SUPRO, in collaboration with the Oxfam and the “Capacity for Research and Advocacy for Fair Taxation (CRAFT)” consortium recently conducted a study on ‘Fair Tax Monitor Bangladesh’ in line with two African countries: Senegal and Uganda with the objectives to identify main bottlenecks in the country tax systems, provide strong evidence-based support for country-level advocacy work, and create a framework to compare tax systems of selected countries over time. The findings of study were shared yesterday in a Consultation Meeting with Media, Development Partners and CSOs at the Daily Star Building, Dhaka.
The tax system in Bangladesh is gradually improving, raising more revenue and reducing the dependency on aid. However, Bangladesh is still a low tax effort country having a high buoyancy ratio, implying that the policymakers of Bangladesh have the scope and potential to opt for greater revenue mobilization through internal resources in order to meet the budgetary deficit.
Share of personal income tax in total tax revenue has steadily been increased over the years but collection is still below the potential, considering size of the eligible taxpayers in the country.
The revenue earned from the wealth taxes (collected from those who have reported to have wealth above Tk 2 Crore) has increased over the last three but it is very low comparing to the total population.
According to NBR, only less than 1% of these taxpayers own assets worth over Tk 20 million, which is unrealistic and unbelievable. The actual value of the assets has not been properly assessed.
VAT remains the single-largest source of revenue for the Bangladesh government. VAT burden in the lowest income group is 6.92% – extremely high given the fact that the VAT burden of the highest-income group is only 4.56%. The average effective VAT rate is 6.01%, which is also higher than that of the highest fourth income groups’ people.
Under the newly adopted Seventh Five Year Plan, the government has set a target to raise the tax-GDP ratio to 14.1% in FY2019-2020. Although the government set a long-term goal for increasing the tax to GDP ratio, there are no effective measures to reach the goal.
The total numbers of tax payers in different categories have increased over the last three years. But still, a large number of potential tax payers are out of tax net. According to NBR survey 2014, the 79% businessman is out of tax net. In a country of around 160 million people, only around 1.2 million individuals and companies/organizations currently pay Income Tax.
According to Global Finance Integrity (2001-2010), the average illicit financial flow from Bangladesh was USD 1406 USD million and the cumulative amount is 14059 USD million for the period from 2001 to 2010.
The central bank of Switzerland disclosed recently that ‘secret’ money from Bangladesh deposited in different Swiss banks, rose by 62 percent year-on-year in 2013. The deposits, which stood at BDT 32.36 billion at the end of 2013, were BDT 19.91 billion in 2012, showed in the Swiss National Bank.
According to the Malaysian government website report, 2,874 Bangladeshis laundered about BDT 35 billion at least to have their second home in Malaysia and none was required to take approval from the authority in Bangladesh, as Malaysia does not asks about the source of the money.
There is a provision of investigating tax evasion but institutional weaknesses of the tax administration, lack of professional support for tax officials and inappropriate behavior of tax officials have undermined the efficiency of the tax policy implementation process.
The absence of a participatory policy making process, lack of research into, and reform of, the tax system, short-term oriented and politically motivated tax policies, loopholes, anomalies and complexities of tax laws and policies are responsible for creating tax evasion.
The NBR is not transparent in providing information about what they call sensitive information to the public. For example, there is no information available at the tax department on the revenue foregone due to tax exemption. The NBR does not publish the list of the companies that are benefiting from tax exemptions either.
In Bangladesh there is no good estimate of revenues forgone due to tax exemptions. At the time of preparing tax incentives, the revenues estimates are also not prepared. As a result, the actual cost-benefit accounting is not prepared.
Over the years, NBR has made efforts to digitize its tax administration. The tax administration however lacks digitalization in rural areas. Filing of tax files by an individual and the submission of tax return online is still not possible as NBR still maintains an outdated ‘control’ based system.
The discretion enjoyed by tax officials, as well as the overall inefficiency of data management within the NBR, has been exacerbated by a high degree of administrative fragmentation.
The NBR remains divided into three highly autonomous divisions: direct tax, VAT and customs. The relative absence of data sharing across departments severely undermines administration, and opens space for collusion, arbitrariness and abuse, while fragmentation also creates additional costs for taxpayers. These challenges have been consistently underpinned by significant human resource constraints within the NBR.
The NBR often struggles with a lack of human resources. During the 1990s the NBR could not recruit new officers due to a legal barrier. At present, the total number of positions in NBR is about 22,136. However, currently, only 11,831 are employed. Among them only 3,750 are first and second class officers who are directly involved in tax collection.
NBR has recently established transfer pricing cell. However, they do not have adequate capacity to audit international transactions of multinational companies.
According to the NBR report 2012-13, the cost of tax collection has been reducing but still there is scope to reduce the cost further. Currently NBR spends tk 1.35 for Tk 100 revenue collection, which is less than 2.5% of OECD cost. The cost of collecting direct tax is higher than indirect tax.
Bangladesh is perceived as one of the most corrupt countries in the world. According to the Transparency International’s Corruption Perceptions Index 2014, Bangladesh was ranked as the 14th most corrupt country in the world.
One of the weaknesses of tax the administration is insufficient oversight mechanism to check corruption. There are also no protection mechanisms for whistle blowers. There is no tax ombudsman office in Bangladesh.
The cases of tax evasion have been investigated; however the cases are often not resolved in due time. The Anti-Corruption Commission (ACC) also lodges tax evasion cases. However, the cases are often influenced by political nepotism.
Government income mostly (90%) depends on domestic sources; only 10% comes from foreign loan and grants. Tax and non-tax revenue are the main sources of government income, namely 60 percent in the national budget 2015-16 followed by domestic financing (19%) and foreign grant and loan. Borrowing from banking is the major source in domestic financing, which creates fiscal burden to pay interest on it.
