The necessity of revenue realisation

Tax revenue becomes pretty  potential when properly mobilised and against which service to the taxpayers  is assured; revenue expenses are proper when appropriately spent. Both revenue income and expenditure should be dealt with transparency in realisation and ensure accountability while spending. The macroeconomic management of both public income and expenditure must be appropriate, if it swindles to system loss and  corruption instead, it is enough to frustrate the development of the socio economic infrastructure.
Taxation one of the major sources of public revenue to meet a country's revenue and development expenditures with a view to accomplishing some economic and social objectives, such as redistribution of income, price stabilisation, discouraging harmful consumption and ensuring proper representation of the tax payer in the macro economic management. It supplements other sources of public finance such as issuance of currency notes and coins, charging for public goods and services and borrowings. The term 'tax' has been derived from the French word taxe and etymologically, the Latin word taxare is related to the term 'tax', which means 'to charge'. Tax is 'a contribution exacted by the state'. It is a non-penal but compulsory and unrequited transfer of resources from the private to the public sector, levied based on predetermined criteria.
Taxation has four main purposes or effects: Revenue, Redistribution, Re-pricing, and Representation. The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems. This is the most widely known function. A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections. A third purpose of taxation is re pricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax. A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.
According to Article 152(1) of the Constitution of Bangladesh, taxation includes the imposition of any tax, rate, duty or impost, whether general, local or special, and tax shall be construed accordingly. Rate is a local tax imposed by local government on its residents or the property owners of the locality, a duty is a tax levied on a commodity, and an impost is a tax imposed for an entry into a country. Under the provision of article 83 of the Constitution, "no tax shall be levied or collected except by or under the authority of an Act of Parliament". The system, however, developed based on generally accepted canons and there had been efforts towards rationalising the tax administration for optimising revenue collection, reducing tax evasion and preventing revenue leakage through system loss.
The historical perspectives:
Bangladesh inherited a system of taxation from its past British and Pakistani rulers. The tax structure in Bangladesh consists of both direct (income tax, gift tax, land development tax, non-judicial stamp, registration, immovable property tax, etc) and indirect (customs duty, excise duty, motor vehicle tax, narcotics and liquor duty, VAT, supplementary durty (SD), foreign travel tax, TT, electricity duty, advertisement tax, etc) taxes.
Existing (tax) revenue regulations in Bangladesh like income tax, VAT and customs laws are usually viewed as British by birth, too much intricate in approach and curiously cumbersome for enforcement. Though Taxation, as an influential instrument for revenue income for the state, was very much there in ancient and medieval India in different form and style but the modern Tax systems as we know it today was first introduced by the British rulers in India. The Indian Mutiny had just exploded in 1857. The British government took over ruling power of India from the East India Company.  The country was in a bad state financially. James Wilson (1805-1860) was posted in Calcutta as member (finance) in the Viceroy's council which is equivalent to the finance Minister. James Wilson, after taking over his assignment in India, had introduced a Bill in the Indian Legislature to restructure tariff laws. Not just that, he also introduced the budgetary system and paper currency, he stood out for floating the Income Tax Act in India in his first ever Budget Speech for FY 1860-61. Two months after historic introduction of income tax in India Wilson died in Calcutta from dysentery. So were many who felt that the novelty of the tax and the inquisitorial methods which its administration would require, would go a long way in making the tax a failure.
