Income Tax Act 2023: What should our tax regime be like?

Reforming tax revenue regulations requires a thorough examination of existing rules and regulations to align them with current social norms and business practices. 

Rules should not be formulated solely for the benefit of those in power or to exploit the innocent and uninformed. Instead, rules should apply universally, without discrimination. They should be straightforward, easily understood and unambiguous in their meaning and interpretation, with appropriate provisions for relief and remedy.

To ensure user-friendliness, the views of stakeholders should be taken into account. A tax system must be economically efficient, minimising damage to the economy as much as possible.

Every tax system introduces distortions in economic decision-making and results in less economic activity compared to a scenario without taxes, causing what economists refer to as "deadweight loss." These costs arise from distortions in work, investment, entrepreneurship and other productive activities.

Moreover, applying different tax rates to various activities or producers worsens the distortion of economic decisions and increases deadweight losses due to the tax system. A sound tax system should be designed to minimise these losses and impose the least burdensome compliance costs on taxpayers. Otherwise, people will be discouraged from paying taxes and more inclined to engage in tax evasion.

There is a theory that all wealth is, to some extent, a result of luck. While extreme cases like winning the lottery or inheriting wealth exist, they are rare. Most wealthy individuals accumulate their wealth through a lifetime of hard work.

The most effective and flexible tax systems are the ones that are neutral and simple. Citizens should face minimal effort and hassle when fulfilling their tax obligations. Participating in tax payments is a fundamental component of a functional society.

A nation's tax system often reflects its communal values. When creating a tax system, a government must make choices regarding the distribution of the tax burden—who will pay taxes and how much—and how the collected taxes will be spent.

At times, to accelerate societal development, a significant portion of income and savings from the rich and high-earning individuals is collected through high-income tax rates. This money is then redistributed to benefit the poor and vulnerable, including those who may be lazy or irresponsible, aiming to promote greater equality and social progress.

The wave of globalization in the 1980s led many politicians and technocrats to realise the need to reduce income confiscation due to emerging "income tax competition" among countries. This shift in thinking occurred until the early 1980s, resulting in top marginal income tax rates of 50% or more in most countries.

However, exceptions like Hong Kong in Asia, Switzerland in Europe, and Argentina in South America, among others, maintained lower tax rates. In many countries with high-income tax rates, tax evasion was prevalent, leading to lower tax collections by governments.

Debates surrounding taxes often revolve around the arguments of "the wealthy can afford it" versus "it is unfair to tax them so heavily." However, neither argument holds much merit. Taxing the wealthy excessively may discourage wealth creation, while taxing them too leniently can either result in ungovernable societies or burden the rest of society with higher taxes, potentially leading to rebellion.

Ultimately, practicality, rather than fairness, drives the decision-making process. As pundits have stated, a person's position on taxes can reveal their entire philosophy, as the tax code embodies the essence of life, encompassing greed, politics, power, goodness and charity.

Establishing an environment conducive to tax compliance is crucial in emerging economies like Bangladesh, where the tax-to-GDP ratio is currently around 7-8%. Global best practices, along with input from stakeholders, must be considered.

It is appropriate to argue that reorganisation proposals should be accessible to stakeholders in their native language (Bangla) to ensure better understanding and facilitate suggestions for modifications. The mindset of both tax collectors and payers should be oriented towards generating revenue, and the principles of tax law should be easily understood and implementable across the board.

Dr Muhammad Abdul Mazid is the former Chairman of NBR.

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.