Tax exemption need to be minimised, bonded facility restricted

The utility of tax revenue is dependent on proper mobilisation, and whether transfer of payment is assured, i.e., revenues are properly utilised when appropriately spent. Both revenue income and expenditure should be transacted with transparency in mobilisation and accountability in spending. 

According to the principle of revenue income, it should be mobilised in the period earned and if they are realised, or realisable payment has been received, or if collection of payment is reasonably assured.

Taxation is one of the major sources of public revenue for meeting a country's expenditures to accomplish certain economic and social objectives, such as redistribution of income, price stabilisation, discouraging harmful consumption, and ensuring proper representation of the taxpayer in macroeconomic management. 

It supplements other sources of public finance such as issuance of currency notes and coins, charging for public goods and services, and borrowings.

Revenue mobilisation and public expenditure

The pressure on the revenue sector is affecting the capacity to fund important areas of public spending. Though the social and physical infrastructures are receiving higher allocation despite lower tax collection, it has already imposed a heavy burden and challenge on macroeconomic management. 

As a share of total revenue, the annual development program (ADP) expenditure roamed between 28% to 49% during FY05 and FY21, respectively. Out of revenue expenditure, the highest expenses, between 23% to 39%, went towards subsidies and current transfers, while pay and allowance accounted for 16% and 27%. 

The pay and allowance shares have been going up in recent years. Foreign aid, in the form of hard term loans and grants, is one of the important sources of deficit finance. The next largest share is interest payment, which has been about 15% to 20% of revenue during this period. Next share of payment is for goods and services, which has been roaming between 9% to 15%. 

If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code, once you get to know it, embodies all the essence of life:  greed, politics, power, goodness and charity.

The share of block expenditure, acquisition of assets and works, and development programs is negligible. A trifling amount of revenue expenditure is used for social and structural improvements. The lion's share of government revenue is spent as current expenditure, which is expected to increase over the medium term. In this case, pay and allowances, goods and services, and interest payments are to increase. Thus the visibility will be shrouded by black clouds and would continue to stir up severe storms in 2023.  

Similar to many other developing countries, Bangladesh faces problems in raising sufficient tax revenues to fund its economic and social development. To address this problem and to improve economic efficiency and growth, a major tax reform program was initiated in 1991, which centred on the introduction of value-added tax (VAT) to replace a range of narrowly-based consumption taxes. 

Relevant data shows that the performance of VAT in Bangladesh was quite satisfactory in the initial years, but subsequently VAT collection has remained stagnant at a certain level. As a result, VAT has become unable to meet the desired objectives. The reasons behind this performance are many, such as the relatively small number of VAT payers, general lack of awareness, and a relatively weak monitoring system. 

There is still scope for improving the revenue collection from VAT by increasing the number of VAT payers, reforming VAT administration, raising awareness among the people, revisiting the list of VAT exempted items, and increasing the efficiency of the monitoring system. Providing the EDF machines to businesses has been in the doldrums. The National Board of Revenue (NBR) must make its position clear and businesses should come forward for compliance.

It is also important to note at this stage that VAT has become the most common type of consumption tax for a variety of reasons in Bangladesh. Unlike income taxes, VAT does not distort consumption, savings or investment decisions. Because sellers can claim a credit for VAT paid on their inputs, there is no cascading of taxes as can occur with other consumption taxes. 

This tax is often regarded as "self -policing" as it is imposed on every transaction throughout the production process, reducing revenue losses should one party fail to collect VAT. It is also neutral between the domestic production and imported goods when compared to an import tariff. 

It has been widely recognized that a well-designed VAT system can raise significant amounts of revenue on a stable and sustainable basis and the decision to introduce VAT has often been made for these reasons.

A commonly cited disadvantage of VAT is that they can be regressive in nature — a problem which can arise with most types of indirect tax. A single rate VAT applied to the broadest possible base becomes essentially a proportional tax on consumption and therefore, regressive. 

Often to address this problem of regressive nature, multiple rates of VAT are offered along with a range of exemptions, even though such provisions have a negative impact on the effectiveness and efficiency of the VAT system. 

Exemptions inevitably make the VAT base narrower and keep its scopes commonly limited to basic foods, health and education. 

Progressive tax is usually a greater issue for Bangladesh where a large proportion of the population lives in poverty. For this reason, Bangladesh should have adopted multiple VAT rates with the lower rates applying to necessities such as food and utilities, as well as exempting a wide range of goods and services to promote greater progressive taxation. 

