Out of 160 million people of the country, only 1.1 million pay income tax. This is shameful and unbelievable, said Finance Minister AMA Muhith at a seminar held in Dhaka recently. It is true that Bangladesh has one of the lowest tax-GDP (Gross Domestic Product) ratios (9-10 per cent) compared to those of other countries in South Asia. It is 15 per cent in India, 12 per cent in Pakistan, 13 per cent in Sri Lanka, 13 per cent in Nepal and 14 per cent in Bhutan. The ratio is 25 per cent in Vietnam and 18 per cent in China.
Income tax is one of the major components of tax revenue. The main use of the money governments collect in taxes is to provide goods and services to the public. Taxes pay for education, highways, public transportation, and public welfare programmes such as social security, unemployment benefits, public housing, health, police, and fire protection. Tax money also pays for the operating expenses of government, such as the salaries of government employees and interest owed on government debt. Therefore, no government can carry on its functions without the income generated from taxes but nonetheless, despite such an essential role in economic growth and public welfare, why are all, even rich people, so reluctant to pay taxes?
An independent survey finds a few reasons of reluctance or lack of interest in paying taxes. People would like to be assured that their money is being used for the right causes. Majority of the people opined that our tax system is unnecessarily complicated and wrecked by age-old corruption and incompetence. Unfortunately, due to high level of corruption in every sector of our economy, many people think that there is no need to pay tax because it will not serve the purpose and as such it will be wasted. Many individuals with taxable income are not interested in paying taxes because they think there is no level-playing field when it comes to paying taxes. Some get demoralised seeing rich people and big companies not paying taxes properly.
But have we ever thought of how the government will finance development and other works? Since revenue is the most sustainable means of financing development activities and to provide better life for the people, a developing country like Bangladesh must have the goal of achieving self-sufficiency through tax revenues and reduction of its excessive reliance on foreign aid. Most developing countries are increasingly focusing on domestic resource mobilisation as part of their broad strategy for economic development. Raising Tax-GDP ratio from the current dismal level of 9-10 per cent of GDP to 16.1 per cent under the proposed Seventh Five Year Plan (SFYP) will no doubt be challenging but it needs to be achieved to increase investment spending and improve quality of public services. Rural development, electricity, transportation and education are some of the major areas where the government allocates most resources from its development budget. In order to provide better life for the people, the government needs money and thus internal resource is the key for sustenance and development of a country. Since revenue is the most sustainable means of financing development activities, a developing country like Bangladesh must have the goal of achieving self-sufficiency through tax revenues and reduction of its excessive reliance on foreign aid.
Besides income tax, there are two other major sources of revenue - value added tax (VAT) and customs duty. The projection of total revenue collection from income tax, VAT and customs duty for the year 2015-16 is Tk 1,763.70 billion against Tk1,350.28 billion last year. For the current fiscal year, the National Board of Revenue (NBR) aims to collect Tk 649.71 billion from income tax, while Tk 642.62 billion from VAT and Tk 187.52 billion from import duty. Undoubtedly, it is an ambitious target but the government is in desperate need of money since it is trying to decrease its dependency on foreign grant and loan for the annual development programme (ADP).
Under the circumstances, the government is set to enhance its revenue mobilisation through income tax. Of the total income tax receipts of last year, approximately 43 per cent were paid by companies, and the rest 57 per cent by individuals and others. There is an allegation that a large number of individuals and companies manage to stay out of the tax- net due to the revenue authority's feeble enforcement mechanism. According to NBR, there are 119,096 companies listed with the Registrar of Joint Stock Companies (RJSC) as firms but only 65,000 have the tax payer identification numbers (TINs). Even after having TINs, many do not bother to submit returns regularly. Tax evasion is a way of refusal by individuals, households, firms, trusts and other entities to pay taxes and in the process, it amounts to resorting to various malpractices.
Tax evasion is a serious problem in Bangladesh as huge amounts of revenue are being evaded by the tax dodgers. In addition, businessmen who collect Value Added Tax (VAT) from consumers also evade tax by under-reporting the same. Tax avoidance is one of the major obstacles in collecting the actual amount of tax. The NBR reveals that tax evasion and incentives cost Tk.400.00 billion a year. Even, tax evasion and avoidance lead to a parallel black economy of about Tk 90 to Tk 110 billion. Some of the multinational companies evade taxes through misuse of a mechanism, known as 'transfer pricing'. Transfer price is the price at which divisions of a company transact with each other for goods or services. It takes place when two related companies -- such as a parent company and a subsidiary, or two subsidiaries controlled by a common parent -- engage in international trade with each other for goods and services. Sometimes, related entities of a multinational firm show artificially high prices for an imported product or service in an attempt to deflate profits to evade taxes. This practice is known as 'transfer mis-pricing'. Several studies have showed that Bangladesh loses a huge amount of tax money because of the abuse of the transfer pricing mechanism by foreign firms.
