Strengthening the NBR to increase revenue earnings
Wednesday, 19 May 2010
Mamun Rashid
WHO knew a humble lunch could be so enlightening and insightful. A few days back, I had the distinct opportunity to attend a luncheon meeting with the LTU (Large Tax Payers Unit) officials of the National Board of Revenue (NBR). I possibly earned that lunch as I am a senior executive of a large tax-paying entity in Bangladesh. A few distinguished members of the NBR joined in the lunch. The lively discussion that ensued shed light on some startling revelations concerning the premier revenue-earning arm of our government. Contrary to popular belief, political pressure is not the primary barrier to broadening our tax net. The critical areas that demand urgent attention are the establishment of an efficient organogram, capacity-building including IT delivery platform, flow of two-way information and a target-linked incentive system.
Gradually it became some sort of a pre-budget discussion session also. In the discussions, it was found that the revenue collection target of the Government of Bangladesh for the upcoming fiscal year might be fixed at Tk 92,947 crore, which is 16.93 per cent higher than that of the current year. The revenue collection target of the National Board of Revenue is likely to be increased by 19 per cent, and fixed at Tk 72,590 crore. This ambitious target is mainly aimed at coping with the pressure of an enormous budget -- possibly in the range of Tk 132,000 crore.
However, we all agreed that, for a developing country like Bangladesh, the rapid increase in the size of the budget is not at all surprising. And for attaining sustainable development, the maximum share of such increase should be funded with domestic revenue collection. To meet this goal, when the revenue collection target becomes significantly higher than the GDP growth rate, the concerned arms of the government must find ways to tap new sources of revenue - which is always a challenging task indeed.
The revenue collection wings of the Government of Bangladesh, especially the National Board of Revenue (NBR), has so far done a satisfactory job in supporting the government by attaining high success rates against the targets set for them. In fact, in FY2007-08 they exceeded the revenue target by increasing their year-on-year collection by 27%. However, according to NBR sources, for the current fiscal year the revenue collection target for NBR has been set at Tk. 61,000 crore against which collection in the first 8 months (till February 2010) has been Tk. 35,767 crore - a shortfall of about Tk. 5,000 crore from the 8-month target at an evenly distributed rate. The growth rate of revenue collection in the first 8 months of the current fiscal year compared to the same period in the previous year has been little over 17%. Given these statistics, the next year target of Tk 72,590 crore (19% growth over the current year) seems quite challenging, but not impractical by any means. In fact, looking at the growing consumerism in the country it may appear that tax revenue collection target could have been kept even more aggressive, we thought.
In order to achieve the stretching target for the next fiscal year, the NBR has planned to set up upazila-level camps and recruit students and part-time workers. These are indeed good initiatives. In addition to the same, the NBR needs to identify sectors currently paying little or no tax to widen its tax net. The structural and capacity issues of NBR also need to be addressed. The propositions discussed in these areas were: 1) One very large sector that has recently experienced an exponential boom in terms of growth but is yet to contribute significantly to the national exchequer is the capital market. Our capital market already enjoys extremely encouraging tax incentives in the form of preferential rates which is currently the lowest compared to peer countries. Despite this fact, the rate of tax evasion in this sector is alarmingly high. Roughly there are about 23 lacs BO (Beneficiary owners') accounts in the country through which the capital market transactions are being executed and it is estimated that 70 per cent of these accounts are not paying due taxes. The NBR needs to launch an immediate initiative to link all BO accounts held with stock brokers to an acceptable TIN number and start monitoring the transaction activities through those accounts. The NBR should consider setting up a cross-regulator team with the SEC (Securities Exchange Commission) in this regard.
2) Another important sector that seems to be evading significant amount of tax is the real estate sector. Over the last decade the price per square feet area in the prime locations of Dhaka city (e.g. Gulshan-Baridhara) ranges from Tk 7500/- to Tk. 20,000/- and transactions are indeed taking place quite regularly at such exorbitant prices. The growth of real estate development projects in and around Dhaka city is phenomenal. This indicates that everyday vast amounts of cash are changing hands in this sector. Currently, there is a tendency of recording these real estate sector transactions at a price much lower than actual to minimise the registration cost etc. A high registration fee puts pressure on the buyer and discourages transaction. The government could consider further rationalising the registration fees to encourage recording of transactions at actual rate and thus increase its revenue on an absolute level.
