asia, the rates are 20 per cent for Bangladesh's RMG rival Vietnam, 20 per cent in Myanmar and Indonesia, 24 per cent for Malaysia, and 17 per cent in Singapore.
As the current international corporate tax structure is fundamentally out of date, the IMF has identified three key areas for redressing the situation on a global scale. Firstly, the profit-shifting and tax competitions should be addressed better. Secondly, legal and administrative obstacles to reform have to be overcome. And thirdly, full recognition of the interests of emerging and developing countries should be ensured.
All countries of the globe can benefit, including the lower middle-income countries like Bangladesh if the existing tax regimes are reformed rationally and the root causes of current weaknesses are addressed properly. Stagnating with one of the lowest Tax-GDP ratios in the world, reform and rationalisation of the tax regime, including corporate tax rates, brooks no delay in Bangladesh.

Dr. Helal Uddin Ahmed is a retired Additional Secretary and former Editor of Bangladesh Quarterly.
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