Tax revenue growth not consistent with dynamism of economy

Mr. Hossain: Greetings. We all have assembled here for a focused group discussion prior to the next national budget. Last year also, we discussed with some people regarding revenue maximisation. We will try to further enlarge the scope of this discussion in the future. Our prime concern will be to focus on the government's proper revenue collection, discuss the fair and equal distribution of burden of revenue as well as shed some light on how it will impact the current scenario of the country. We will try to identify the possible opportunities that are yet untapped. We can start the discussion.

All of you were provided with a working paper, which was prepared with a lot of hard work. We will look into the ways in which the tax amounts of large tax payers are not altered or affected. We may start the discussion with Dr. Nasir, who currently works in the tax division of the Anti-Corruption Commission.
Dr. Ahmed: Greetings. I would like to thank you first for inviting me here in this discussion. Actually, I have reviewed the 7th five-year plan, which was written by Mr. Ahsan Monsur of the Policy Research Institute (PRI). So my dialogue will mostly revolve around that. I have gone through the concept paper of the today's dialogue. It covers three sectors, namely, tobacco, telecommunications and construction. I have taken up information from NBR, that cigarettes and bidi must be considered on separate accounts.

The rate of growth of tax on cigarettes from the year 2008-09 to 2013-14 was 23.5%, whereas the telecommunication sector had a negative growth of 26%; as for the construction sector it was over 30%. All of these are value-added tax (VAT). However, let me start with the 7th five-year plan the implementation of which is due to start from the next fiscal year. According to the projections of Dr. Monsur, the revenue -- GDP ratio stands at 16.2%, which is currently less than 11%. The NBR tax -- GDP ratio is 14.3%. So we can understand that a huge portion of it would come from the NBR taxes. From my calculations our average revenue growth rate should be 20%. There are two different dimensions when it comes to taxation. One is on policy issues and the other is on administrative issues. In case of policy issues, three major laws, namely Income Tax Ordinance 1984, VAT Act 1991 -- a revised law was enacted in 2012 but it has not been put to action yet--- and the Customs Act, 1969 come into play. I will not talk much on the policy issues, since we discuss about the same almost throughout the entire year and the changes usually come through the Finance Bill. There are some complications in the income tax process or its corresponding legal implications. Actually, the 1984 Ordinance is no longer suitable for today. The business economy is changing so rapidly and the contribution of the growing industries to the economy, in the form of income tax should also change. Income tax should make the highest contribution. It is now less than 30%, whereas in the other countries the contribution is well over 50%.
In India, for instance, the contribution of Income Tax is 60%. If the personal Income Taxes are also taken into consideration perhaps it will be even more. Our VAT itself comprises 40% and the others include bits and pieces of customs. We tried to prepare a new law on VAT. However, that is yet to be implemented. We brought forward in the new law. The Income Tax needs an overhauling altogether. When we speak of fairness, we must keep two kinds of equity in mind - vertical equity and horizontal equity. There are many issues in horizontal equity, also some in vertical equity. I will not get into the details. There are many aspects of research in these cases. In my opinion, the new VAT law will prove to be a good one. We are very grateful to the IMF for all their cooperation in this matter. In terms of single rate, it is a decent law, which was there before as well but with a lot of distortions. VAT has got the greatest potential in Bangladesh and the law supports that. The salient feature of this act is also notable and the sooner it can be put to action the better it would prove to be. One other praiseworthy step has been taken by NBR for Customs. I think the main problem with taxation is not only in the policies but also in the administration. The NBR requires a lot of restructuring, both functional and organisational. We have two good sources, VAT and Income Tax. Their digitisation has already started and we are trying to look into further improvement. Dividing the geographical zones has not been the right decision. This has also been mentioned in the Modernisation Plan of the NBR. The status of the NBR needs to be redefined. Status and regulatory power is very important because it is formed by the 1972 Presidential Order. I understand it was put to amendments on occasion. However, it needs to be empowered further like an integrated corporate authority. Also, there is a separate division named IRD linked to NBR.
