Reforms in revenue management: Let's do it and do it now

Highlights:

• Need technological, legal and structural reforms
• ⁠Paperless, contactless and faceless tax system
• ⁠NBR to be headed by a State Minister
• ⁠Two boards- Direct Taxes and Indirect Taxes
• ⁠NBR members to be given status of a Secretary
• ⁠A Fiscal Research and Analysis wing in NBR
• ⁠An enforcement wing empowered and equipped with revenue forces

Revenue reforms in Bangladesh is a much-talked and much-hyped issue although it is mainly focussed on the narrative of lower tax-GDP ratio and the lack of automation in the tax system. Popular perceptions among the stakeholders and current narrative among the academics reflects the same with an extra emphasis on collection from direct taxes. Consensus is there on the necessity of a comprehensive reform in NBR to meet the growing demand arising from higher expenditure needs and lack of external resources from desired sources.

Every year we come across some sporadic proposals in this regard especially, when the annual budget knocks the door. But if we have a holistic approach, the reforms in revenue management should be mainly focussed on three key issues – technological reforms, legal reforms and structural reforms. Discussions and suggestions made here on these three issues may not make it fully comprehensive but expected to bring significant success in this regard.

There are some technological reforms going on which have brought some limited success recently. But these are neither enough to boost the revenue nor ensure people's comfort. When it comes to technological reforms in NBR we have to understand that only the business process automation of NBR is not enough to ensure an ideal tax system. It is the nature of the whole economic system that matters most. Unless the whole economic system is automated or digitised significantly the tax system will not be automated enough. The business transactions, banking, retail transactions etc. should be fully automated in order to make the economy less cash based and more documented. Banks, Fin-techs and mobile phone operators should come forward to establish the necessary infrastructure and technology. They should do it for their own business interest. It is very difficult for NBR alone to put ECR machines on every retail outlet across the country.

We should take note that an ideal tax system should have three essential features. It is paperless, contactless and faceless. It means that the system is electronic which is speedy, accurate and well documented. It is contactless which makes the taxman unable to meet the taxpayer and exploit any given situation. Thirdly, it is faceless, which means the identity of taxman is unknown for an assessment which makes it difficult for any interference from outside for any potential malpractices. The NBR should put much emphasis on these features while undertaking any automation process. The current tax return submission system should be made easier. But without the automation of TDS (Tax Deducted at Sources) it is not possible. More than half of our direct tax comes from deduction at sources. There are some basic problems in our TDS systems like no tax deduction, deduction at wrong rates, tax deducted but not deposited, delayed tax deposit, tax deposited but not recorded etc. If we look into the tax system of India, we will find that they have their tax deducting entities at sources registered. They have their own identification numbers and when they deduct and deposit the tax with an automated system which ensures the tax so deducted will be given credit to the taxpayer in the system. Which makes the computation of tax liability or the refund claim seamless and speedy. We have noticed that NBR has established a separate TDS zone to streamline these issues which is a welcome move. But the unit should be automated as per the global best practices in this regard.

When it comes to legal reforms, we have noticed the newly enacted Income Tax Law. It requires some time to evaluate the new law. In this case, feedback from the stakeholders must be sought and necessary amendments should be made in this regard. For ensuring ease of doing business, customs procedures should be made more paperless until it becomes fully paperless. One important aspect is the rules under the various tax laws which should be easier and people friendly. Actually, these rules are the vehicles through which these laws are being implemented.

But the most important reform among these three is the structural reform of NBR. Although the NBR has undergone some horizontal expansions, no major structural reform took place in the NBR in the last fifty years. It is high time the government took the initiative. The first major structural change should be taken vertically-the NBR must be headed by a state minister to the Government. At present the Secretary, IRD is the Chairman, NBR as ex-officio which means that an individual is performing two separate full-time duties. This needs to be changed at the earliest. We have to understand that unless we strengthen the NBR structurally it is not possible to collect taxes beyond a certain threshold considering the changing socio-economic reality of the country. We have to understand that our reality in tax management has some strange features. On one hand, we have a very low tax-GDP ratio but on the other hand we have very low expenditure on our tax administration. NBR makes an expense of 31 Paisa to earn a tax of 100 taka which is very low compared to peer countries. This is an indicator of the efficiency of the tax administration which is not reflected in common rhetoric. This situation further justifies the vertical changes recommended here. A separate research wing with adequate funds and expertise is very important which is not present now. An attempt was made in the late 90s when Shah AMS Kibria was the finance minister to establish a Fiscal Research and Analysis Wing. But that effort has not yet seen the face of the day. A chief economist may be appointed under the policy wing in order to better coordinate with the monetary policy. There should be a separate planning wing which will supervise the various development projects and undertake new initiatives where it is necessary.

Another very important structural reform is to establish two separate boards for direct and indirect taxes headed by two different Chairmans. An efficient and experienced state minister should look after the whole revenue administration. Members of the revenue boards must be upgraded to the status of Secretary to the Government. This will strengthen the revenue administration and also motivate the employees. We have to note that one part of public administration collects the revenue for the state and the other part makes the expenditure for the benefit of the people through various programs. If the revenue administration is not strengthened with time, it will not be able to keep up with the other part of public administration, therefore, administrative balance will be hampered. The Ministry of Foreign Affairs and the ministry of Planning have several officers with the status of Secretaries. 

When it comes to direct taxes, the quality of the assessment for income tax should be improved and collection of arrear tax must be strengthened. Improvement in these areas will ensure more & timely collection from the people with higher income. To ensure this, more coordination within the three wings of NBR – income tax, VAT and customs is essential. The NBR must have a strong legal team to fight their cases in higher courts to avoid delay. In order to collect the arrear tax demands, the enforcement wing must be empowered & equipped with revenue force/police. At the same time, tax officials should be more careful in dealing with respectable taxpayers.

In developing countries, any reform takes time and faces strong opposition from various stakeholders, therefore, the reform initiative must be taken in the first year of any government.

The author is a former senior secretary of the Finance Division, Ministry of Finance, Bangladesh.