Revenue shortfall and tax evasion

Collection of incremental taxes becomes a big challenge for the country's tax authority. In the past fiscal year (FY19), collection of tax revenue by the National Board of Revenue (NBR) stood at around Tk 2.24 trillion. Though the collection posted some 10.67 per cent growth, the shortfall against the revised budgetary target was around 25.0 per cent. The original budget fixed a target of Tk 2.96 trillion to collect as NBR tax revenue which had later been revised down to Tk 2.80 trillion. A big gap between revised target and actual realisation of NBR tax revenue indicates that something is wrong there. Either there are tax evasion and tax avoidance or there is a flaw in setting the target. Even, a combination of all three things may also be there.
When observed from the perspective of the projections made in the Seventh Five-Year Plan (7FYP), the incremental gap between projected and actual revenue collection underpins the proposition. For FY19, the projected collection of NBR tax revenue is Tk 3.20 trillion while actual collection stood at Tk 2.24 trillion. Thus gap stood at around Tk 0.97 trillion (Tk 964.08 billion to be precise). The gap in previous years were Tk 0.21 trillion (FY16), Tk 0.45 trillion (FY17) and Tk 0.62 trillion (FY18).
In all the five years of the 7FYP period (2016-2020), annual budgetary target of NBR tax revenue collection is set below the projected figure. In the first two years, the targeted figures were slightly lower than projected ones. In the next three years, these are much lower which shows that tax authority gradually finds it difficult to set collection target closer to the 7FYP projection.
There were some assumptions behind projecting higher tax revenue collection in the 7FYP. One of the core assumptions was surge in economic growth during the plan period. The Gross Domestic Product (GDP) growth was projected to reach at 8.0 per cent in FY20 from 7.0 per cent in FY16. In reality, annual growth rate of GDP substantially crossed the projected figures. In FY19, growth rate is estimated at 8.13 per cent against the projection of 7.80 per cent. As higher GDP growth reflects expansion of economic activities, it also widens the opportunity of higher tax collection. Higher growth means higher spending and higher spending could be met by higher income. Higher income also means more tax.
Higher economic growth is, however, yet to make the NBR tax revenue closer to projected figure or targeted amount as reflected in big gap between projections and realisations. Despite continuous upward growth, a big portion of taxable income is still not under the tax net. To put it in another way, a good amount of tax has been evaded. The finance minister, in his budget speech in June this year, acknowledged the fact. He said: "A culture has been established in our revenue domain for a long time; that is, those who pay taxes to the government, only continue to do so every year. Others, despite having taxable income, continue to evade payment of taxes." Expressing his desire 'to get out of this bad culture,' the minister asserted that 'all eligible taxpayers will be brought under the tax net.' In support of his statement, the minister also mentioned that though there are some 40 million people in the country belonging to the middle income group, the number of taxpayers is only around 2.20 million. So, the government wants to enhance the number of annual tax payers to 10 million 'at the earliest possible time.'
It is to be noted that tax evasion is not tax avoidance. By using unlawful means to avoid tax payment is tax evasion while by using legal scopes or tools to reduce tax burden is tax avoidance. Tax evasion usually generates black money and sometime fuels illicit transfer of funds or capital flight from the country. It is, however, difficult to assess the extent of evasion due to its unseen nature. Nevertheless, rise in corruption and irregularities in different sectors reflect that tax evasion is also increasing. The latest crackdown on illegal casinos and recovery of a big amount of cash is an example in this regard.
Though a big portion of income may be concealed, it is much difficult to hide consumption or spending. From spending pattern, it is possible to get some idea about the income. The consumption-based method for estimating income tax evasion is popular in tax literature. A working paper, released by United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) in July this year, sheds light on the matter. It mentioned that there are 'three central assumptions' to apply the approach. First, the elasticity of consumption with respect to income is more or less equal for both the wage earners and self-employed. Second, 'neither group systemically misreports spending on certain items such as food or non-durables.' Third, wage earners are generally presumed to report their true incomes, whereas the self-employed 'systematically underreport their income.' It is presumed that by applying the method the tax authority may get a better picture of tax evasion in the country.
In Bangladesh, tax authority is more dependent on source or withholding taxes. Around 85.0 per cent of income tax falls under this type of indirect taxation. It is easy to collect and difficult for tax payers to avoid. At the same time, this also enhances the scope of tax evasion. A good example may be tax at source in interest income of bank deposits. Tax revenue from bank depositors' interest income increased by 16.66 per cent annually on average in last 10 years. The earning was Tk 15.54 billion in FY09 which increased to Tk 65.77 billion in FY19. But a large number of bank account holders don't have Tax Identification Number (TIN) and so they don't need to submit annual tax returns though they are paying higher rate (15.0 per cent) of source tax. They remain outside the direct tax net. Those who have TIN are subject to 10.0 per cent withholding tax which is credited in their annual tax returns.
The 7FYP, however, outlined a series of reform initiatives to raise tax collection and reduce the scope of tax evasion. The government has implemented a number of those reforms and some are still under process.

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