Wilson witnessed the revenue law laid down by Manu, the sacred authority and the version of the ancient Hindu law and he concluded, proposed, "Now, Sir, I must say that there is latitude enough for the most needy Exchequer and the most voracious Minister:- a twenty percent income tax upon profits, tax varying from two to five percent , upon accumulated capital, a share of almost every article produced, an annual tax on the trades, half the produce of mines" .  Though Wilson took the logic from ancient Indian pundits as basis, he imported British regulatory frame work for the revenue collection mechanism for imposing it to natives of India. The first general income tax was levied for a period of five years in order to meet the difficulties caused by the Mutiny. It was levied, on the English model, on all incomes above Rs 200 per anum and arising from property, professions, trades and offices at the rate of 2.0 per cent, on income between Rs 200 and 500 per annum, and 3.0 per cent on larger income which also bore the additional one per cent to be used for the purpose of local development. One may note with dismay that the basis for income tax calculation made cumbersome from the start where an embedded scope for creating and applying discretionary power by tax officials leading to harassment and revenue dwindling.   In fact the Income Tax laws and methods of collection were framed and formulated by the British political bureaucrats, who themselves were exempted from tax payment and the responsibility of collecting taxes were assigned to another such class of bureaucrats who also got the impression that they will not be liable for paying tax rather they will share commission for collecting more. So the regulation and the method of calculation and collection as well, all were designed only for imposing on the natives. Unfortunately this subjugating philosophy and attitude as a legacy, still reign in a free independent society and state.  If the lawmaker is exempted from the enforcement of that particular law and if it is framed only for ruling, regulating, controlling and exacting revenue from others, then one can easily imagine what could it be its nature and level  both  in spirit  and action.
Though the modern income tax was introduced in 1860, lasted about five years until it was scrapped in the face of protests from citizens. It was re introduced in the seventies and eightees for a short duration. First formal tax law was promulgated in 1882, compiled in 1886 and finally the Indian Income Tax Law 1922 came into being, which   anthologised the entire annual amendments. The Income Tax Law of 1922 was adopted by India and Pakistan in 1947 and later by Bangladesh in 1972 just by replacing the word 'India' by 'Pakistan' and 'Pakistan' by 'Bangladesh' respectively. India introduced its own income tax law in 1961 and Bangladesh introduced in 1984 as an ordinance as there was no parliament in session at that time. It is again a fact that this time the law was written (rather copied from earlier laws) by local and foreign bureaucrats tuned consultants, not by the lawmakers. After a long demand and decree a new income tax law is now in the making and it is hoped that it will be enacted by the law makers in the parliament.  The present customs law was also born in the British India, carried over to Pakistan and present Bangladesh. Though the nature and scope of customs tariff have to be reformed, if not replaced, to the open market economy and global business environment, it is yet to be amended or reformed.
After independence of Bangladesh, income tax was made effective under the Income Tax Act 1922 passed on the basis of the recommendations of the All-India Income Tax Committee appointed in 1921. To convent and adopt Act. 1922, recommendations of the Final Report of the Taxation Enquiry Commission submitted in April 1979. Finally, income tax has been imposed under the Income Tax Ordinance 1984 (ITO) promulgated on the basis of Act-1922. Income taxpayers (assessees) are classified as individuals, partnership firms, Hindu undivided families (HUF), associations of persons (AOP), companies (publicly traded and private) and local authorities. Tax rates and scope of taxable income differ based on residential status of an assessee (resident or non-resident). There remains a filing threshold of annual total income applicable for individuals (including non-resident Bangladeshis), partnership firms, HUF, AOP and assessees other than companies and local authorities. In case an identity of this group has a total annual income less than the there hold- level, he is not required to submit tax return but if someone's income is higher, he is to pay a minimum tax  decided by the government from time to time.
The present land revenue system of Bangladesh has its base in the East Bengal State Acquisition and Tenancy act 1950, which established a direct contract between the taxpayer and the government. The most important tax on the value of transferred property is the non-judicial stamp tax (levied under the Stamp Act 1899), which has been in existence since January 1899. Current rates of non-judicial stamp duty are provided in the First Schedule of the Finance Act 1998, ranging from Tk. 4.0 to Tk. 10,000 in case of absolute rate, or from 0.07 per cent to 1.5 per cent of the value of consideration in case of ad valorem rate. The judicial stamp tax is being levied under the Court Fees Act 1870, although the levy of court fees originated in the introduction of the Bengal Regulation No. 38 of 1795. The first sales tax was introduced in the former Central Provinces of India in 1938.
