Time for a more radical approach to fixing our tax system

As the world enters a phase of supply-side turmoil induced by rising geopolitical tensions in Europe, undercutting the global economic recovery process, the issue of domestic resource mobilisation has once again come to the fore, particularly for developing countries where the Covid-19 pandemic has already exacerbated inequality and caused considerable convolutions in the path of socio-economic progress.

With rising inflation, depreciating currency and depleting foreign reserves, the situation has become all the more challenging for Bangladesh, which historically has had a low tax-to-GDP ratio. Yet, as new rifts appear along the most crucial levers of the macroeconomy, the national budget for FY2022-23 advocates policy pathways that have already proved futile in revenue management. 

If we consider the rising social inequality, in contrast to the low public expenditure for social protection and human capital development, such policy deficiency has greater significance and long-term implications. Whereas over the last decade, Bangladesh's annual average nominal GDP has grown at a rate of around 13%, the average annual growth of tax collection has been only 11%. 

The tax-to-GDP ratio has been declining. As of 2021, Bangladesh's tax-to-GDP ratio was 7.64%, which is the lowest in South Asia, the lowest among LDCs set to graduate in the coming four years and the lowest among low-middle-income countries. Needless to say, poor management of revenue collection puts pressure on the country's fiscal capacity, narrowing the prospect of crucial public expenditure for human development. 

One of the major reasons behind the poor tax-GDP ratio is the low level of compliance. While the number of people with a Tax Identification Number in the country is 7.4 million, according to the NBR, tax returns were filed by only 2.3 million in FY 21-22. Over the last seven years, corporate tax returns have reportedly remained stagnant at around 30,000. 

In "The State of Tax Justice 2021", published jointly by the Tax Justice Network, the Global Alliance for Tax Justice and Public Services International, it was reported that Bangladesh is losing $143.96 million or Tk1,2350 million in tax revenue every year to global tax abuse by multinational corporations and wealthy individuals. This loss amounts to 14.52% of the country's public health expenditure. 

There is also a systemic issue with the management of revenue collection, as evident in NBR's consistent failure over the last decade to achieve targets set by the government. In FY 21-22, the collection goal was set at Tk3.30 trillion, of which, till May 2022, NBR had been able to collect only Tk2.53 trillion, which is just 77% of the revised target. The government target for VAT collection from domestic sources was Tk1.28 trillion in FY 20-21, of which the NBR collected only Tk975 billion. 

Tax exemptions have had a large role to play in constraining the manoeuvrability of authorities and, in the process, cap the net scope of revenue collection. Despite having over three decades of facilitation and support behind it, the RMG and textile sector enjoys the benefit of half the corporate tax rate applicable for other non-listed companies. In each annual budget, exemptions and special treatments are conceived through Statutory Regulatory Orders (SRO), mostly on an ad hoc basis. 

In "Bangladesh Institutional Diagnostic", a joint study conducted by SANEM and Oxford Policy Management, two effective average tax rates of 10% and 15% on the income share of the top ten percentile were considered to illustrate the loss of revenues from exemptions and low compliance. It was found that the yield from personal income tax could reach 3.8% of GDP under a 10% tax rate and 5.7% of GDP under a 15% tax rate, whereas the actual share of income tax in GDP has been around only 1%. 

On the other hand, the lion's share of the total revenue comes from VAT, which puts a burden on the consumers and particularly on the lower-middle-income and low-income groups. Reportedly, VAT and supplementary duties account for almost 55% of the NBR's tax revenue. 

Given the current rise in inflation, marginalised households are in a financially difficult position. In a recent exercise by SANEM, the food inflation rate for urban and rural marginalised households was found to be more than two times the officially reported food inflation figures. 

While there has been a nominal increase in allocation to the social safety net, a major portion of it would be directed towards pensions of retired government employees and paying salaries and allowances to those involved in implementing social safety net programmes. As a share of the total budget, the allocation for the social safety net has dropped to 16.8% in the proposed FY 22-23 budget from 18.8% in the revised FY 21-22 budget. 

Moreover, allowances for beneficiaries and allocations for programmes, such as OMS, VGD, VGF, Food for Work, and employment generation, would remain at the same level as in the previous budget. Without pension, interest, stipend, allocation to social safety net program actually gets reduced to 11.2% of the proposed budget from 13.7% in the revised budget of FY21-22.  

A well-structured progressive tax system would have enabled the state to allocate more resources for social protection programmes. Yet unfortunately, in the absence of a robust and people-oriented revenue collection system, state capacity erodes and consequently fails to deliver much-needed relief to public grievances. 

It is also high time for Bangladesh to consider a more serious approach towards wealth tax to address inequality and polluter tax to address the negative environmental externalities of industrialisation. While provisions for both exist in some form, there are policy deficiencies with regard to identification, documentation and implementation. 

Analysis of the tax structure of Bangladesh illustrates the influence of groups with vested interests. The nexus of special interest groups and policy enablers have created an inertia in the institutional processes which can potentially devise and carry through reforms. 

With regards to making headway towards a progressive tax regime, whether reforms of existing institutions alone would suffice or a more radical approach of building new institutions representing and emboldening otherwise neglected stakeholders is required, needs to be carefully considered. 

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Omar Raad Chowdhury is a Research Associate at SANEM.