NBR is not an agency; it is rather a national organisation. It must be elevated further to a more reputable status. I have seen in India that the Chairman and the members do enjoy the status of secretaries to the government. That is how we need to reset the status of NBR. We suggested that an integrated revenue management programme must be formed. We have put forward some propositions questioning the necessity of both BIN & TIN. Since they serve the same purpose, we propose BIN to be eliminated since the new e-TIN will suffice. We also suggested integration of Customs, VAT and Income Tax. We have also emphasised on the Integrated Revenue Management Programme, implementation of which requires digitisation. We took an initiative of taking the entire VAT system online. The World Bank has come forward to help implement this initiative. This will bring about a revolutionary change in the system. Just to make it easier for the tax providers, the NBR has been organising a tax fairs. NBR is still lagging behind in terms of income tax. To make it more convenient for the people, we have taken some initiatives. For example, we have introduced e-TIN. The tax fair provides a slip for it, but the users would still need to visit the office to attain a tax clearance certificate. So our proposals tried to look into these matters. We tried to identify the motivational factors of  taxpayers. We observed that people do accept the idea of giving tax, however, the troublesome system acts as a barrier to it. We organised a tax fair in the year 2010 and got a huge favourable response from people. If we can reach out to the public with a new system, it will definitely flourish. Another big obstacle to revenue maximisation is the fact that many of our cases are pending for a long time in both higher and lower courts. On a survey that we conducted two years back, we found out that more than 20 thousand cases were still awaiting disposal. In one case involving 4 mobile phone operators we had received Tk 7.0 billion (700 crore).
Since the courts would run according to their own ways, we decided to introduce a new mechanism called the ADR (Alternative Dispute Resolution). When we went to South Africa, we observed that 80% of their disputes are settled outside of court. They have a facilitator and there is a set of rules for the game. None is held liable if the collection is less in case of settlement reached through this process. In our case however, if the revenue collection is low, the officer concerned is usually held responsible. We are trying to devise a more effective way instead. Lastly, I would like to talk a little on the human resource dynamics. In general, relatively more talented people of our society, who successfully get through the BCS (Bangladesh Civil Service) Examinations, work in Customs and Income Tax. If we can further train them to their full potential, I believe it would bring out great results. Apart from them, there are more officers who do not belong to BCS Cadre. We must work out ways to transform them into efficient officers as well. We tried operating an internal control mechanism as a remedy for this. However that has not produced results of any major value. That is all from me. Thanks, everyone.
Mr. Hossain: Thank you. I would now request Dr. Yunus to say a few words. I would also like to draw your kind attention to another issue. India has recently passed their budget, where it has highlighted the current global trend of decreasing corporate tax and increasing individual tax. This year India's budget is quite interesting. They have decreased their corporate tax from 37.5% to 35% and indexed 25% in 4 year. I hope this issue would come up in our discussions later.
Dr. Yunus: Thank you. Actually while working on a project in 2010, I gathered some insight on Bangladesh tax system. That is what I will basically talk about today. Before that I would like to raise a couple of issues; how much our tax potential can rise up to and what is the deviation-factor at the moment. NBR and other research organisations should look into these issues. Even if our tax potential has a 10% deviation, we don't need to expand the tax space. We just need to assess the potential and achieve the same. I have recently worked on the local government's municipality tax. You will be surprised to know that evaders of holding tax pay one-fourth to one-fifth of the actual payable tax. There is no such database for national level tax. As Dr. Nasir has said, if NBR can be modernised further, such procedures will be easier to implement. In countries like the USA, they withhold some personal data of taxpayers and disclose the rest for research.