In Bengal, sales tax was adopted in 1941. In 1948, sales tax was transferred as a central tax under the General Sales Tax Act of 1948. The Sales Tax Act 1951 came into force on 1 July 1951 by repealing the Pakistan General Sales Tax Act of 1948. Until 1982, sales tax was being collected under the 1951 Act, which was replaced by the Sales Tax Ordinance 1982. The VAT law was promulgated by repealing the sales Tax in 1991.
Tax avoidance and tax evasion:
The use of the terms tax avoidance and tax evasion can vary depending on the jurisdiction. In general, the term "evasion" applies to illegal actions and "avoidance" to actions within the law. The term "mitigation" is also used in some jurisdictions to further distinguish actions within the original purpose of the relevant provision from those actions that are within the letter of the law, but do not achieve its purpose. Most countries impose taxes on income earned or gains realised within that country regardless of the country of residence of the person or firm. Most countries have entered into bilateral double taxation treaties with many other countries to avoid taxing nonresidents twice - once where the income is earned and again in the country of residence (and perhaps, for Bangladeshi citizens, taxed yet again in the country of citizenship) - however, there are relatively few double-taxation treaties with countries regarded as tax havens. To avoid tax, it is usually not enough to simply move one's assets to a tax haven. One must also personally move to a tax haven (and, for Bangladesh nationals, renounce one's citizenship) to avoid tax. Double taxation on the professional is accumulated to VAT and Income tax.
Revenue Mobilisation and Public Expenditure: The pressure on the revenue sector is affecting the capacity to fund important areas of public spending. Social and physical infrastructure receives the lower allocation for lower tax collection. For example, in the budget of FY 2013-14, 19.6 per cent allocation had been set for human development sector, which was 20.22 per cent of total budget in FY 2012-13. The ADP allocation for human resource, agriculture and rural development were reduced to 23 and 25.4 per cent from the previous year's allocation of 23.5 and 30.9 per cent respectively. Similarly, the infrastructural sector received 2.6 percentage points lower allocation than FY 2012-13. The expenditure on education and technology, and health and family welfare were 5.92 and 4.26 per cent respectively of total budgetary allocation, which were 0.12 and 0.61 percentage points lower respectively than the previous FY 2012-13.
As percentage share of total revenue, ADP expenditure roamed between 28 to 47 per cent during FY 2004-05 and FY 2012-13.Out of revenue expenditure, the highest expenses go for subsidies and current transfer between 23 to 37 per cent; and pay and allowance hover between 16 and 24 per cent in this period. Trifling amount of revenue expenditure is used for social and structural improvement.
Role of VAT in the Revenue Basket: In common with many developing countries, Bangladesh faces problems in raising sufficient tax revenues to fund its economic and social development. To address this problem and to improve economic efficiency and growth, a major tax reform programme was initiated in 1991, which centred on the introduction of a valued-added tax (VAT) to replace a range of narrowly-based consumption taxes.
Empirical study data shows that the performance of VAT in Bangladesh was quite satisfactory in the initial years- but subsequently VAT collection has remained stagnant at a certain level. As a result, VAT is unable to meet the objectives for which it was introduced.
The reasons behind this performance are many, such as: a relatively small number of VAT tax-payers, a general lack of awareness, and a relatively weak monitoring system etc. There is still scope for improving the revenue collection from VAT: by increasing the number of VAT taxpayers; reforming the VAT administration; creating intensive awareness among the people, revisiting the list of VAT exempted items and increasing the efficiency of the monitoring system.
VATs have become the most common type of consumption tax for a variety of reasons in Bangladesh. Unlike income taxes, VATs do not distort consumption-savings/investment decisions. Because sellers can claim a credit for VAT paid on their inputs, there is no cascading of taxes as can occur with other consumption taxes. The tax is often regarded as "self -policing" as it is imposed on every transaction throughout the production process reducing revenue losses should one party fail to collect VAT. It is also neutral between the domestic production and imported goods when compared to an import tariff. It has been widely recognised that a well designed VAT can raise significant amounts of revenue on a stable and sustainable basis and the decision to introduce a VAT has often been made for these reasons.