It is evident that given the wealth accumulation by the middle class and the enormous opportunity space existing in the above sectors, finding areas to widen the tax net should not be the biggest challenge. Neither the political intervention nor the lack of political will be the main hindrance to this effort. The more serious challenges are the structural and capacity issues facing the NBR itself. There are also limitations in terms of information availability as well as the capacity in analysing whatever information is available.
Administratively, the NBR is under the Internal Resources Division (IRD) of the Ministry of Finance (MoF). The Secretary, IRD is the ex-officio Chairman of the NBR. The NBR is responsible for formulation and continuous re-appraisal of tax-policies and tax-laws, negotiating tax treaties with foreign governments and participating in inter-ministerial deliberations on economic issues having a bearing on fiscal policies and tax administration. It is unfortunate but true that in spite of being the main revenue generating arm of the government, the NBR has no revenue or expense budget approval authority within itself. Any proposal of funding any initiative has to go through very complex bureaucratic procedures through IRD and relevant sectors of MoF. Even trivial administrative affairs within the NBR (e.g. leave applications for junior NBR officials) have to go through the approval process of IRD. And this approval process is also not flexible enough to incorporate two-way communication between the approvers and the applicants. This type of structure is seriously detrimental to the NBR's expected role of playing a proactive revenue-focused organisation. The NBR needs to have independent authority to spend within a given budget, recruit as per its annual HR Plan and administer its staff on its own.
To build up the capacity of the NBR the most important consideration should be the quality of human resources in-take within the organisation. To be more effective in identifying and pursuing new areas of increasing the tax net the NBR needs qualified human resources in the form of statisticians, information technology specialists, qualified accountants and economists, especially for its Central Intelligence Cell (CIC). Like any other department of the government, the NBR is struggling in this area in competing with the private sector of the economy which has by far taken a significant upper-hand over the public sector in terms of compensating and thereby attracting proper talent. Hence, the NBR, being a revenue-generating organisation, should have a proper compensation structure in place to give adequate incentive to their staff in line with the private sector. Otherwise, the organisation will fail to attract staff who will be superior in knowledge to challenge tax-payers in the private sector.
Currently, only a few selected sections of NBR get a miniscule percentage of collected revenue as incentive payment. This percentage should be increased and all circles and sections of the NBR should be brought under this programme. The initiative of structurally strengthening the NBR needs to go beyond revision of compensation structure of the staff. The entire set-up of the NBR as an organisation needs to be revisited. After establishment in 1972, the organogram of the NBR has been reviewed only once (1991-92). Whether the current setup is conducive for attracting right human resources is also questionable. The current organisational structure is very flat with only a few layers and a large span of control. Such a setup does not encourage career progression for the junior staff members and newcomers and hence discourages potential recruits.
Another area of challenge for the NBR is the lack of cooperation and coordination among the various regulatory wings of the government. The discussions identified that different organs of the government hold information on economic activity in various sectors. For example, the Ministry of Land has information regarding sale of land and real estate; the Bangladesh Road Transport Authority (BRTA) has information on purchase and sale of vehicles; the Central Bank, through its command over banks, has access to bank deposit information and the SEC has access to capital market information. The NBR needs to have free access to all these information sources to carry out focused and fruitful research. In an ideal scenario, CIC should run a database of all valid TIN numbers which should be automatically and regularly fed with information on their respective tax returns, bank account balances, capital market transactions and real estate/vehicle transactions. Setting up such a database is not impossible if quality human resources and cooperation amongst the mentioned wings of the government can be ensured.
Currently, our total revenue collection stands at a meagre 9 per cent of GDP. This exposes our national budget to interest pressure and in fact government debt-to-revenue ratio is a staggering 350 per cent at present. In the recently published Sovereign Credit Rating report, the internationally renowned credit rating agency Moody's also came to the same conclusion and identified this shortcoming in revenue generation as a serious rating constraint. The rating agency will critically observe the tax reforms that may be announced in the forthcoming budget and use the same as input to determine our credit outlook. Increased revenue earnings will also allow the government to increase employment-generating public expenditure and thus create a social safety net for the marginalised
people.
We concluded that the NBR has so far done a commendable job in supporting the revenue collection targets of the government. But to fund the development needs of our fast-growing economy the revenue target and actual collection will need to be increased exponentially in the coming years. Given the wealth and capital accumulation in the country it is clear that abundant sources of tax revenue are present. All we need is to adequately equip the NBR to tap those sources and in the process provide us the financing needed to lead us to our goal of becoming a middle-income economy.