Such facility is not available in our country. A proper database would enable us to find out the exact deviation factor. If we can acquire a lot of revenue from the same base, then there is no need to expand the base. Increasing the base poses a risk of decreasing the efficiency. The more the base increases, the more the cost of operation will go up. Since we have technological and human resource crisis, increasing the base will impose an impossible task on the NBR. And not only NBR, without support from the government, it will never be possible in our country to expand the tax base. As Mr. Nasir has already stated, there are many organisations like NBR, IRD and finance ministry. Getting these organisations properly integrated is altogether a very challenging job. Rather, empowering one organisation would probably give better results. Improving their technological power is a vital element to do so. For instance, in the USA, a mechanised system itself can evaluate and tell the customer the tax amount pending by taking every aspect into concern. This greatly reduces the human cost behind it. Also, due to the differing values between corporate tax and individual tax, it is likely to only consider the lower value for deceptive calculations. Thus the difference adds more trouble than extending help. The Income Tax that we receive is mainly from the government employees. However, there are many people involved in the private sector, who lack legal documentation of joining in the organisation. Or in most cases, the private sector workers don't have pension of gratuity facilities, so, how tax amount is calculated in these cases? Like e-TIN, if a legal contract is made mandatory for employment in the private sector, I think that would impact the revenue collection positively. We could see if the experience of USA and Europe could be put into use in this respect. Furthermore, what is the use of increasing tax rate if the authority concerned remains problem-ridden? In the USA, the President can be kept waiting at the door, but not the tax officials. There is a fear factor working among the Americans regarding the tax officials, whether new tax burden is going to be imposed on them or not. We are also somewhat scared of tax people. However, our fear is not for any additional taxes, but for the bribe they might ask for to get things done. How can you increase revenue in such a situation? I once witnessed Atlanta's mayor being imprisoned for not paying his taxes. I don't think there are any such examples in our country. Black money can be converted into legal money by paying only 10% tax. On the other hand, an honest taxpayer is paying 25%. The honest ones then would also opt for black money. Moreover, past experiences show that legalising black money does not have any significant impact on revenue. The whole practice of legalising black money will discourage honest tax payers like us if the facility is sustained further. Only NBR can perhaps come up with a proper remedy for this, in association with a collective movement with IRD and finance ministry. Without proper implementation, any increase or decrease of tax rates is unlikely to work.  I don't personally support the idea of increasing the tax rate. Rather a higher rate of compliance would perhaps help raise the revenue. If the export-oriented thrust sectors are given tax holidays for years then would fight to the last to continue with that. Recently, a new tendency of ownership transfer to enjoy tax holiday is being noticed. I am not sure how massive this trend is, but this is not right in any way. Improving only the human resource or technological support will not do, a major overhauling should also be put to practice in terms of legal framework. An unbiased and unforgiving tax system is vital to make it work. A strong implementation of laws concerned must be present to ensure proper compliance. An up-gradation of human resource and technology would come alongside with legal enforcement of a transparent system. Universities and research centres must be assigned with researching and speculating the potential sector for revenue increment. As far as I know, such researches on income tax, customs duty or VAT have not been conducted as yet. After proper research, the government can effectively put the acts and processes in a framework. We cannot talk about increasing the base or rate with no solid research yet. Thank you.
Mr. Hossain: So your advice would be to move into such matters after substantial research. Well.  Now I like to request Mrs. Rupali Chowdhury  to present her valuable observation on the issues raised here.
Mrs. Chowdhury: Thank you. What I want to say first is that since 2009 many of our sectors have developed. The ratio of industry VAT has gone uphill, along with tax and GDP. Holding this rate of development is the challenge here. My opinion on that Indian budget this year is that they have gone for a slightly different approach this time. They said they would bring down corporate tax to 25% within the next 4 years. They are paying particular attention towards their industrial growth, aiming to compete alongside China. They have forged strong alliances with the ASEAN countries to increase the chance of getting more foreign investments.

They are carefully going for value-adding investments and generic-research based products. Since they need more revenue they have increased service tax from 1.6% to a whole 2.0%. On a research their findings came up with an interesting fact - a family with an approximate income of Rs. 30,000 would pay a tax of Rs 500 just on the basis of visiting restaurants and cinemas. According to them, they have lessened the burden by distributing such factors among the mass for better internal revenue collection.  