Therefore to widen the scope of VAT, a special VAT regime has yet to be introduced for small businesses in Bangladesh, which may not be necessary in developed economies. This should be an enabling agenda in 2023.  

The adoption of VAT is often seen as an opportunity in many developing countries to modernise tax administration, which may reflect the influence of international financial organisations such as the IMF or World Bank. Bangladesh has already, however, found VAT more difficult to administer than initially thought and problems with administration and enforcement often undermine the effectiveness of VAT. 

Another problem in Bangladesh is the payment of VAT refunds. The provision for registered taxpayers to receive refunds is a key feature of the system. However, this has been problematic for Bangladesh for several reasons, including inefficient processing, reluctance of revenue officials to refund taxes already paid, and concerns about fraudulent claims. 

Self-assessment by taxpayers under the VAT regime is also a problem in Bangladesh as self-assessment systems must be backed up by regular audits to ensure compliance and prevent evasion. 

In Bangladesh, it is difficult to undertake an effective audit program to combat VAT evasion. This is why the potential of VAT cannot be captured here in full.

Reforming tax revenue regulations

Reforming tax revenue regulations should deserve a very close review of existing rules and regulations one by one, if not word by word, in fitting with present day demands of social norms and business practices if we really want those to be effectively enforceable, prudently practised and impartially implemented. 

Rules should not be a tool for applying discretionary power by the enforcement officials. Any rule has to be simple, comprehensible, and clearly defined with adequate remedial provisions. Stakeholders' views at large should be taken into consideration to make it more user-friendly.

There should be no denying the fact that a sound tax system should be logistically economical. It should impose the smallest possible compliance costs on taxpayers. Otherwise, people will not be encouraged to pay taxes, rather they will be inclined to evade taxes.  

There is a perception that all wealth is fortuitous — it comes simply out of luck or by chance. There are people who win the lottery or inherit wealth. But most wealthy people became rich through a lifetime of hard work. Then you must ask why people work hard. Is it their character, their psyche, or their upbringing? 

All of these are determined by circumstances. Every tax system imposes direct costs on taxpayers in terms of time devoted to tax preparation or money to buy the services of certified public accountants. 

Ultimately, every tax system diverts a portion of tax revenues raised by the tax to pay the cost of administering and collecting the tax and enforcing its provisions. A sound tax system would minimise these costs.

A nation's tax system is often a reflection of its communal values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden — who will pay taxes and how much they will pay — and how the taxes collected will be spent. 

In democratic nations where the public elects those in charge of establishing the tax system, these choices reflect the type of community that the public wishes to create. In countries where the public does not have a significant amount of influence over the system of taxation, that system may be more of a reflection on the values of those in power.

Debates about taxes usually devolve into "the wealthy can afford it" or "it is unfair to be taxed so harshly". Neither argument has merit. Tax the wealthy too harshly, and they will stop creating wealth. Tax them too leniently, and either society will be unable to govern itself, or the rest of society will be so harshly taxed that it will rebel. 

It is entirely a matter of practicality. Fairness never enters into it. As pundits of the past have put it "If you know the position a person takes on taxes, you can tell their whole philosophy.  The tax code, once you get to know it, embodies all the essence of life:  greed, politics, power, goodness and charity."

Raising revenues 

Due to a negative revenue collection growth during the pandemic, the ratio came down to 7.9% in the fiscal year 2020-21. However, the 7th five-year plan had projected the tax-GDP ratio to be 13.7% in FY21. The ratio is way behind projections. 

The 8th five-year plan has also projected that the tax-GDP ratio would be 12.25% for FY25. Will Bangladesh be able to meet the target? There is still doubt, though. The visibility for 2023 is depressing if appropriate steps are not taken for minimise exemptions, streamlining tax holidays, commonsensical protectionist tariffs, and restricting wholesale bonded warehouses.

If Bangladesh's revenue management is compared to that of many other countries including India, there are two different bodies for direct tax and indirect tax. This is because direct and indirect taxes are very different. The whole population, irrespective of being poor or rich, pays indirect taxes. 

If you buy a product or a service, you will have to pay taxes. But only those who have regular income pay income taxes. The earnings from direct taxes tend to be higher. The more one earns, the more they will pay as taxes.

Many countries like India empower their finance ministries to manage direct taxes because they are also responsible for creating the country's budget. The problem with indirect taxes is very much related to trade and business, i.e., the price of commodities in the domestic market, imports and exports. 