The writer is a banker and economic analyst. He can be reached at e-mail: mamun1960@gmail.com
WHO knew a humble lunch could be so enlightening and insightful. A few days back, I had the distinct opportunity to attend a luncheon meeting with the LTU (Large Tax Payers Unit) officials of the National Board of Revenue (NBR). I possibly earned that lunch as I am a senior executive of a large tax-paying entity in Bangladesh. A few distinguished members of the NBR joined in the lunch. The lively discussion that ensued shed light on some startling revelations concerning the premier revenue-earning arm of our government. Contrary to popular belief, political pressure is not the primary barrier to broadening our tax net. The critical areas that demand urgent attention are the establishment of an efficient organogram, capacity-building including IT delivery platform, flow of two-way information and a target-linked incentive system.
Gradually it became some sort of a pre-budget discussion session also. In the discussions, it was found that the revenue collection target of the Government of Bangladesh for the upcoming fiscal year might be fixed at Tk 92,947 crore, which is 16.93 per cent higher than that of the current year. The revenue collection target of the National Board of Revenue is likely to be increased by 19 per cent, and fixed at Tk 72,590 crore. This ambitious target is mainly aimed at coping with the pressure of an enormous budget -- possibly in the range of Tk 132,000 crore.
However, we all agreed that, for a developing country like Bangladesh, the rapid increase in the size of the budget is not at all surprising. And for attaining sustainable development, the maximum share of such increase should be funded with domestic revenue collection. To meet this goal, when the revenue collection target becomes significantly higher than the GDP growth rate, the concerned arms of the government must find ways to tap new sources of revenue - which is always a challenging task indeed.
The revenue collection wings of the Government of Bangladesh, especially the National Board of Revenue (NBR), has so far done a satisfactory job in supporting the government by attaining high success rates against the targets set for them. In fact, in FY2007-08 they exceeded the revenue target by increasing their year-on-year collection by 27%. However, according to NBR sources, for the current fiscal year the revenue collection target for NBR has been set at Tk. 61,000 crore against which collection in the first 8 months (till February 2010) has been Tk. 35,767 crore - a shortfall of about Tk. 5,000 crore from the 8-month target at an evenly distributed rate. The growth rate of revenue collection in the first 8 months of the current fiscal year compared to the same period in the previous year has been little over 17%. Given these statistics, the next year target of Tk 72,590 crore (19% growth over the current year) seems quite challenging, but not impractical by any means. In fact, looking at the growing consumerism in the country it may appear that tax revenue collection target could have been kept even more aggressive, we thought.
In order to achieve the stretching target for the next fiscal year, the NBR has planned to set up upazila-level camps and recruit students and part-time workers. These are indeed good initiatives. In addition to the same, the NBR needs to identify sectors currently paying little or no tax to widen its tax net. The structural and capacity issues of NBR also need to be addressed. The propositions discussed in these areas were: 1) One very large sector that has recently experienced an exponential boom in terms of growth but is yet to contribute significantly to the national exchequer is the capital market. Our capital market already enjoys extremely encouraging tax incentives in the form of preferential rates which is currently the lowest compared to peer countries. Despite this fact, the rate of tax evasion in this sector is alarmingly high. Roughly there are about 23 lacs BO (Beneficiary owners') accounts in the country through which the capital market transactions are being executed and it is estimated that 70 per cent of these accounts are not paying due taxes. The NBR needs to launch an immediate initiative to link all BO accounts held with stock brokers to an acceptable TIN number and start monitoring the transaction activities through those accounts. The NBR should consider setting up a cross-regulator team with the SEC (Securities Exchange Commission) in this regard.
2) Another important sector that seems to be evading significant amount of tax is the real estate sector. Over the last decade the price per square feet area in the prime locations of Dhaka city (e.g. Gulshan-Baridhara) ranges from Tk 7500/- to Tk. 20,000/- and transactions are indeed taking place quite regularly at such exorbitant prices. The growth of real estate development projects in and around Dhaka city is phenomenal. This indicates that everyday vast amounts of cash are changing hands in this sector. Currently, there is a tendency of recording these real estate sector transactions at a price much lower than actual to minimise the registration cost etc. A high registration fee puts pressure on the buyer and discourages transaction. The government could consider further rationalising the registration fees to encourage recording of transactions at actual rate and thus increase its revenue on an absolute level.