We are also continually building industries, but the government is also imposing supplementary duties on them. We are already paying off 35%, the telecommunication sector is giving 42% tax and there is more disparity among the other sectors. Thus I would definitely support the notion of lowering corporate tax. Since government is giving the impression of a continual industry growth, we need to figure out how many of them are governed under the taxation policy. Like Mr. Nasir said, the key structure must be handled by them. Everytime we exchange views with the government, it's disappointing to learn that they have been unable to break through such complications. Like they said, NBR must be turned into a corporate body, like they did with VAT. There are also some problems with customs that are yet to be resolved through discussion with individual sectors. From what I have seen, there are confusions regarding the tax rates whenever product ranges get altered in the global market, I believe technology can play a part in this to improve instant communication and settle them. Automation would help in this case. My opinion is that the mistrust between the tax payer and collector could only be broken when we come in a system. I represent the corporate sector, so I can tell that in terms of compliance we are nearly there. Since foreign companies have also entered the market, it is vital for their survival. They abide by these things in accordance to their corporate ethics. However as for the local companies, whenever
I have spoken to them they always complained how big of a burden the taxes were on them. Their capital returns are not timely. So we need to find out the right tax rates that are affordable. As for individual taxes, a gradual increment makes sense, not a drastic leap. This matter requires a lot of discussion since it puts numerous factors in question. As for the income taxes, all the people working in multinational companies did not receive one month's remuneration due to the upheaval of the fiscal year and tax rate changes. Whenever supplementary duties are enforced on us, you will notice that this is multiplied by 5. In that case how much will they give it back to the consumers, and what is going to be the inflationary effect? We need to look into that as well. Generating profits is not an offence, but we can make them to reinvest the profit. One more important aspect is the consistency of policies. For the 5-year plan, I do not have any plan of 10% supplementary duties or some other indirect taxes. So settling these matters over an elaborate dialogue is imperative. I am also a party of NBR, you need to listen to me, so there is no reason for them to keep us in the dark while deciding on important matters like fixing taxes. I must understand the trade and should thus be open to receiving such information. Mistrust can never help improve things. So we must look into the details, find out the reason as to why the ones avoiding taxes are doing so. I would like to add in the fact that local industries and foreign investments are both imperative for our economy. We will not get foreign investment if we cannot provide them a healthy platform to do so. If our taxes get increased by 5.0%, it means that I have to pay 11 months' worth of taxes from last year. I talked to the Chairman of NBR about increasing taxes by 1.0-2.0%, not 5.0% in one go. He told me that if you could pay 25% tax, you can also pay 30%. I could not make any sense of it. We all want industrialisation, so let's go for it together. World Bank, IMF and ADB make queries us about our problems, but I can say that whoever entered this country to do business had not gone back incurring losses rather they have survived and sustained. Our strongest leverage is that we have trainable human resource. I will not get into the issue relating to one skill level, but I am certain of the trainability own manpower. Their potentials are waiting to be unleashed; I hope a country with such potentials does not fall behind in the global race. Thank you.
Dr. Ali: I feel industrialisation will open doors of opportunity. I have seen the elements of vision 2021. However, I still think we need to diversify our internal resource mobilisation.

We must put emphasis on increasing the direct tax revenue. Taxation does not necessarily need to go in the direction of regression, rather a proportional approach would do well, not even progressive. Thank you.
Dr. Taslim: The first principle of Economics is that individuals serve to maximise their own utility, so I want to start from here. Of all the economic activities we are involved in, payment of taxes is one of the most significant. So, there must be some maximisation principle in work with regard to taxation as well. We don't want to pay tax, but others pay it happily, what does that mean? Are they interested to pay greater amount of taxes? Why would that be?
My opinion is that, the way we are reluctant to pay taxes, the Americans, or for that matter other nations are equally reluctant to pay tax; why is that? We always think about the benefit when we pay something.

Thus, people are not just interested to pay tax; they also want to get benefits (that the tax money is supposed to provide).
In foreign countries, the process is transparent; you get to see where your tax money is going. The government lets you know what they are doing with your money, how much are they getting, and how are they spending it. In developed nations, each legislative bill comes with a "Costing" (financial evaluation). In Australia a party lost the election simply because of a mistake in costing. Only one mistake, they underestimated the required amount of treasury money. The sources & destination of tax money are all clear there.
Now, is that realistic in Bangladesh? If I were to pay tax, am I going to know where will it go? How many of us believe that the money that we pay will be spent on something good? You said it earlier that the holding tax on municipal households should be raised to five times the current amount; but don't we already pay five times the benefit we receive in return? Recently a younger colleague of mine told me, "Sir, see that they are supposed to spend 18,000 crore BDT for the Padma Bridge, but 30,000 crore have already been spent!"
Which is quite true, where does all the money go? Why would I pay tax? Just to fatten the pocket of someone else? We don't want to do that. We don't want to pay tax because we don't know what happens to our money. For example, the government recently announced that they are going to recruit 50,000 new policemen. The cost of maintaining this new batch will come from my pocket, but will that force be of any benefit to me? Yeah, they might be good in beating me up; as such, I have no interest in increasing the force.
