Written by: Anuradha Biswas and Moumita A. Mallick
Objectives and Method
Bangladesh followed the British-Indian Income Tax Act 1922 until the country established Income Tax Ordinance, 1984 (XXXVI of 1984), effective from 1st July 1984. Since then several measures have been taken to revamp the tax system and reinforce the process of revenue mobilization. As a part of that journey, Bangladesh introduced the Value Added Tax on 1st July 1991. Lately, to change the tax structure, ample simplification and justification has been set in motion. Tax evaluations have been simplified, the tax collection process has been digitised, and the system acts more in accordance with the specifications and structures established by the World Customs Organisation (WCO).
On 10th September 2021, Youth Policy Forum (YPF) organised a webinar as part of their “Road to Reforms” series to discuss and understand the success, challenges, and gaps in Bangladesh’s taxation policies to map our way forward to form a new social contract. The panelists for the session were Dr. Mohammad Tareque, Barrister Nihad Kabir, Md. Farid Uddin, Dr. Nahida Faridy. Shafqat Shafiq was the moderator of the dialogue. In accordance with the webinar, this brief looks at how to modernise taxation policies and increase the tax base.
In the last 5 decades, Bangladesh’s tax structure has faced several changes. The climacterics, i.e., from establishing the country’s first Income Tax Ordinance to modernising and digitising the National Board of Revenue (NBR), are reviewed below.
Robust Taxation Policy for Public finance
Taxation policy is a highly sensitive matter for public finance as even a meagre 1 tk tax initially causes a 70% negative impact on GDP. The two therefore go hand in hand, with the understanding that the government has to use the money taken from tax productively. In the case of Bangladesh, it has been observed that 1tk invested by the government yields to almost 1.13 tk, which means that government expenditure positively impacts the economy. Hence, the investment is robust. It is to be noted that public finance and the fiscal state of the economy is dependent on the development of the country, therefore, a gap still persists for Bangladesh to reach its optimal level in this regard, aggravated by the knowledge that tax evasion is a common practice and tax reform is an ongoing key issue. Although NBR has re-engineered some policies that are still working properly, as witnessed in the Large Taxpayers Unit (LTU), they failed to implement the learnings from their best practices to other departments.
Turning to value-added-taxes, it is suggested to keep to one rate and not resort to any fluctuations or changes. VAT is highly applicable for Bangladesh as it is rather difficult to implement income tax in an economy where all the transactions cannot be recorded over the years. As for direct tax, the structural change of Bangladesh is commendable. Income tax was 12% previously and is now 30% of income.
Taxation System and the NBR: Major Drawbacks
Import tax (including VAT collected at the import point) has been the greatest source of tax revenue and not VAT, for the last 20 years. This leads to negative impacts as it adds cost for the consumers and the economy as the tax collected comes in from imports and not domestic income, thus, facilitating money laundering, evasion, misdeclaration, and overall making investments difficult. Import tax will remain the highest source of tax revenue unless there is a major reform in the NBR but unfortunately, there have not been sufficient reforms in the NBR for the last 15-20 years to mitigate this problem. In the last 40 years there have been digital interventions in the NBR. Although there have been many attempts at digitalisation, those weren’t successful. Moreover, fragmentation and discretion have been present in the system. It is suggested to take learnings from the systems that have worked well and to re-engineer the process. There can be no alternative to modernizing the NBR in order to become a high income nation by 2041.
One of the key issues is that the system that makes tax policies is the same system that implements those policies and collects the revenue. Hence, there lies a conflict of interest in the administration. Unlike Bangladesh, Non-OECD and OECD countries have a National Board of Revenue that engages in policy making and governance only and are independent of the executives of the tax administration system. The board is usually not responsible for collecting tax revenue; instead oversees the people accountable for tax collection or oversees tax implementation.
Last but not the least is the effect of VAT/Sales tax on the lower quartiles of the income distribution. More often than not, small taxpayers have to pay a rather higher percentage of tax relative to their income compared to the rest of the population. Such taxes are regressive in nature and tend to impose a large burden on low income groups but unfortunately are some of the greatest sources of tax revenue of Bangladesh.
Tax Awareness, Evasion, and Avoidance
The citizens of Bangladesh are not well aware of the taxation policies. It has been found that 90% of the women entrepreneurs are not acquainted with the 2021-22 national budget where the government is planning to waive tax on them. Furthermore, citizens take taxes as a burden to business and try to reduce their tax compliance by evading or avoiding paying tax. Tax evasion is a common practice in Bangladesh and NBR has re-engineered some policies that are working properly. NBR needs to be fully equipped with modern ICT instruments for collecting taxes effectively. Taxpayers’ opinions should also be taken into account for a good taxation system.
NBR and Economic Activity
The NBR is the entity in charge of the formulation and re-appraisal of tax laws and policies. In the 21-22 Budget, the government has decreased corporate taxes, which was a courageous decision. Reducing the tax burden would not only increase capital formation but also productivity, innovation and lead to economic growth. This decrease in corporate taxes should be gradual because it is impossible to reduce the tax from 25.5% to 20% in one go.
The administration should think ahead and make taxation policies upon understanding the economic conditions over the next ten years. Tax policies should be made considering the business, trade, resources and social investment environment because a tax burden over one industry will negatively impact it and its adjacent sectors. For instance, over reliance on export tax can hamper that industry and its adjacent sectors. As research regarding this is absent, the National Board of Revenue should engage in such research.
- Transition from Informal to Formal Economy where every transaction is identified and taxed accordingly by using Technology (Merchant Services, Electronic Payment services).
- Reduced reliance on Indirect Taxes (VAT/Import/Sales) and increased reliance upon Direct Taxes (Income/Corporate).
- Decentralization of Taxation Policy at LGA, District, Divisional and National levels to better capture heterogeneity in income/expenditure and implement taxation policies synchronous to Gini-Coefficients.
- Decoupling of NBR’s responsibilities (Governance, Administration, Execution and Research).
- Increased emphasis on research projects in Public Finance using International Standards.
The Way Forward
The NBR needs massive reforms, not only to influence the sources of tax revenue, but to also decrease the burden of businesses which have moderate to low income. The senior officials of the NBR have to be held accountable and there should be a detailed study on the modifications a senior official has made in the NBR. If we are to fulfill our vision of eventually becoming a developed country, we must act quickly and efficiently. Furthermore, a significant proportion of our GDP does need to come from tax revenue, yes, but new laws formulated to achieve that goal should match the dynamics of our country and a practical approach is more appropriate for problems related to taxation instead of a purely academic one.
This brief has been prepared by Anuradha Biswas (Associate, YPF) and Moumita A. Mallick (Policy Envoy, YPF), and reviewed by Shafqat Shafiq (Poverty and Big Data Fellow, YPF).
We also acknowledge the contribution of our Jobs and Economy Policy Network Team- Barsha Chowdhury, Sharar Chowdhury, Anika Bushra, Maliha Arosha Hasan, Anuradha Biswas, Moumita A. Mallick, Nayeema N. Khan, Rupita Tahseen Joyee and Sharmin Akhter
Thumbnail credit: Arpita Muhury