Bangladesh is the lowest tax effort country among the developing countries. This was confirmed by a study of Bangladesh Bank. The study, conducted recently, found that Bangladesh was the lowest tax effort country in the sample with an average tax effort index of 0.493. This has important policy implications: countries having low tax effort (less than unity) are not utilising their full capacity of tax revenue, and therefore, have the potential for financing budgetary imbalance through raising tax revenue. The tax effort index for both direct and indirect taxes is below 0.6, implying that Bangladesh has the potential for raising revenue collection from both direct and indirect taxes. In terms of tax buoyancy, Bangladesh ranks the second highest among the sample countries viz., Indonesia, Philippines, Singapore, South Korea, and Sri Lanka, with a tax buoyancy ratio of 1.235, meaning that tax revenue is quite responsive to GDP (gross domestic product) and effort has been made to increase tax revenue over the period.
Bangladesh tax effort is also low compared with the five Asian countries included in the study. Each of them has a tax effort index above unity, implying the full utilisation of their revenue potential. Among others, Pakistan and Thailand have an average index greater than or equal to 0.9. Average tax effort of Bangladesh is 0.657. Tax effort for VAT is slightly higher than only one other country in the list, and it is higher than only two countries in the list for income tax. The comparator table also indicates that efficiency in collection of VAT is somewhat better than that of income tax. Tax efforts are higher even among the comparator African countries.
Like many other developing countries, Bangladesh is too far from reaching a comfortable level of tax-GDP ratio due to its relatively ineffective tax administration, outdated tax and fiscal policies, and weak tax practices.
It is pertinent to note that income inequalities can be reduced through the tax system: people with ability to pay tax will not be left out from tax coverage; gaps in tax system can be improved; use of revenue collected through VAT and tax should be equitable and transparent fulfilling people's expectation that 'My tax for our welfare and development'. If VAT and tax justice is ensured that will increase government revenue which will ultimately contribute to reduction of income inequality and an incremental allocation of resources for the benefit of the poor and marginalised people and to uphold their rights.
In recent years much simplification and rationalisation have been brought about in the process of taxation system. Complication in tax calculation has been reduced and above all, an attempt to attract more taxpayers to the tax net has been made. Automation in tax collection mechanism has set in. Compliance with the standards and systems introduced by WCO (World Customs Organisation) has increased. The practice of honouring the taxpayers and recognising their contributions has got institutional shape in the National Board of Revenue (NBR). In the case of legislative reforms, new Value Added Tax and Supplementary Duty Act, 2012 has been enacted which will be effective from July 2016. A draft Direct Tax Code has been posted on the website and steps are being taken to get it passed by parliament by the next year. In principle, there are plans for a comprehensive/maximum reduction in the rate of Import and Supplementary Duty in the budget for 2016-17 financial year which will eventually shift the burden of revenue collection to Individual and Corporate Tax along with Value Added Tax (VAT).
One of the basic concepts of designing and implementing an equitable taxation regime is 'Broad Basing', meaning that the taxes should be spread over as a wide section of the population as possible , or sectors of economy, to minimise the individual tax burden. Tax burden basically imply direct taxes to be borne by individuals. While the indirect taxes, e.g., VAT on any goods or service affects the rich and the poor alike, the direct taxes may cause burden on certain income group. Hence, to reduce individual's tax burden taxation regime should be diverse and broad-based, maintaining an equitable balance of both direct and indirect sources.
Tax structure of Bangladesh is perceived to be regressive as it is heavily dependent on indirect tax which was about 64 per cent in 2014. However, the gap between direct and indirect tax has been reducing from 2005 as share of direct tax has been increasing. Among the sources of income tax, share of corporate income tax has always been the major source, which was about 55 per cent in 2013. Since 2005 the gap between corporate and personal income tax remained between 10 per cent (in 2013) and 13 per cent (in 2011); but a big gap was observed during 2006- 2008, with the highest 28.58 per cent in 2007. During this period the share of personal income tax went down to 35.21 per cent, while the share of corporate income tax went up to 64.79 per cent. Presumably, this is due to over-emphasis of an interim caretaker government on corporate tax than the personal income tax. However, the share and volume of  income tax started increasing from 1991 when democracy was restored in the country. However, no study has been done so far to measure the effect of democratic environment on the revenue administration and governance. It could, however, be inferred that the sudden increase was due to the result of a transition towards good governance and expansion of the income tax department. In the income tax structure, withholding at source has been a major component (54 per cent), the payments through submission of return is only 10 per cent.
In Bangladesh, withholding taxes are usually termed as tax deduction and collection at source. Under this system, both private and public limited companies or any other organisation specified by law are legally authorised and bound to withhold taxes at some point of making payment and deposit the same to the Government Exchequer. Withholding tax is important as it comprises major portion of income tax in Bangladesh.  Currently, the NBR collects source tax from 58 sectors, ranging from contractors, bank deposit holders, to exporters and importers of certain items. A 10 per cent tax at source has been fixed for various services, but the services are yet to be defined individually. It may create ambiguity for both taxpayers and tax authorities. In order to monitoring collection of Tax Deduction at Source (TDS), a separate Taxes Zone may be set up.
Bangladesh has a very narrow taxpayer base with a small number of registered TIN (Taxpayer's Identification Number) holders and not all of them filing tax returns. The taxpayer base would need to be expanded rapidly with major registration drives. The Direct Tax Law/Codes are still outdated and now are undergoing fundamental changes based on the principle of universal taxation. The direct tax administration is also under a restructuring plan, paper-based are being automated and territorial/geographical administrative units are being rationally revived. Following reform agenda are on the card:
* Broadening of the taxpayers' base. This will require monitoring of the ownership of all sizable physical and financial assets of taxpayers and determining the income generation out of those assets.
* Broadening of the tax revenue sources from traditional dependence on taxing financial institutions and a few large non-financial corporations. It is alleged often that tax administration has the tendency to increase tax incidence on existing and complying taxpayers and not to work hard on identifying the new taxpayers by gathering information from multiple sources. The so-called "Black Money" is circulating in the domestic economy and capital flights to foreign lands are going on;Â it should be the responsibility of the tax department to find their owners.
* Focusing on income from service providers and self-employed (who are difficult to tax).
* Treating all sources of income equally for the tax purpose without discrimination for the households. This would imply taxation of capital gains from land, real estate/housing, and stock market. Wealth accumulation in Bangladesh is primarily happening through accumulation of urban land and real estate, untaxed/low tax income of the rapidly growing RMG and other sectors, and relatively low tax incidence on income through financial instruments. This must change and the anomalies are to be handled.
Dr Muhammad Abdul Mazid is a retired Secretary and a former Chairman of NBR .
mazid.muhammad@gmail.com
Treating all sources of income equally for tax purpose
Muhammad Abdul Mazid | Published: September 15, 2015 00:00:00 | Updated: September 14, 2015 21:12:10
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