That's why we don't want to pay tax. We need to bring transparency. Sometimes, you say that NBR has developed a competent workforce. A young Assistant Commissioner of Tax sent me a very nicely written letter. He asked me "Why am I not going to be charged". Apparently I am not paying quarterly tax! My annual income is more than 400,000 BDT, so I will have to pay taxes quarterly. However, I have notified multiple times before, that I don't pay my tax on my own, the University does that automatically. But, he won't understand. This is the state of a "Competent Workforce".
Even many rickshaw-pullers can nowadays earn BDT 400,000 annually. The statements you've made are all "Eternal" kind of statements; we have been talking about "long term" for the last 50 years, and can talk about that for 50 more in the future. But today's topic is about the Short-Term, what we can do at this moment? We can see NBR is complaining that the revenue target is not feasible. It has already been revised. Their collection by January is BDT 690 billion (69,000 crore). The remainder won't give us any better. That means we will face huge shortfall. The question is how to balance the shortfall?
In Economics, there are some equations of revenue shortfall, which we generally use. One is the tax function, which if correct, would predict that (taxable) income is declining. You have already mentioned the fact that our tax GDP ratio is 11% (which is nearly constant across time horizon). As such, this shortfall is due to declining share of reported taxable income. In this regard, we need to look into all the relevant situations.
We know that we are going through a political turmoil. In this condition, the number of "forecasters" has increased dramatically. Even the same guy is giving two contradictory statements on the damage caused to economy due to political troubles!
We can't even properly define the costs of sudden action. Whatever we are saying is not believable either. The damage that is most visible is that from the destruction of property, mostly buses and trucks. We get to know figures instantly. How much is lost? Surely not a lac crore or so,  only a few hundred crores at maximum.
But where else is the rest of the damage? It lies in lost productivity; in this case there will be effects on the GDP. Last year it was Tk.13 trillion (13 lac crore). Losing 2 lac crore is having 1/6 of your economy lost! How come we still declare a 6% growth target? It is supposed to be minus 7.0% to minus 8.0%. Even economists are joining these weird estimations. Those of us who are not working on these but think on broader terms are having difficulties. We are receiving information from the government and if these statements are incoherent, then all the estimations based on them are also false. Then it will not be possible for me to use this information.
We researchers are falling in hard times really. These estimates are important; we don't get to know how we achieved 6% growth last year. We didn't have political violence the year before that. But in the last 6 months of the current fiscal year, we faced severe instability. Does this mean political turmoil increase economic growth? Will we see more growth this year? Is that "Creative Destruction" of property? The issue actually is how to meet our current shortfall in revenue.
Let me share something with you: as I will be retiring soon, I was looking for an apartment recently. The house prices in the area in which I live range up to approximately Tk 20 million (2 crore). The rent that you will get from such an apartment is not more than 40,000 BDT monthly. Annual income after tax will be BDT 300,000 at maximum. Why would anyone spend the amount to earn just Tk 0.3 million (3 lac) per annum (which is only 1%)? It will pay more if I keep the money in FD! If the tax is to increase 5%, then that 1% will become 0%. See how distorted the market is? If you were to replace this distortion with normality, then it will not work.
Those who are earning a lot, can't they spend a few thousand taka for research? Those who do research, they don't even pay taxes! World Bank & IMF are doing research, their officials are exempted. Who don't pay taxes, how can they estimate the trend (of lost contribution)? If the government is in agreement with them, then why is it so? Surely there are vested interests involved. We are not being able to develop local resources. We are saying we have none - how can that be? First, we must allow our young ones with working opportunity in order to develop internal resource. There are a lot of young talented people, recruit them.
The same is true for local research agencies. I have worked with quite a few of these, both public and private. Whenever I tell them to hire local talents to develop them, they start to drag their feet. They ask to hire foreign manpower, they already have developed resource. As long as these things are not corrected, there's no point in saying we don't have manpower. While going to a conference, an Indian from a federation of their local Chambers of Commerce told me that they employ 500 PhD economists. Even, 300 is a big enough figure and the point is, even India's private agencies have strong research pools. Our strongest is the BGMEA, but do they have any research output? If you were to ask them if they know how many labourers work there, they won't be able to tell. Or maybe they will give you a figure of 4.5 million, which is wildly different from government figures.
