Tax reforms can help economy recover quickly

With a more than eight percent GDP growth in fiscal year 2018-19, Bangladesh was advancing well toward its declared goal of becoming a developed-country by 2041. Padma Bridge, Karnaphuly tunnel, Metro Rail, Elevated Expressway kept us immersed in the dream of marching towards a double-digit GDP growth and a higher standard of living for the people at large.

Covid-19 has given a severe blow to this dream. Government revenue collection has fallen prey to the crisis. Now that lockdown has been eased, we now need to look into the near future, first, to save the livelihood of the people by saving businesses and second, by devising novel ways for generating revenue for meeting the augmented government expenses and consequent budget deficits.

Tax policy experts around the world are contemplating of novel taxes like wealth tax, excess profits tax, digital tax, consumption tax etc. as opportunities for governments to raise new revenues. Peru is trying to introduce wealth tax to be named as 'solidarity tax'. It is, however, desirable that instead of designing novel taxes governments focus on neutral competitive reforms to existing taxes for sustainable financing and to support economic growth.  A general framework to analyse options for raising revenues should pay attention to the capacity of a tax to raise revenue in a weak economic situation and the burden which the tax would place on economic recovery. In what follows, we can recapitulate some of such options for Bangladesh.

In the beginning of the crisis, Bangladesh like other countries around the world responded well with reduction of tariffs on medical equipment and accessories and other goods related to the fight against Covid-19. Introduction of a 5 percent slab of income tax was also a step in the right direction to alleviate the sufferings of the small taxpayers. So was the reduction of the corporate tax rate to 32.5 percent from 35 percent which better aligned the corporate tax rate against the highest individual tax rate of 25 percent. It is now time to look for some mid-term and long-term adjustments of tax policy.

Bangladesh in the past had wealth tax which was abolished in 1998. We cannot bring it back at this time of economic distress because it will hurt capital formation and hence post-pandemic economic recovery. In its place we now have wealth surcharge. This is payable only by the high net-worth individuals who are less afflicted by the present crisis. It is, therefore, advisable to enhance the surcharge rates to some extent for the next two fiscal years (FYs 2021-22 and 2022-23).

In the same vein, slab-width of income tax rate of 5 percent can be enhanced from Tk1 lakh to Tk2 lakh for the next two FYs which will act as a relief for the smaller taxpayers who have been seriously hurt in the pandemic. On the corporate front, tax rate should be further reduced to 30 percent during the next two years in order to increase the competitiveness of the businesses.

Second, the scope of turnover tax which now stands as minimum tax has been widened this year by inclusion of proprietorship businesses as well. Given that many businesses are fighting for their sustainability in the pandemic situation, the concerned provision Section 82C(4) may be kept in abeyance for the next two financial years. This gross receipt tax will hurt them most not only because they have to pay them in spite of incurring loss and having no taxable income but also because this tax is cascading in effect and will tell on post-pandemic economic recovery.

Third, NBR should take up steps to have the cases pending in the higher courts settled within the shortest possible time. During the last ten years, particularly in 2015 and 2016, steps were taken to train tax officials with the technicalities of court procedures and system with the help of the Attorney General's office. Committees were formed in each tax zone to help expedite the disposal. Nothing has been heard since then. These committees should be revamped to restart the process. Disposal of big cases can free up big chunks of revenue to enrich government exchequer without going for any new taxes.

Fourth, taxes due from foreign workers working in Bangladesh and remitting billions of dollars from the country should be recovered. Two task forces were formed in Dhaka and Chattogram about 6 years ago to make a database of these workers in an attempt to recover due taxes from them and new provisions were added in the tax law to recover penalties from the employers who informally allow them to work. But news reports show that no progress has been made so far on this front. It now appears that such generalised task forces won't work. Instead, smaller audit committees should be formed with officials who are actually responsible for auditing and supervising the tax cases of these foreign workers and their employers.