It is evident that given the wealth accumulation by the middle class and the enormous opportunity space existing in the above sectors, finding areas to widen the tax net should not be the biggest challenge. Neither the political intervention nor the lack of political will be the main hindrance to this effort. The more serious challenges are the structural and capacity issues facing the NBR itself. There are also limitations in terms of information availability as well as the capacity in analysing whatever information is available.
Administratively, the NBR is under the Internal Resources Division (IRD) of the Ministry of Finance (MoF). The Secretary, IRD is the ex-officio Chairman of the NBR. The NBR is responsible for formulation and continuous re-appraisal of tax-policies and tax-laws, negotiating tax treaties with foreign governments and participating in inter-ministerial deliberations on economic issues having a bearing on fiscal policies and tax administration. It is unfortunate but true that in spite of being the main revenue generating arm of the government, the NBR has no revenue or expense budget approval authority within itself. Any proposal of funding any initiative has to go through very complex bureaucratic procedures through IRD and relevant sectors of MoF. Even trivial administrative affairs within the NBR (e.g. leave applications for junior NBR officials) have to go through the approval process of IRD. And this approval process is also not flexible enough to incorporate two-way communication between the approvers and the applicants. This type of structure is seriously detrimental to the NBR's expected role of playing a proactive revenue-focused organisation. The NBR needs to have independent authority to spend within a given budget, recruit as per its annual HR Plan and administer its staff on its own.
To build up the capacity of the NBR the most important consideration should be the quality of human resources in-take within the organisation. To be more effective in identifying and pursuing new areas of increasing the tax net the NBR needs qualified human resources in the form of statisticians, information technology specialists, qualified accountants and economists, especially for its Central Intelligence Cell (CIC). Like any other department of the government, the NBR is struggling in this area in competing with the private sector of the economy which has by far taken a significant upper-hand over the public sector in terms of compensating and thereby attracting proper talent. Hence, the NBR, being a revenue-generating organisation, should have a proper compensation structure in place to give adequate incentive to their staff in line with the private sector. Otherwise, the organisation will fail to attract staff who will be superior in knowledge to challenge tax-payers in the private sector.
Currently, only a few selected sections of NBR get a miniscule percentage of collected revenue as incentive payment. This percentage should be increased and all circles and sections of the NBR should be brought under this programme. The initiative of structurally strengthening the NBR needs to go beyond revision of compensation structure of the staff. The entire set-up of the NBR as an organisation needs to be revisited. After establishment in 1972, the organogram of the NBR has been reviewed only once (1991-92). Whether the current setup is conducive for attracting right human resources is also questionable. The current organisational structure is very flat with only a few layers and a large span of control. Such a setup does not encourage career progression for the junior staff members and newcomers and hence discourages potential recruits.
Another area of challenge for the NBR is the lack of cooperation and coordination among the various regulatory wings of the government. The discussions identified that different organs of the government hold information on economic activity in various sectors. For example, the Ministry of Land has information regarding sale of land and real estate; the Bangladesh Road Transport Authority (BRTA) has information on purchase and sale of vehicles; the Central Bank, through its command over banks, has access to bank deposit information and the SEC has access to capital market information. The NBR needs to have free access to all these information sources to carry out focused and fruitful research. In an ideal scenario, CIC should run a database of all valid TIN numbers which should be automatically and regularly fed with information on their respective tax returns, bank account balances, capital market transactions and real estate/vehicle transactions. Setting up such a database is not impossible if quality human resources and cooperation amongst the mentioned wings of the government can be ensured.
Currently, our total revenue collection stands at a meagre 9 per cent of GDP. This exposes our national budget to interest pressure and in fact government debt-to-revenue ratio is a staggering 350 per cent at present. In the recently published Sovereign Credit Rating report, the internationally renowned credit rating agency Moody's also came to the same conclusion and identified this shortcoming in revenue generation as a serious rating constraint. The rating agency will critically observe the tax reforms that may be announced in the forthcoming budget and use the same as input to determine our credit outlook. Increased revenue earnings will also allow the government to increase employment-generating public expenditure and thus create a social safety net for the marginalised
people.
We concluded that the NBR has so far done a commendable job in supporting the revenue collection targets of the government. But to fund the development needs of our fast-growing economy the revenue target and actual collection will need to be increased exponentially in the coming years. Given the wealth and capital accumulation in the country it is clear that abundant sources of tax revenue are present. All we need is to adequately equip the NBR to tap those sources and in the process provide us the financing needed to lead us to our goal of becoming a middle-income economy.
The writer is a banker and economic analyst. He can be reached at e-mail: mamun1960@gmail.com