Our research firms could give you the estimates had they have the researches ready, about what opportunities are lying there and in which way. What we are discussing now has no basis; this can't be the right process for policymaking. We are lacking a solid basis. If you could do frequent sector-wise research one at a time, even then we could have learned something. I want to quote the economist Burner here, about the General Equity Model. He was asked if this could be used by the Central Bank, he said it can be, but with 4 to 5 different model simulations. They should be used simultaneously to make sure nothing is overlooked.
For example, Dr. Nasir is working on VAT; similarly, if others could look into something else, then we could have a better clarity. But we can't do that because no one is financing us. Those who are complaining, and those against whom the complaints are raised, none has any research to back themselves up. We have a tendency to target luxury items& cigarette for tax increase whenever we are in need. But the problem is that luxury item is a small portion of the economy, increasing tax on that won't suffice. We need Tk 2.0 trillion (2 lac crores), and taxes on vehicles earn you a few hundred crores only. This will never be a good source of revenue.
Another is cigarette. It has seen many tax impositions before, what will be the marginal benefit of imposing new ones? Difficult to say! It may be difficult to say, since many people say that tax is increasing to discourage consumption, but it is actually not decreasing worldwide. If the number of male smokers is declining, there is a rise in number of female smokers. While a student, we learned that the direct tax is optimal tax, but the greatest share in our revenue is of the indirect taxes. The proportion of direct tax is hardly 25%, with major emphasis on VAT. The best way to minimise the cost of taxation is to have the same rate applied to all the commodities. Foreign countries already have that.
Most smokers here are of average income group. Increasing tax will hurt them. If you are to point out health cost, then I won't argue. But, you should consider some other factors; I heard once about people's reasons for smoking, they thought it helps them by stress relief. This perception has to be counted in it as well. There is no point in tax increase in construction. What's the point of raising taxes when the sector is not making any development? They will be left with nothing then. Nasir bhai, can you please give me the sector growth rates?
Dr. Ahmed: Tobacco revenue growth is  always 24-25% positive, only in FY 2012-13 it  was negative, construction was around 30% (positive) and the telecommunication was at 26% negative growth rate last year.  
Dr. Sattar: Telecommunication has some issues regarding taxation. Usage & revenue will go hand in hand here; there has been a revolution in Bangladesh.
Mr. Hossain: I'll request Mrs. Rupali to add to the points made by Ms. Taslim: How do you calculate losses in strikes? It is supposed to be negative!
Mrs. Chowdhury: Our only method is to determine the potential, but we have no mechanism to do that. When we say, market is growing in 'x' rate, what we do is make an internal budget. Another thing is, we estimate whether we are growing compared to the last year. We try to define current year's growth based on previous years' growth rates. Individual industries are going through their own data. We were uncertain about data collection in urban centers initially. We are fearful of the threat to human life. We can't ask our colleagues to go due to added risks now. So we are focusing on the urban centres now. Maybe my transport is entering Dhaka, but insurance cost is extremely inflated in Chittagong and my factory is in Chittagong. Still that covers our goods only, but, human lives can't be secured like this.
Mr. Hossain: So this is guesstimate then?
Mrs. Chowdhury: No, we are projecting 70%-80% compared to last year. Some are growing at 2 digits, some 1 digit, FMCG is supposed to make profits, but they are losing. In construction the land price is so inflated that it is beyond peoples' reach.
Dr. Taslim: I'd like to know how does import increase this much?
Mrs. Chowdhury: Import of machinery was halted for last one year. This year it is still going on. I'd consider it good for the economy.
Dr. Taslim: Okay, but businesspeople say that they have stopped importing; if so, then who are importing? Last year the growth was 19%? Is that 24% this year?
Dr. Ali: Dr. Atiur Rahman gave the same figures.
Mr. Hossain: We actually don't know the real facts here. I will now request Dr. Zaidi Sattar to say a few words.
