Tightfisted tax expenditure, revenue boosting imperative

Tightfisted tax expenditure and domestic revenue boosting are two core dos suggested by a think-tank for the government in presenting fiscal measures for next budget, including key IMF recommendations.
Finding ways to increase personal income tax by withdrawing tax waiver on allowances, capital gains on share market, focusing on payroll tax, tariff rationalisation for export diversification, taming income inequality and inflationary pressure on commoners are also detailed in the recommendations mooted at a programme in Dhaka on Wednesday.
Economists at the Policy Research Institute of Bangladesh (PRI) made these observations at the press meet on 'connecting fiscal policy changes to economic outcomes: evidence from a quantitative exercise'.
They said a 2.0-percentage-point increase in corporate income-tax revenue may result in 0.44-percent negative real growth due to 1.15-percent decline for inflationary effect despite having a positive nominal growth of 0.71 per cent.
Also, a 2.0 PP increase in revenue from vat would lead to nominal economic growth by 1.5 per cent. However, associated inflationary rates outweigh the rate of nominal growth and would cause real GDP growth to decline by 0.37 per cent.
The PRI economists emphasised focusing more on personal income taxes that can help government in mobilising higher revenues.
'Increasing the tax-GDP ratio by 2.0 percentage points (PP) from PIT yields average additional revenue Tk 650 billion', says the analysis conducted by the PRI Centre on Domestic Resource Mobilisation (CDRM).
Dr Bazlul Haque Khondaker, director of PRI, gave a presentation on 'Economic impacts of fiscal policy change' at the programme.
"A 2.0-PP increase in revenue from PIT would result in increases of 0.14- percent growth in the agricultural sector, 0.2 per cent in the industry sector and 1.02 per cent in the service sector," he told the press.
Executive Director of the PRI Dr Ahsan H Mansur said the government should target mobilising at least Tk 300 billion in revenue in the upcoming fiscal year through budgetary measures, cutting tax expenditures.
Responding to queries, he justified the recent recommendation of the International Monetary Fund (IMF) to tax allowances of individual taxpayers.
The economist, however, is not in favour of taxing remittances, as the IMF recommended, with an observation on diverting the remittance inflow.
Dr Zaidi Sattar, chairman of PRI, said increase in tax burden without reform may fuel trade tax impacting country's export diversification.
He suggests implementation of the National Tariff Policy in the next budget through incorporating it into the fiscal measures.
Research Director of PRI Dr Abdur Razzaque said PIT could play a significant role in reducing income inequality.
"Major challenges in the upcoming budget are to control stagflation as pace of economy becoming slower due to import contraction and inflation," he noted.
Dr Ahmad Ahsan, Director of PRI, suggests expenditure management of taxpayers' money should be addressed properly to build trust on tax payment.
Boosting country's revenue from personal income tax could unlock 0.5 percentage points of additional growth and reduce inequality, said Dr Khondoker.
"Ability to pay tax has been increasing among people so the government should pay attention on ensuring their tax-return submission," he added.
Dr Sattar has found trade tax in Bangladesh non-transparent and complex and working as "anti-export bias due to higher profitability in local market".
Dr Razzaque feels that country's trade negotiations for signing free-trade agreement would not be possible amid high tariffs.
Dr Mansur finds the existing corporate tax rate higher than in India, which could be cut down further.
He, however, has found IMF-recommended tax-free threshold at Tk 0.5 million justified to ensure equity and ease burden on marginal-income people. Dr Razzaque recommends high tax on wealthy people as a measure of stemming wealth overconcentration responsible for wide inequality.
He said, "10-percent well-off people have been holding 30 per cent of National Income where imposition of 15-percent tax can increase tax-GDP ratio by 2.5 PP."

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