A commonly cited disadvantage of VATs is that they can be regressive in nature being a problem, which can arise with most types of indirect tax. A single rate VAT applied to the broadest possible base becomes essentially a proportional tax on consumption and therefore regressive. Often to address this problem of regressivity, multiple rates of VAT are offered along with a range of exemptions even though such provisions have a negative impact on the effectiveness and efficiency of VAT. Exemptions inevitably make the VAT narrower and for this reason are commonly limited to basic foods, health and education. Regressivity is usually a greater issue for Bangladesh as a large proportion of the population lives in poverty. For this reason, Bangladesh may have to adopt multiple VAT rates with the lower rates applying to necessities such as food and utilities as well as exempting a wide range of goods and services to promote greater progression.
Therefore, to widen the scope of VAT, a special VAT regime may be required to be introduced for small businesses in developing countries .The adoption of a VAT is often seen as an opportunity in many developing countries to modernise tax administration, which may reflect the influence of international financial organisations (such as the IMF, World Bank) in the decision to introduce a VAT. Many developing countries, however, find the VAT more difficult to administer than initially thought and problems with administration and enforcement often undermine the effectiveness of the VAT. Another problem experienced with VATs in developing countries is the payment of VAT refunds. The provision for registered taxpayers to receive refunds is a key feature of the VAT, however, this has been problematic issue for many developing countries for several reasons including inefficient processing, a reluctance of revenue officials to refund taxes already paid and concerns about fraudulent claims. Self-assessment by taxpayers under a VAT regime is also a problem in many developing countries as self-assessment systems must be backed up by regular audits to ensure compliance and prevent evasion. Many developing countries find it difficult to undertake an effective audit programme to combat VAT evasion resulting in VATs in many developing countries not meeting their full potential.
Reforming tax revenue regulations
Reforming tax revenue regulations should deserve a very close review of existing rules and regulations one by one, if not word by word in fitting with present day demand of social norms and business practices. If these regulations have to be effectively enforceable, prudently practiced, impartially implemented in a free and democratic environment unlike past colonial regime, it has to be such a public law framed by the lawmakers who should also be within its jurisdiction. Appropriate ownership has to be established for each item of law equally on every footing. Rules should not be framed only  for the ruled, to twist  the innocents and ignorants, should not be a tool for applying discretionary power by the enforcement officials , but be applicable to all indiscriminately. Cannons of tax law should be digestible and implement-able across the board and be applied without fear and favor.  It has to be simple, comprehendible, non duality in meaning and interpretation, delegable, assertive but with adequate relieving and remedial provisions. Stakeholders' views at large should be taken into consideration to make it more user friendly.                           
To be sound, a tax system must be economically efficient, inflicting as little damage as possible on the economy. Every tax system distorts economic decisions and leads to less economic activity than otherwise would occur, resulting in what economists call "deadweight loss." These are the costs caused by distortion to working, investment, entrepreneurship, and other productive activities. It has been argued that typical estimates of the economic cost of a taka of tax revenue range from 20 paisa to 60 paisa over and above the revenue raised." Harvard's Martin Feldstein has gone so far as to conclude that the deadweight burden caused by incremental taxation "may exceed one dollar per dollar of revenue raised, making the cost of incremental government spending more than two dollars for each dollar of government spending" (National Tax Journal, June 1997)
What is more, applying different tax rates to different activities or to different producers exacerbates the distortion of economic decisions and increases the deadweight losses due to the tax system. A sound tax system should be designed to minimise these losses. There should be none to deny the fact a sound tax system should be logistically economical. It should impose the smallest possible compliance costs on taxpayers otherwise people will not be encouraged to pay tax, rather they will be inclined to evade tax.