Dr. Sattar: All of you have discussed on the matter hence I might not require to say much. Especially Mr. Taslim has talked about from the bottom of the problem. Dr. Nasir has referred from his experience particularly on taxation and tax administration. I also think these as serious problems. My own experience with NBR suggests that tax administration is a major problem. Both tax administration and tax policy need to be reformed. In fact in Bangladesh if there is one government agency which needs to undergo significant reform, then that is NBR. And the return from those reforms will be also significant. Realisation of this is very important. This agency is just not functioning right. The revenue -- GDP ratio or tax -- GDP ratio in Bangladesh tells you that something is not right here. Revenue hasn't been generated that much in comparison to the income level and dynamism of the economy of Bangladesh, which has achieved and reached so far. So, something is very wrong with the tax efforts. There lies serious deficiency both in tax policies and tax administrations. So something has to be done. Now we are coming to the purpose of this discussion what are the scopes of revenue maximisation. In that case central point of discussion is the reason of tax evasion. A saying goes, 'tax evasion is a crime and tax avoidance is not.' Tax avoidance, under the law, is permissible. What is happening in our case? Is it tax evasion or tax avoidance? Probably both. The other thing is that if you look at the low mobilisation of revenue taking place in Bangladesh, doesn't it tell us something about its fundamental economic principles? What is the relationship between the tax rate and the tax revenue? There is a concept that there is an optimum rate of taxation. So, the principal says that if you raise the tax rate, you will get the higher revenue, but up to a point.
At a certain stage the raise of rate will cause the fall of revenue. So on which point of the curve we stand then? The numbers tell us that we are in the wrong side of the curve. So if we are in the wrong side of the curve on the basis of this low revenue mobilisation, then there is a very simple answer, reduce the tax rates. But which rate you want to reduce? You have direct taxes, individual taxes, and corporate taxes. Indirect taxes are the VAT, supplementary duties and the taxes on imports. Hence it is difficult to comprehend which rate has to be reduced. I have my experience in 'customs revenue'. I have been working with customs revenue, trends, performance etc., for a very long time, something as 25 years or more. I have a few thoughts, and views, regarding this matter because of my long research. Let's have a discussion on some missing points like revenue maximisation or mobilisation. It's very much related to business incentives. Incentives relate to business and investment. So the effort to elevate revenue mobilisation is fine and much needed for us. In this level of income, Bangladesh should collect more than 11% of tax revenue. Even Nepal has higher tax-GDP ratio. So there is a huge gap between the effort of tax collection and the potential of tax revenue coming out of economic activities. So this gap has to be abridged. And you also have to balance between the incentives that remain for the business and investment activities and the demand for public resources. Dr. Taslim here brings a very good point that, why people will pay taxes. That's the decent reason for the individual tax payer. People are hardly getting the amount of service by paying taxes. Still, there are several principles which must be highlighted in tax reformation. One is, principal of voluntary compliance. Paradoxically it seems like NBR is chasing the people who are paying taxes like how many times they have sent notification letters to you, how much you owe them etc. How much revenue will be increased like this? But enough effort is not put to the most important factors for revenue mobilisation. My recommendation for Bangladesh is to lower the tax rates. It could be direct and also for the indirect taxes. The other thing related to business investment, and overall dynamism of economy; you have to shift emphasis from import based taxes to domestic taxes, direct tax in particular. The import taxes are very easy to collect, imposing tax at the point of imports. We are repeating the same trend without doing the basic reformation. Custom automation commenced since 1994 in Customs but the manual intervention is still there. How is this happening? Why not the top official of NBR or the policy makers make the determination to make it complete automated rather than semi-automated? The NBR chairman is the person who can do the reform, but that person needs to be very dynamic, hard headed person.
Dr. Ahmed: Is it possible to avoid political commitment or pressure every time?