The public administration receives highest allocation (19.2%) in 2015-16, followed by interest payment (11.9%) and education (11.6%). The allocation for interest payment is more than double than health sector allocation (4.3%).The allocation for health is less than defense budget (6.2%).
Education expenditure is represented as ‘Education and Technology’ where the government allocates money to the military run universities and technical colleges. This is presumably because the government does not want to show that the defense expenditure is much bigger.
Expenditures on education and health has remained either stable or declined in relation to GDP and declined in relation to total budgetary expenditure.
Spending on social sector programs has been declining in terms of total budget. With spending on education and public health at about 2% and 0.7% of GDP, respectively, cannot expect to provide the quality of education and health care services that the citizen’s of a middle income country would need.
Tax administration seems not to be accountable to the tax payers because they always try to generate income without any consultation with the tax payers.
The office of the Controller and Auditor General of the government of Bangladesh carries out regular audits, but not annually. The audit results are not debated in the parliament and are not available publicly.
The Ministry of Finance meets the CSOs, think tank organizations, business associations and professional bodies to seek opinion on revenue generation and spending. However views of the CSOs and others are merely considered in revenue policies at the national and local level.
There is no grievance mechanism for citizen to complain about errors and misconduct of tax authorities. Even, while taking decision on sensitive issues, the government does not consider creating mass awareness and raising people’s opinion on those issues.
Tax enforcement should be fair in order to treat every taxpayer equal according to the law. The need for greater fairness in enforcement is thus universal.
The tax system continues to suffer from unfair enforcement, widespread corruption and the failure to translate the tax revenues into public services. Greater political leadership and commitment is needed to overcome prevailing challenges.
Broadening of the taxpayers’ base and identify sectors. This will require monitoring of the ownership of all sizable physical and financial assets of taxpayers and determining the income generation out of those assets.
Wealth accumulation in Bangladesh is primarily happening through accumulation of urban land and real estate, untaxed/low tax income of the rapidly growing RMG sector, and relatively low tax incidence on income through financial instruments. This must change.
The simplistic manner of imposing Wealth Tax in the form of an Income Tax surcharge of 10% should be abandoned and the NBR should move to develop a proper “Wealth Tax” or “Property Tax”.
NBR has to build up its capacity for proper administration of property/wealth tax with proper study and identifying the right way to collect the tax, not simply by taxing the income tax in the form of a surcharge.
VAT in Bangladesh could be made less regressive by making a distinction between luxury goods and necessity goods. Supplementary taxes can be imposed on luxury goods.
VAT exemptions in Bangladesh should be limited only to basic health services, public transport, agriculture and agro-based industries and government education.
Undertake reform measures to determine the true value of property and apply property tax.
The number of income tax payers in Bangladesh is very low. The NBR should ensure a tax-payer friendly environment to bring more people under the tax net. People who are evading taxes must be brought under the law so that honest tax payers are not treated unequally.
While bringing the informal businesses under the tax net, it is important to ensure that the new tax payers are treated without hassle. Make strong political decisions not to allow the whitening of “black money”.
To curb illicit financial flow, along with the ongoing reforms actions need to be implemented according to the plan.
Focus on non-NBR sources and non-tax sources as they have significant potential of revenue generation. Study and analysis on the non-NBR and non-tax sources to diverse and expand tax coverage.
Tax exemptions and tax evasion in general are also contributing to the low revenue mobilization. Curbing tax exemptions and ensuring that all existing exemptions are approved by Parliament and open to public scrutiny are both feasible and necessary
The key to more effective management of tax incentives and exemptions is likely to lie in reduced discretionary powers in the granting of tax benefits, total transparency about the recipients of such benefits and an unambiguous mandate for the NBR to implement and monitor all incentives and exemptions.
VAT exemptions and zero rates are still tax foregone and there needs to be explicit criteria for determining what goods and services are exempt or zero rated.
Monitor the ownership of all sizable physical and financial assets of the taxpayers and determine income generation out of those assets.
Development of a central data base under NBR with assigned human resources would help follow-up on additional tax payments and also administer withholding agencies.
Tax related laws and rules are often found to be complex for an ordinary tax-payer. It is important to simplify tax rules in order to make them tax payer friendly.
Formulation of tax policies should be backed by evidence based research. For a progressive taxation, consultation with taxpayers, including individuals, business communities, civil society, experts and other stakeholders must be held.
Enhancement of the members of parliament’s capacity on tax related policy and practices and empowering of Public Accounts Committee need to be prioritized.
Strengthening and decentralization of the tax administration with professional tax officials and change the behavior of tax officials to tackle tax avoidance. Capacity of tax officials also needs to be enhanced while the vacant positions at the tax office need to be filled at soon as possible to ensure services to the tax-payers.
It is important to emphasize the mobilization of tax revenue with transparency and accountability to ensure more resources for public spending. The government must enhance budget allocation to the essential service sectors like health, education, social safety nets, food security etc. And ensure a balanced distribution of resources among sectors.
Transparency and inclusiveness are essential in fair tax systems. This implies that citizens should have detailed information about how taxes are assessed, how much tax revenue is collected and how that revenue is used. Measures to enable citizens to monitor the fairness of tax collection efforts and expenditure are crucial. The tax related data also needs to be published in a user friendly manner. Make use of information technology in tax governance and make the information public.
The role of civil society must be to generate broad-based political pressure for reform by actively engaging a wide public constituency, while the government must be willing to adopt fair tax policies and practices.
To conclude, SUPRO believes that the report covers the major areas of the tax system in Bangladesh and that it provides valuable recommendations for the policy makers and citizens. If the tax system is Bangladesh is to be improved on the basis of equity, these recommendations must be implemented at all levels of the tax administration.