Why our peers are much better at collecting taxes

Infographic: TBS

It is no secret that taxes are something that Bangladeshis strongly dislike. Only 1.4% of people in the financial year 2022 filed tax returns. Under-invoicing by importers to evade tariffs has become more popular recently, while companies dodging corporate taxes are practically a well-kept secret. 

All of this has led to an incredibly low tax-to-GDP ratio of 8%, the second-lowest in South Asia and, generally speaking, nearly 5% less than lower-middle income countries. 

The International Monetary Fund (IMF) has set a target of increasing Bangladesh's tax-GDP ratio from to 8.3% by the end of FY24 and to 9.5% by the end of FY26. But even in FY23, the National Board of Revenue (NBR) ended the fiscal year with a revenue shortfall of Tk44,000 crore, despite revenue generation growth of 8.12% compared to the previous financial year. 

This year, the trend continues. 

Bangladesh's total tax revenue collection is quite low compared to its neighbours such as India, Vietnam and Sri Lanka. Even Pakistan used to have a better tax-GDP ratio than ours, but in recent months, that number fell behind. But what sets Bangladesh apart?  

What policy shortcomings does Bangladesh have that has locked the country in the perpetual state of low tax revenue collection? 

There are a few reasons for low tax revenue in Bangladesh, mostly structural, but there may be some other things at play here. 

Structural issues

In recent years, there has been a massive push to increase tax revenue in Bangladesh, as numerous development projects and fiscal expansion have increased the demand for more and more tax revenue. 

Yet, in every Five Year Plan from the Sixth FYP, the tax-GDP ratio goals have never been fulfilled. The Seventh FYP had set the goal at 14.1%, and the Eighth FYP had set the goal at 14.6%. 

"One of the biggest problems here is that of policy level issues. It means that the institutional support necessary to carry out this improvement is absent here. And it is partly because our taxation policy is not coherent, even our VAT regime has numerous rates and complex rules for tax exemptions. These loopholes are often used by tax evaders," says Dr Selim Raihan, professor of economics at Dhaka University and Executive Director of South Asian Network For Economic Modelling (SANEM). 

Simplicity in tax rates is one of the indicators of a good tax structure; and the Bangladeshi authorities have failed to meet this indicator, whereas Vietnam or Sri Lanka have fairly simpler tax structures and less loopholes. 

According to the Tax Complexity Index, Vietnam ranks 43rd among 69 countries; while India ranks 65th — both have high complexity, but Vietnam is the simpler one here. Unsurprisingly, Bangladesh is not included in the index. 

Our revenue generation is mostly done by indirect tax, which ultimately puts pressure on the population. Indirect taxes contributed 65–67% of the Tk3,01,633 crore revenue collected in FY22 in Bangladesh; whereas for India it was 53% (GST included); and 40% for Vietnam. Leaving high tax on the people in terms of indirect taxes actually puts the burden on the poor. 

Another issue is corporate tax revenue. The amount of tax loss due to corporate tax abuse is 0.1% of the country's gross domestic product (GDP). The corporations shift $1.4 billion in profit out of Bangladesh each year to the tax havens; and for this, the amount of Bangladesh's annual tax loss is $387 million and it is 1.5% of its tax revenue, which is higher than the regional average. 

The share of corporate tax in Bangladesh is only 16%; whereas in India it is 21% and Vietnam it was 22% in 2016; the current data is not available, but it is unlikely to drop. 

In India, the revenue generation from the corporate sector has been tremendous. For the financial year FY23, India witnessed a robust increase in direct tax collection, with net collections reaching ₹16.61 crore. This represents a year-on-year growth of 17.63%. Notably, the collections surpassed the budgeted estimates by an impressive ₹2.41 lakh crore. Compared to us, it is much greater. 

Yet another structural issue is that the NBR has multiple responsibilities which boggs it down. Take India for example — there are two tax administrations, Central Board of Direct Taxes (CBDT) for direct tax, and Central Board of Indirect taxes and Customs (CBIC) for indirect tax. 

Also, the problem with Bangladesh tax disputes is that it is NBR who investigates the disputes filed against NBR, so disputes are mostly never settled. This is not found in our peers. It creates a conflict of interest. 

The case of Vietnam

Now, let us take Vietnam as an example. According to the World Bank, Vietnam's tax-GDP ratio was 14.6% in 2019, which was higher than the average of 14.8% for lower-middle-income countries, and also higher than some upper-middle-income countries such as Thailand (16.5%) and Malaysia (13.6%). 

Among the ASEAN countries, only Singapore (14.2%) and Brunei (0%) had lower tax-GDP ratios than Vietnam. 

One of the reasons for Vietnam's high tax-GDP ratio is its comprehensive tax reform that started in the late 1980s and continues until the present day. Vietnam has simplified and rationalised its tax system, reducing the number of taxes from 40 to 10, and introducing taxes such as value-added tax (VAT), corporate income tax (CIT), personal income tax (PIT), and environmental protection tax. 

Vietnam has also improved its tax administration by adopting online tax registration, declaration, and payment systems, enhancing taxpayer services and compliance management, and strengthening audit and enforcement capacities . 

Vietnam has even started to deploy artificial intelligence to spot tax evasion as part of a more tech-savvy approach to prevent corporate tax evasion, and it has bore fruit. As the tax authority in Vietnam pushes taxpayers to go digital, including with electronic billing, it is also digitising itself. The authority will use AI software, for example, to flag firms that issue invoices too often, for unusually high amounts or in other ways indicating attempts to slash taxable revenue. 

Not just a structural problem

A study conducted by the International Growth Centre found how much people are willing to pay taxes depends on the trust they have in the government and the quality of services they receive. Corruption, especially extreme levels of corruption, can significantly erode people's trust in the system leading to tax evasion. 

Studies suggest that corruption in tax administration can also create opportunities to evade taxes. Corruption, therefore, can be both a reason and a tool for tax evasion. It depresses tax morale and discourages people from paying taxes, and then provides a cost-effective way to do so. 

A study conducted by Transparency International titled "Exploring the Relationships between Corruption and Tax Revenue" showed that corruption perception negatively affects tax-GDP ratio. Here, Bangladesh is much behind her three peers; Bangladesh ranks 12th in the Corruption Perception Index. While Vietnam ranks 77th, India 85th, and Sri Lanka 101st in the index. 

According to the Global Trustworthiness Monitor, India is one of the countries with a high level of public trust. Sri Lanka has recently shown tremendous fiscal and monetary recovery after establishing the new government one year ago. Same goes for Vietnam, where the public trust and confidence in the government of Vietnam is quite high, as seen during the COVID-19 response and recovery program. 

"At the centre point of the crisis, there is a strong socio-political factor. There is a strong group of  influential businessmen who use lobbies to exempt themselves from tax," says Dr Selim Raihan. 

"They also get tax exemptions in budgets. Sometimes, we hear that they are money launderers as well. They are nothing but crony capitalists. In Bangladesh, the government does not have the courage to go up against these cronies, nor do they possess the institutional strength to discipline them," he added. 

Now this begs the question: How can we reach the level of our peers? 

"With such deep problems persisting in Bangladesh tax structure, it is not possible for the country to increase its revenue and tax-GDP ratio; and we have been seeing this for years. Our taxation sector is suffering from acute policy paralysis, there are many wonderful policies on paper, but not on the ground. So, NBR needs a structural reformation, so that the policies they set will be executed by a separate entity. Also, first and foremost, we need to discipline the socio-political factors, so that we can properly implement our existing tax policies," concluded Dr Raihan.  

Sketch: TBS