Dr. Sattar: The reform would not happen at all unless the government is willing to do go. And the current system is supporting only 1.0% of the population who are evading taxes. But, why such laws are approved for facilitating only 1% of the population where the rest 99% face the sting? Now the managers, the top policy makers, ministers, they should know how to counter the matter. They should have the vision that, 'we ought not to develop our system to aid only 1%, 2% people. They should develop a system which is useful for the 98% people. The revenue system must be pro-business, pro-investment, and pro-growth. Revenue mobilisation effort is required to generate revenue in order to make that public expenditure, which is required for economic development. This balance is missing out. Not to mention some key points on customs, the principle is, you have to shift. It was a good source of revenue 10-12 years back. Customs revenue is the most distorted taxation. Imposing 5% more custom duty for all top industries cannot be a solution at all. As Ms. Rupali Chowdhury was mentioning on

supplementary tax which was initiated in Bangladesh back in the year 1991, was supposed to be a trade neutral tax. It was same as VAT tax. But today it has become a protection tax. But the domestic producers are happy, because they are not competing this. The duty structure is imbalanced and not neutral. You are imposing a 15%, 25% or even 40% duty on imports whereas you are not imposing the same on domestic producers. Even in some cases the duty is less on domestic producers than on the importers. Yes, the rate of customs duties in NBR is coming down, but, it should be reduced more, including VAT. I would like to compare Bangladesh with Vietnam, because we were in same level. But we are falling behind. They have much more dynamic economy, growing faster; exporting much higher rate than Bangladesh. Can you imagine the two countries have the same size of economy, but Vietnam's exports are new worth $75 billon? It's FDI flow is also $18 billion. So we are doing something wrong, where they are doing something right, when it comes to bringing dynamism. Custom revenue has some options. Most of the principles of good taxation are uniformity, transparency. In the process of liberalisation in the last 25 years tariff rate has been, rationalised and reduced. So the goal of uniformity has been met. There were 20 tariff slabs before and now there are 5 slabs. Some identification is perceptible and evident in the uniformity. For example, top rate is for final consumer goods. Then there is 10% tax for intermediary goods, 5.0% for raw materials and 3.0% for capital machinery. That is great. But what has been happening, is dangerous for the long term industrialisation or diversification of the economy that is bringing in the so called rational taxation as the pressure from the domestic producers has been growing so strong. Unfortunately, the businessmen have much more understanding about the tariff system and the implementation policy than the people in the NBR. They always talk about protection of the domestic products but in reality, while forming policies, they are doing it completely wrong. As a result, this pressure has formed an imbalance between input and output tariff. I have studied 20 countries' tax ratio, comparable with Bangladesh, they have the balance between the input and output tariff. In Bangladesh the overall tariff has fallen for sure, but only at the cost of input tariffs not output tariffs. Bangladesh cannot participate in the integration of production across countries. Why? It's because of the NBR. Administration as well as the policy of it has to be changed. Now it is a global open market, but Bangladesh is not a player of these production network businesses. Bangladesh is a player of readymade garments as it has become the number two, after China. And it is also number two in import of cotton, why, because, we are number two in RMG. But in the rest of the sectors, Bangladesh is still not participating equally. So policy change is very important for economic dynamism. Thank You.
Dr. Taslim: But the tariff rate is high on our textile goods
Dr. Sattar: Yes, this has to be reduced as well. You are asking to lessen the intermediary goods tariff but it has to be cut short for output goods as well.
Mrs. Chowdhury: But, the domestic market has to be considered for industrialisation as well. Technology seems to be a problem for our economy as it is capital intensive. So it can be made possible via FDI. What India is doing is, making treaties with the investors. When I am going to Thailand as an importer, I see my costing is 5.0% higher than that of India since India has made agreements with all ASEAN countries. Hence discussion only on tax maximisation will not be enough. We will also have to listen to the cry of the industrialists.
Dr. Sattar: India and China are getting export oriented. Bangladesh has to follow that path. If you go to India for exporting you will experience their insolence and obstruction set through tariff.
Another important thing is footwear. It is going to be the next RMG of Bangladesh because its growth rate is 20-25%. The global market of footwear is as big as RMG. But, the anti-export, biased tax regime is restricting us. So, there should be a balance between export orientation and import substitution.
Dr. Ali: Most importantly we must make sure of the proper coordination between the tax on import and export sector. Our pharmaceuticals industry has the potential also. Hence this sector should get due patronisation. But as we are cruising along to be a middle income country, we must look after the domestic market as well.
Dr. Taslim: According to me, the issues you all have spoken about are not possible without FDI. Countries like Vietnam, Cambodia has higher FDI than of Bangladesh. Mostly businessmen are to be held accountable for this. They stand against such initiatives. Once BGMEA used to say they do not prefer any FDI in this sector.  On the contrary governments say we need FDI in those sectors, where we do not have enough capacity. Why do not you have the capability? Obviously that sector is not so profitable. If you yourself haven't foreseen profit then how can the foreigners do? Foreign investors will come only in the most profitable sector, like RMG.
Mrs. Chowdhury: Let me say on the paint industry. Though this industry is not large enough and we say that the capacity we have is more than enough. We don't even expect others to join in this industry but still at least 3.0 international companies have jumped into. We welcome constructive competitors.
Mr. Hossain: Thank you all for your fruitful and active participation in today's Programme. Thanks again.