The commerce ministry is responsible for setting certain prices as they actively gauge the markets, therefore it must have a role in setting tariffs, and thus, has an impact on indirect tax. The task of the tariff commission under the Ministry of Commerce is to give the ministry recommendations on what product it should impose duties on.  

In Bangladesh, there is a huge lack of coordination between the NBR and the tariff commission. As a result, the NBR fails to realise the taxes and duties it sets. The commission usually arranges public hearings to do so. 

But as the NBR is under the finance ministry, it pays no heed to the tariff commission's recommendations on price or customs duty, because if the NBR did so, it could lose the freedom to change customs duties at will. 

It should be the responsibility of the commerce ministry to increase and decrease the prices and other things like customs duty because it also formulates the import and export policies. It should also administer the bonded warehouse mechanism. In fact, the customs duty that the NBR imposes is completely based on the import and export policy. While one agency is framing the policies, the other is setting the duties and collecting revenue. 

If the commerce ministry could set indirect taxes, the tax collection system would have been fairer. Another point to ponder is that every year, before the national budget, the NBR takes suggestions from different trade bodies, which are actually under the commerce ministry and not the finance ministry. 

These trade bodies are seen meeting with the NBR to lobby for reducing duties. If the trade bodies lobbied the commerce ministry instead, there would be fair play. And it would, undoubtedly, bring discipline in the market mechanism and increase the revenue; the system would be more business, economy and fiscal friendly. 

And tax holidays should be a matter related to industrial policy and therefore be set by the industries ministry.

Universal Self Assessment has been introduced in many countries around the world. The system was introduced in Bangladesh so that the taxpayers could easily report their income figures on their own. Tax authorities need to honour the taxpayers, and honour what the taxpayers declare to pay tax. But it often happens that the taxpayers are summoned in the name of carrying out audits. The revenue authority has the power to summon a certain percentage of taxpayers at will. The problem occurs when many days later, the same taxpayers are called multiple times. 

This might mean that taxpayers are not given the freedom of self-assessment. However, it is also true that some taxpayers misuse the self-assessment system while filing their taxes. And if for this reason, the NBR officials summon them, it is completely justified. But these summonings should be done with moderation instead of quizzing the same taxpayers again and again. The NBR will have to develop a system where taxpayers have no choice but to file taxes honestly.

The economy runs on the basis of ethics. If you let a man who earned money illegally to get away with paying a small amount of tax or penalty, you are ultimately indulging them. New taxpayers may think that it is better not to pay taxes. They will think the government will give them a chance too and raise no questions. Then they will think it is okay not to pay taxes at all! 

The NBR's stand is hypocritical. 

On one hand, NBR is very sympathetic to those who are evading tax. On the other hand, they are very rigid in scrutiny and assessment, creating an abiding situation where people are forced to pay their taxes. This cannot be sustained. 

The government should undertake a carrot and stick policy. The government should let tax evaders know that if you deceive, you will get punished. You will be asked questions about the source of your wealth. Yet, the government continues to indulge the tax evaders and money launderers.

But instead of completely stopping the whitening of black money, we should gradually phase it out over time. No country in the world has allowed the whitening of black money to go on for years; it is usually limited to a few months. 

In other countries, governments collect the undisclosed money and warn the tax evaders that if they repeat such actions, they will face serious punishment. If you do not send them a strong message, they will take you lightly and you will not be able to collect taxes effectively.

Bangladesh has beaten the initial pessimism about the viability and prospect of the country with its resource limitations to feed a large population and the lack of energy and natural resources for developing industries. 

Fifty years ago, it was a war-ravaged economy facing the dire challenges of rehabilitation and reconstruction. Notwithstanding all hurdles, Bangladesh surged forward, and in recent decades, the country's average economic growth rates have reached 7% per year, and growth has been inclusive. 

Bangladesh was raised to the status of a lower middle-income country with GNI per capita of $1,080 in FY14, and per capita GNI in 2022 was $2,824. The country attained remarkable success in many of the socio-economic indicators.

Bangladesh now needs to focus on addressing growing socio-economic inequalities and the structural and institutional reforms as major agendas in the next 50 years. Bangladesh needs to work on strengthening income and asset-based tax collection, enhancing private investment for economic diversification and growth of labour productivity based on upgraded technology. 

The activity clusters to consider for making the country's recent success more sustainable and inclusive are streamlining the mismatch between GDP and tax income, improving tax governance, increasing tax net and coverage, analysing tax incidence, and enhancing the capabilities of the NBR.

The author is a former secretary to the government of Bangladesh and chairman of the National Board of Revenue (NBR)