It should not be reflected that there is no fairness in taxation. No one is going to say that taxes are unfair, but on the contrary, it is often observed that fairness does not enter into the matter. There is a theory that all wealth is fortuitous, or "lucky". There is the extreme case of the people who win the lottery, or inherit wealth, but that is a small fraction. There are also gifted people, luck in one's genetics is also luck. However, most wealthy people became rich through a lifetime of hard work. Then you must ask why people work hard. Is it their character, their psyche, their upbringing? All of these are determined by circumstances.
Every tax system imposes direct costs on taxpayers in terms of time devoted to tax preparation or money to buy the services of CPA's. Ultimately, every tax system diverts a portion of tax revenues raised by the tax to pay the cost of administering and collecting the tax and enforcing its provisions. A sound tax system would minimise these costs.
A sound tax system takes:
Pay what you owe: An economically neutral tax is unbiased across the spectrum of economic activities. Removing complexity and limiting the collection points for taxation also makes the system more transparent, making the public more certain that everyone is paying what they owe, and more comfortable with the fairness of the system.
Transparency: A tax system is transparent to the taxpayers if it is clear how much the government is costing them (and who is paying for what). Without transparency, the public isn't able to accurately asses how their money is being spent and thus isn't able to hold their representatives appropriately responsible.
Equal treatment under the law: Equality of opportunity should be the linchpin to our tax system, not equality of outcomes. The tax system shouldn't be manipulated into an instrument of wealth redistribution or social engineering.
Simplicity: A tax system shouldn't be gratuitously complicated beyond what is required Simplicity is the best sort of medicine for the tax-inflicted headache.
To be sure, the most visible, fluid tax systems are the most neutral and simple. Just a little bit effort by the citizens should be required in paying taxes. This is a necessary evil. Otherwise, the government could do and take whatever it wanted. Citizen-voters have a minimal responsibility, if not civic duty, to participate in this, a fundamental component of democratic society.
Recently they submitted their long-awaited final proposals.  The proposal from national tax-reform panel  plans changes to the tax breaks people have come to expect-as well as to the complexity and costs of filing that many have come to loathe. The panel's task was not to reduce taxes, but to make the tax code simpler, fairer and better equipped to promote economic growth. Any proposal would have to be revenue neutral.
A nation's tax system is often a reflection of its communal values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden - who will pay taxes and how much they will pay - and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing the tax system, these choices reflect the type of community that the public wishes to create. In countries where the public does not have a significant amount of influence over the system of taxation, that system may be more of a reflection on the values of those in power.
That is, in order to speed up the development of their societies, a big portion of the income and savings of the rich and high-earning people should be confiscated through high income tax rates, and the money be distributed to the poor and the weak, including the lazy and irresponsible, so that there will be more equality and more social progress. The wave of globalisation in the 80s made many politicians and their respective technocrats realiae that they need to relax a bit their level of income confiscation as there was an emerging "income tax competition" among countries. This thinking has pervaded until the early 80s, so that by 1980, the vast majority of countries have top marginal income tax rate of 50 per cent or more. Exceptions were HK in Asia, Switzerland in Europe, and Argentina in South America, among others. A lot of tax cheating also happened in many countries where income tax rates are very high, resulting in lower tax collection by governments.
Debates about taxes usually devolve into "the wealthy can afford it" or "it is unfair to be taxed so harshly". Neither argument has merit. Tax the wealthy too harshly, and they will stop creating wealth. Tax them too leniently, and either society will be unable to govern itself, or the rest of society will be so harshly taxed that it will rebel. It is entirely a matter of practicality. Fairness never enters into it. As pundits of the past have put it "If you know the position a person takes on taxes, you can tell their whole philosophy.  The tax code, once you get to know it, embodies all the essence of life:  greed, politics, power, goodness and charity."
Dr Muhammad Abdul Mazid is former Secretary to Government of Bangladesh and former Chairman of the NBR.
 [email protected]