Why minimum income tax will eventually lead to lower revenues

The government usually resorts to minimum tax as a buffer – to prevent tax revenue from falling drastically in bad times. It is an attempt to secure the means of government financing needs to some extent. It is also used to recover some costs of an action that incurs costs to maintain or to prevent misuse of some facility. 

In the Bangladesh Tax Code, there are three types of minimum tax: (1) minimum tax for individual taxpayers with income, (2) minimum tax for individual or firm or company taxpayers with turnover, and (3) minimum tax for all taxpayers with the tax deducted at source. 

The idea of minimum tax first entered the Bangladesh Tax Code in 1993. Before its introduction, the tax authorities' field offices collected Tk1,500 from each applicant who applied for a tax certificate. People needed this tax certificate for various reasons. Many, including students who had no tax file and no taxable income, used to apply for such certificates. But the tax offices declined to issue the certificates, which sometimes resulted in untoward incidents. 

To cover up costs necessary to offset the pecuniary and non-pecuniary losses for such issuance of certificates, the authority decided to go for the minimum tax in the 1993-94 budget. It was added as a provision to the tax-rate schedule in the Finance Act.

The first-mentioned minimum tax is justified by cost recovery and the buffer principles. The minimum tax for people with taxable income is Tk5,000, Tk4,000, and Tk3,000 for Dhaka/Chittagong city corporations, other city corporations, and areas outside city corporations, respectively.

The second-mentioned minimum tax is justified on the buffer principle and, to some extent, on the perceived doubtfulness of the books of accounts of the taxpayers. This is applied at rates ranging from 0.25% to 2%, depending on the taxpayer type and turnover volume. 

The third-mentioned minimum tax has been there since 2017 when the provision of the final settlement of tax (introduced in 1997-98) was amended. The rationale of this minimum tax rests on the sole principle of protecting the government's tax revenue from being eaten up by tax refunds with falsified books of accounts. 

Tax policy expert economists Alex Radian and Ira Sharkansky justify this type of minimum tax as a means of "rough justice" in difficult-to-prove false documentation by taxpayers in tax jurisdictions, especially if documentation problems and administrative weakness co-exist in the tax ecosystem. In other words, justification for the last two types of minimum tax arises from the potential threat to tax revenue emanating from administrative weaknesses.

The National Board of Revenue has proposed one more layer of minimum tax in the 2023-2024 budget. All TIN holders must pay a minimum tax of Tk 2,000 to file yearly tax returns and obtain a Payroll Submission Request, even if they have income below the official threshold. 

This proposal, however, appears self-contradictory. Our tax authorities want to expand the tax net, and with that end in view, TIN registration has been made mandatory in some cases. Now filing of tax returns for TIN holders has also been made compulsory. 

Many other tax jurisdictions have made return filing mandatory irrespective of income level, and our tax authorities are not unjustified to follow suit. However, having to pay a minimum tax despite having a non-taxable income will likely discourage them from registering for TIN in the first place and derail the avowed tax net expansion objective of NBR.  

The primary objective of the proposed minimum tax is to raise more revenue. But how much revenue can it generate? 

Last year, from 87 lakh TIN holders, about 34 lakh returns were filed. Among these, about a third or about 11 lakhs were "zero return," meaning they reported income below the taxable threshold limit and, as such, did not pay any tax with the return. 

Another about seven lakh returns had income levels between Tk300,000-400,000. If the threshold of non-taxable income level is raised to Tk350,000 next year as proposed, in the present depressed economic conditions, most of these taxpayers will probably fall in the "zero return" category. 

About 18 lakh taxpayers will face this proposed minimum tax in the coming year. This minimum tax can raise about Tk360 crore at best. But this is different from the net gain because those 7 lakh taxpayers within the income range of Tk300,000-400,000 were paying minimum tax of category (1) mentioned above, which this year fetched about Tk700 crore. 

Raising the non-taxable income threshold from Tk 300,000 to Tk 350,000  for the next tax year will wipe out most of this revenue. Therefore, the proposed minimum tax may recover only about 50% of the revenue lost due to raising the non-taxable income threshold in the next tax year. 

Therefore, the proposed minimum tax may have a negative, revenue-reducing impact on some marginal taxpayers. If the non-taxable threshold income level for the next tax year is raised to Tk350,000 as proposed, taxpayers within the income range of Tk350,000-450,000 will be subject to the existing minimum tax (category 1 above), which ranges between Tk3,000 to Tk5,000. 

Most of these taxpayers report income without any books of accounts. It will be enticing for them to report estimated income below the taxable level to pay only the proposed minimum tax, which is around 50% lower. If past experiences are any guide, NBR will hardly have any ability to contain this tendency.

All the minimum taxes mentioned above directly or indirectly relate to "income." But the proposed one has none. It has a connection only with TIN ownership and consequent entitlement to receive certain services. It is, therefore, appropriate to call it a "user fee" rather than a minimum income tax.  

It is also important to note that the proposed measure may encourage malpractice with PSR. At present, we have about 87 lakh TIN holders. They must have registered for TIN to receive specific services. But in the current tax year, only 34 lakhs have filed returns. What happened to the remaining 53 lakh TIN-holders? How are they availing of certain services now? Our tax authorities should be able to monitor the results of the tax provisions enacted if they aspire to transition to the post-LDC-graduation Bangladesh and Vision-2041 successfully.    

The author is a retired Commissioner of Taxes. He can be reached at [email protected].

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.