Widening the tax net

To begin with, revenue efforts will need to be intensified in all three areas - NBR, non-NBR, and non-tax revenues. Some of the very obvious and potentially highly productive sources of revenue are highlighted below.
CORPORATE INCOME TAX: Bangladesh's tax effort is low by global standard, but its statutory corporate income tax rate for publicly listed companies (27.5 per cent) is similar to global level. The nominal tax rates applied to non-listed companies (37.5 per cent) and financial institutions (42.5 per cent) are, however, significantly above those in most developing countries.
The country's business community has been strongly lobbying with the government for lowering the prevailing corporate income tax rates, arguing that lower tax rates will result in greater tax compliance and also encourage investment. However, there is little empirical evidence in developing countries in support of either of these claims, and hence there is no rationale for reducing the corporate tax rates as demanded by the business community. Yet, such lobbying has been a regular feature in the past years.
In fact, the responsiveness of revenue collection to tax rates has nowhere been found robust. As regards investment, too, it is universally recognised that investment is influenced not by lower tax rates, but by the presence of a favourable investment environment created by developed physical infrastructure - smooth supply of energy, easy access to credit and a set of consistent and business-friendly policies.
That higher corporate tax rates do not necessarily constrain investment growth can be seen in the case of India, where the present corporate tax rate is 34 per cent, which is 6.5 per cent higher than Bangladesh's 27.5 per cent, and yet India has a higher investment rate of 35 per cent in GDP, as against the relatively low investment level of 26.8 per cent in Bangladesh. One may, therefore, legitimately ask why the investment rate is low in Bangladesh despite having a lower rate of corporate tax rate than
in India.
In order to strengthen the case for lowering the corporate tax rate, the country's apex trade body, the FBCCI (Federation of Bangladesh Chambers of Commerce and Industry) has said that because of high rates of taxes most business firms have been evading tax payments by showing losses in their business operations (Bangla daily the Jugantar report, 22 May 2014).  In other words, the companies are falsifying their books of accounts to cheat government on tax payments by showing that they are losing concerns.
The FBCCI argues that tax evasion by companies can be avoided by lowering the tax rates. What an innovative argument! The FBCCI's confession of wrong-doing by its member-firms should, in fact, be investigated by the NBR.
AN ASIDE TO CORPORATE INCOME TAX: The corporate income tax is the largest source of revenue in most countries (in Bangladesh it accounts for 60 per cent of NBR revenue), but on grounds of revenue productivity and more so on grounds of efficiency, it scores very badly. The argument put forth by famous British economist Charles Allan in this regard four decades ago (The Theory of Taxation, Penguin, 1971), runs like this: The corporate income tax is levied on profits, and hence it is only the profitable and efficient firms that pay taxes, while the unprofitable and inefficient firms are lightly taxed or are not taxed at all (if they do not make any profits). Inefficiency is thus rewarded and efficiency penalised.  
This anomaly can be removed, and companies made to contribute to the government exchequer, by replacing the present system of corporate income taxation by a "factor tax". That is to say, instead of taxing profits, companies should be made to pay in proportion to the amount of the country's scarce resources (land, labour and capital) they employ in production.
A beneficial result of such a tax system would be that firms would be forced to improve efficiency if they wanted to remain in business. Inefficient and unprofitable firms would be forced out, thus releasing scarce resources for use in more efficient industries elsewhere. In the present situation of corporate taxation, the inefficient industries that just break even will continue to make uneconomic use of the country's scarce resources and contribute nothing to the country's economic growth. The proposed "factor tax" will also put a check on the extravagant spending of companies that squander away shareholders' money through lavish decoration of office rooms, luxurious office buildings, expensive chauffeur-driven motor cars etc., a part of which could easily go to the government's exchequer.
There is some definite wisdom behind the idea of "factor tax", but in the absence of any knowledge about the empirical nature of the trade-offs between factor tax and the corporate taxes, it has little chance of being adopted in any country in the foreseeable future. Nevertheless, it can be a topic of serious research by experts on public finance, research institutions and, even NBR, to compare the relative superiority of the one over the other.
PERSONAL INCOME TAX: Bangladesh at present collects only 1.0 per cent of GDP from personal income taxes, while the top 5.0 per cent of the population owns 25 per cent of the national income. The effective income tax rate is thus a paltry 4.0 per cent. Former World Bank economist Dr. Sadiq Ahmed in his masterly article published elsewhere two years ago (Daily Star, 28 March, 2012) showed that an increase in the effective personal income tax rate to even 10 per cent would yield income tax from this group alone to the tune of 2.5 per cent of GDP. Applying this tax rate to the top 10 per cent of the population, that now account for 35 per cent of the total national income, will yield 3.5 per cent of GDP in taxes.
MAKE TAX STRUCTURE MORE PROGRESSIVE: There is also a wide range of opportunities to collect more revenues from personal income taxes by making them more progressive. The highest tax slab for individuals could now be made 30 per cent, one notch above the current highest slab of 25 per cent. In this regard, an NBR official, as reported in the press the other day, said that any move to modify the tax slabs would trigger backlash from different quarters. This type of statement by an official is highly objectionable and totally unwarranted. Decision making on tax matters is purely a political act, and it is the prerogative of the politicians, not of the tax collectors.
The fear expressed by the NBR official is also unfounded because the burden of the increased amount of the tax will be on the highest income group, a substantial share of whose income goes to conspicuous consumption. Tax payment by this group is thus unlikely to affect their savings or investment.
Revenues from personal income tax may also be substantially increased by withdrawing superfluous provisions of tax rebate, and improving tax administration. It has to be mentioned in this connection that if the personal income tax were made more progressive, as suggested above, an increase in the prevailing tax exemption ceiling for the lowest income group that normally suffers the most from inflationary price rises, might produce only a minimal effect on government revenue.
EXPANSION OF THE TAX NET: There are enormous opportunities for the government to raise revenues by widening the tax net, but not enough has been done in the past in this regard. To cite only a few, there are immense possibilities of raising revenue by bringing NGOs (non-governmental organisations) engaged in profit-making commercial activities, private universities, and large agricultural landowners under the tax net.
PROFIT-MAKING NGOS AND PRIVATE UNIVERSITIES: Though poverty alleviation is their sole objective, some of the NGOs are engaged in profit-making businesses, running retail shops, banks, universities, conference centres and guest houses. Similarly, private universities have had a mushroom growth over the past years.
Many of them are running multiple campuses across the country without any lawful authority and making brisk businesses without caring for the quality of teaching, and thereby destroying the future of the youths. The profit-making NGOs and private universities should be subjected to the same nominal tax rate of 37.5 per cent as that applied to non-listed companies.
The writer is a former Professor of Economics at the University of Dhaka.
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