Moreover, there are some businessmen, politicians and government officials, who instead of paying taxes on their undisclosed income (legal or illegal), are taking away their money and investing in commercial ventures and properties abroad. According to Global Financial Integrity (GFI), a Washington-based firm, a total of $34.12 billion flew out of Bangladesh between the years 1990 and 2008. It means the country lost $1.8 billion in capital a year during this period, causing the tax authority to lose a huge amount of revenue.
In another report, the GFI disclosed that $13.16 billion flowed out of the country between 2003 and 2012. Also latest data of the Swiss National Bank shows, Bangladeshi nationals' deposits with various Swiss banks rose by over 36 per cent year-on-year basis and the amount increased to Tk 42.83 billion in 2014 compared to Tk 31.49 billion last year. All these are affecting the economy with disproportionate effects on the poor and marginalised section of the population.
Only working on serious changes in the tax system can give long-term results. Unfortunately, the NBR has neither manpower nor the expertise in checking tax evasion of such kind. It is difficult for taxmen to identify the loopholes without having advance training on transfer pricing, money laundering etc. Therefore, the government should train up tax officials to hone their skills and come up with pro-people policy measures and create awareness on developing a culture of paying taxes.
Tax compliance depends on how the government perceives the social contract between the government and the tax payers. When citizens see that the services they get from the government are less than what they pay, i.e., the social contract is not honoured, they may tend to reduce their tax compliance by not paying income tax. This results in serious inadequacy in government funds for public utility services such as water supply, electricity, maintenance of roads and highways, health care, security and so on. Therefore, there is a crucial need for the government to make sure that this contract is honoured and public services are well provided for.
As income tax is one of the major sectors of NBR's revenue, the policy of tax collection requires a complete overhaul to induce higher revenue mobilisation. The main thrust of tax policy reform is to boost up revenue mobilisation by expanding the tax base. In this connection, there are ample opportunities to increase tax revenue collection. Under current practices, the burden of tax lies on a limited number of persons/companies with higher marginal income tax rates.
Moreover, the bulk of those paying income tax are salaried employees, whose companies are responsible for making their tax payments. Around 75 per cent of income tax revenue comes from tax withheld at source. Another problem in our tax policy is the extensive use of tax exemptions, incentives and special provisions, which limit revenue collection and make the effective tax base much narrower than the standard tax regime. Generally, it is argued that widespread exemption encourages tax evasion, erodes tax equity and creates distortions in the economy. Various other tax breaks legally keep many more people off the tax rolls. It has been noted that we are practicing too much of 'infant-industry theory'. Since independence, 44 years have passed, and our industry by now should be 'adult' enough not to be shielded from global competition. As such, we recommend withdrawal of all sorts of tax holidays and tax exemptions from all sectors (special consideration can be given on case-to-case basis).
Throughout the world, responsible governments follow the policy of progressive income tax. Those with a higher income are expected to pay a higher percentage of their income in tax than those at a lower income. But Bangladesh should think in its own perspective rather than comparing tax rates with other countries. Considering our socio-economic culture, the present tax structure is too high to attract more people to pay taxes, so the government should devise a long-term plan to increase income tax revenue. Bringing down the tax rate is one such option, which will encourage people to pay taxes voluntarily, thus making the tax base wider. Many economists argue that when the tax rates on producer surplus approach 100 per cent, then tax revenues may approach zero, since economic agents would not be left with any incentive to produce. The higher the tax rate, higher is the disincentive against tax compliance and greater the propensity to generate black money. Thus, reducing tax rates, particularly the maximum marginal rates of progressive taxes, can increase tax revenue in two ways, first by increasing tax base and second, by increasing compliance with the tax rules. Finally, strong institutional reform is essential to enhance the efficiency and capacity of the tax administration. Without an efficient and effective tax administration, it is almost impossible to execute the policies that are intended to enhance the volume of revenue collection.
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