A tax policy usually aims at achieving a few objectives in the economy. These are enough tax collection for the government, ensuring distributive justice for citizens and serving or influencing public interests. It also aims at discouraging some consumption items like tobacco which are deemed to be hazardous t o health.
The policy also encourages or sometimes coerces companies, specially the multinational ones, to leave a portion of their equity ownership for members of the public. The tax authority continuously sets tax rates and also decides as to which tax should be paid by whom.
There are two types of taxes: one is called direct tax and other is indirect tax. This division has been made on the basis of shifting of incidence. Normally, the burden of direct tax, such as income tax, cannot be shifted to others, and the burden of indirect tax, such as value added tax (VAT) can be transferred by the collectors to the consumer or to those who buy the commodity or service. But the fact remains that the burden of every tax can be shifted to others. Can't income tax payers shift the burden of tax levied on their incomes received from house rents to the tenants?
The income tax policy in Bangladesh is not bad, but revenue collection from this sector is poor. This is because those who can pay tax do not pay and those who pay more income tax pay less. Only in recent years, the National Board of Revenue (NBR) made a requirement of an income tax certificate for those who buy costly items like automobiles, land and flats. But collecting a tax identification number (TIN) and a certificate thereafter is very easy. Many of the buyers of these costly items normally are first timers in income tax payment and they pay the minimum tax to have a TIN. The NBR should follow these people, ask them to file their tax returns on a regular basis. Again, some people should be denied this identification number unless they show their full income in a transparent way.
The highest income tax rate in Bangladesh is 25 per cent, which is alright. But as the income tax policy already offers some concessions on investments in the name of investment allowances, this concession can be further widened to encourage savings in the economy. The proposed enhanced tax concession can be tied to the tax rate, say those who pay at the rate of 25 per cent will enjoy higher investment allowances.
Tax on dividend is too high. The dividend earners are paying tax twice from the same income - once their companies are paying in the form of corporate income tax, and later the receivers of the dividends are also paying in the form of personal income tax. This writer's suggestion is that tax on dividend should be levied at a lower rate, especially for individual dividend earners. This will encourage the income tax-paying people to invest in the stock market. Investing in stock market means taking more risk. Incomes accruing from risky investment like that in equity and the same from safe investment like that in the government savings certificates should not be taxed in the same way and at the same rate. Income tax on dividends for individuals should be brought down to 15 per cent, by keeping a scope for a further reduced rate for the very small stock investors.
The corporate income tax rate is higher in Bangladesh compared to what it is in many other countries, including some European countries. In fact, countries are in competition to lure investment by offering lower corporate income tax. In Bangladesh, the same is between 27 per cent and 45 per cent, the highest being for banking and finance companies and the lowest for publicly traded listed companies. At some points, the financial companies were not discriminated against other types of companies in this respect. But a few years ago, a discriminatory tax was levied on the former.
Listed companies should pay less tax as they are sharing their incomes with their small owners. In fact, a further 5.0 per cent tax reduction should be given to them so that their dividend-paying capacity can go up and other companies which are still outside the bourse listing feel encouraged to invest in stock markets.
Many multinational companies are still outside the stock market. Why? Because, nobody told them boldly to come to the stock market listing or tax concessions were not enough to bring them to the stock market. In other countries, the same multinationals, like Unilever, City Bank NA and Siemens are listed companies.
Getting listed in the stock exchange means parting with a portion of ownership in equity capital in favour of stock market investors. How could the multinationals in many other countries have gone away with without giving any kind of ownership to the local people? This question should be left to our policymakers to answer. A huge amount of money goes out of the country every year in the form of transfer pricing. Who stops this hidden transfer of money by the companies, specially by the multinationals?
A better way of stopping capital flight is to reduce the tax rate. Where do they shift the incomes? Certainly it is to the lower tax rate countries and to the off-shore centres. By doing so they benefit the foreign shareholders, but they deprive the local ones.
It is time to make corporate income tax competitive. That the higher the tax rate the higher will be tax collection is not true anymore. Now-a-days, the opposite is true.
In other countries, more taxes are being imposed on expenditure, specially on costly items like cars, hard drinks, soft drinks and travellers who travel in first class and live in luxury hotels. In Bangladesh, the tax authority also should follow the same way.
The tax policy should encourage investment, discourage high consumption, encourage the companies to go public, and provide lower tax rate for small investors in stock market.
The writer is a Professor of Economics, the University of Dhaka. abuahmedecono@gmail.com
Let tax policy deliver distributive justice
Abu Ahmed | Published: April 21, 2014 00:00:00 | Updated: November 30, 2026 06:01:00
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