Reforming the revenue realisation regime

Revenue reform remains a crucial agenda following the July-August movement, necessitating comprehensive changes to the tax and customs administration in Bangladesh. These reforms aim to enhance revenue collection and management. Key areas for reform include:

• Restructuring legal and regulatory frameworks for taxes and customs.
• Digitalising taxpayer services.
• Broadening the tax base.
• Reducing corruption and ensuring equity in the tax system.
• Prioritising alternative dispute resolution.
• Strengthening internal controls.
• Combating tax fraud, evasion, and cross-border profit shifting.

Restructuring revenue administration

Effective tax policies must meet revenue objectives while supporting equitable, inclusive, and sustainable growth, ensuring legal certainty and minimising administrative burdens. Key areas of focus in tax policy reforms include analysing the costs and benefits of policy changes, developing methodologies for revenue analysis, forecasting, and assessing tax legislation.

There are compelling reasons to separate revenue administration from revenue policies.

Administrative Efficiency and Revenue Collection:

While tax policies and laws create the framework for revenue generation, actual tax inflows depend on the efficiency of the revenue administration. Weaknesses in administration lead to inadequate tax collection, necessitating budget deficits covered by public debt.

Investment climate and private sector development:

The quality of revenue administration influences the investment climate. Firms are not only concerned with tax policies but also with how they are implemented. Perceptions of arbitrary or predatory practices deter investment. Similarly, efficient customs administration is vital for attracting multinational companies, a significant source of foreign direct investment. Weak enforcement also disadvantages law-abiding firms, as informal sector competitors evade taxes, discouraging formalisation.

Corruption and Revenue Leakages:

Tax and customs administrations are often plagued by corruption, leading to revenue losses as dishonest officials provide undue tax breaks. Honest taxpayers face harassment, inflated assessments, high litigation costs, and unfair competition from non-compliant businesses.

Sophistication of business and tax evasion:

Globalisation and advancements in technology have increased the complexity of business activities and tax evasion schemes. Issues such as cross-border production, tax havens, electronic transactions, and e-commerce present significant enforcement challenges. Without corresponding increases in professional and technological capacity, revenue administration will struggle to counter tax evasion.

Comparing the tax-to-GDP ratio with similar economies can offer insights into the effectiveness of revenue administration. However, this metric must be interpreted cautiously, as tax revenue depends on expenditure needs, alternative resources, and the extent of the informal economy. Optimistic revenue estimates, often influenced by political pressures, highlight the need for realistic budgeting.

Reform initiatives and challenges

Recent tax and customs reform projects have experimented with:

• Organisational restructuring for improved autonomy.
• Changes to tax and customs codes.
• Re-engineering business processes.
• Investments in ICT.
• Enhancing taxpayer outreach.

However, the organisational placement of the National Board of Revenue (NBR) significantly impacts its capacity to implement reforms and enforce laws. An independent revenue administration agency with financial, personnel, and operational autonomy is crucial. It should have a status comparable to a division or ministry, guided by a competent committee of relevant stakeholders.

Bangladesh could also benefit from integrating tax and customs administrations under unified management to improve coordination and resource utilisation. Centralised Data Processing Centres (DPCs) could streamline routine tasks, reduce taxpayer-official interactions, and mitigate corruption.

Digital Transformation and Modernisation

Digitalisation is essential for efficient revenue collection and improved taxpayer services. Key focus areas for ICT reforms include:

• Developing ICT strategies and action plans.
• Strengthening data governance.
• Drafting business cases and functional specifications.
• Securing funding for ICT investments.

Implementing advanced IT systems requires skilled personnel. Existing employees must be trained, and new IT professionals must be competitively compensated. Reform efforts should also address software development contract management, requiring expertise in both revenue administration and IT.

Legal and Institutional Reforms

Tax regulations must align with contemporary social norms and business practices. Rules should be impartial, comprehensible, and enforceable in a democratic environment. Stakeholders' input is vital to create user-friendly regulations that minimise discretionary power and promote fairness.

A sound tax system should be economically efficient, minimising distortions and compliance costs. Progressive taxation ensures fairness by imposing higher taxes on those with greater incomes, while indirect taxes affect all consumers. Bangladesh could consider separate bodies for direct and indirect taxes, as seen in India, to enhance system efficiency.

Reforming the revenue regime requires a holistic, long-term effort backed by political commitment. While digitalisation is critical, broader institutional and public sector reforms are essential for sustained improvements. Legal changes should empower tax administration while protecting taxpayers' rights. A comprehensive and inclusive approach is imperative for successful reform.

Sketch: TBS

Dr Muhammad Abdul Mazid, Former Secretary to the Government and Former Chairman, NBR
The author is currently Chairman of the Social Development Foundation and a Member of the Revenue Reforms Advisory Committee.