"Income Tax Authoritise in Bangladesh" Term Paper

 Introduction:

Tax revenue refers to compulsory transfers to the central government for public purposes. Certain compulsory transfers such as fines, penalties, and most social security contributions are excluded. Refunds and corrections of erroneously collected tax revenue are treated as negative revenue.

“Recently, a section of our society has become remarkably affluent. The government, however, is not receiving due taxes from this section of the society. We need to provide a lot of incentives and motivations to expand our revenue base. For instance, we provide considerable tax exemptions in areas where employment opportunities are created. As export helps increase demand for production, we provide various incentives and tax holidays for exports”—M.A.Muhit, Minister of Finance, Government of Bangladesh, Budget Speech 2010-11

Most developing countries are increasingly focusing on domestic resource mobilization toward economic development. In this context, tax performance is of crucial importance, especially for a developing country, since it is the prime source for domestic resource mobilization. Many developing countries often face difficulty in augmenting tax revenue to the desired level and considerable attention is being devoted to formulating fiscal policy best suited for increasing revenue.

Bangladesh, as an emerging developing country, is committed to augmenting revenue and achieving fiscal discipline with a view to increasing self-reliance. The external environment influencing the tax performance of Bangladesh has changed remarkably as the country became increasingly integrated with the global economy during the 1990s (McCarten, 2005). In recent years, the Government of Bangladesh has initiated some administrative and policy reforms in the tax system. An improved tax administration in association with some pragmatic policy initiatives has resulted in a modest improvement in the tax-GDP ratio of late. However, the performance is still unsatisfactory as compared to other countries at a similar stage of economic development.

Tax Administration in Bangladesh

National Board of Revenue (NBR) is the central authority for tax administration in

Bangladesh and collects almost 75.37 percent of total revenue for the country, non tax revenue 20.88%, revenue beyond NBR 3.76%.  (NBR Annual Report, 2007). It was 78% in 2000.

Tax revenue constitutes around 80 percent of total internal resources in the country. The NBR under the Internal Resources Division of the Ministry of Finance is the apex tax authority of Bangladesh and collects about 95 percent of the country’s total tax revenue. The non-NBR portion of tax mainly includes narcotics duty, land revenue, non-judicial stamp, registration fee and motor vehicles tax.

Main features of Bangladesh Tax Structure

1. Tax-GDP ratio is very low

In FY 1999-00, revenue/GDP ratio was 8.47 percent, which gradually rose to 10.79 percent in FY2005-06. In FY 2007-08 the revenue/GDP further rose to 11.17 percent and the increasing trend of revenue-GDP ratio further enhanced to 11.24 percent in FY2008-09. Table 1 shows tax and non-tax revenue receipts and tax-GDP ratio during the period from FY1999-00 to FY2008-09. As Table 1 shows, the tax GDP ratio in Bangladesh is very low, it is less than 10%. Though tax-GDP ratio has risen from 5% in the early 1980s, it is still very low compared to even the neighboring countries. It is also lowest among the developing countries. 

             

Table 1: Revenue as percentage of Gross Domestic Product

Year	Total Revenue as % of GDP	Tax Revenue as % of GDP	Non-tax Revenue as % of GDP
2000	8.47	6.78	1.69
2001	9.6	7.8	1.8
2002	10.21	7.81	2.4
2003	10.35	8.30	2.05
2004	10.63	8.5	2.13
2005	10.57	8.62	1.96
2006	10.79	8.70	2.09
2007	10.58	8.40	2.18
2008	11.30	8.96	2.34
2009	11.25	9.03	2.22
2010	11.5	9.3	2.20

Source: Bangladesh Economic Review 2010, Ministry of Finance, Government of Bangladesh

2. Heavier Reliance on Indirect Taxes

 Total taxes in Bangladesh are divided into direct and indirect taxes. Direct taxes in Bangladesh consist of taxes on income (income tax, corporation tax, agricultural income tax) and taxes on property (wealth tax, gift tax, estate duty, capital gains tax, urban property tax, house rent, land revenue, registration and non-judicial stamp). Like other developing countries, direct taxes contribute little to overall tax revenue in Bangladesh. As Table 2 shows, around 75% of the total tax revenue in Bangladesh is comprised of indirect taxes. The direct taxes in general accounted for less than a fourth of the total tax revenue of the country. Traditionally, the tax structure of Bangladesh is such that it has to rely on indirect tax for revenue generation, which is discriminatory in nature.

Table 2: Composition of Tax Revenue in Bangladesh

FY	Direct Taxes (%)	Indirect Taxes (%)
2003	22.96	75.78
2004	22.04	76.88
2005	21.87	77.21
2006	22.95	76.20
2007	23.13	75.81

Source: NBR, cited from Bangladesh Bank, Working Paper Series: WP0715, June 2007

Among the indirect taxes, VAT constitutes 39 percent of total tax revenue for FY09, followed by supplementary duty as shown in figure 1. Taxes on Income and Profit occupies major share of direct taxes, with 26 percent of total tax revenue in FY09.

The sources for such high growth of revenue collection in the recent years are the increase in income tax and value added tax (VAT) at local stage which grew by 20.83% and 25.60% respectively.

A slow move towards increasing the income tax is being observed recently. The proportion of tax is targeted at 29% and of VAT by 35% in FY11. In an effort to improve the revenue scenario revenue tax-GDP and revenue-GDP ratio have been targeted to be to 9.3% and 11.6% respectively in FY11 as opposed to 8.8% and 11.5% respectively in FY10.  

Table 3: Composition of Tax Revenues in Bangladesh-FY 2008-09

	Percentage
Vat	39%
Supplementary duty	16%
Excise Duty	0%
Income Tax	26%
Other taxes and duties	1%
Import Duty	18%

Source: Bangladesh Economic Review 2010, Ministry of Finance, Government of Bangladesh

3.  Narrowly Based Tax Structure

Both direct and indirect taxes are quite narrowly based in Bangladesh. For example, in direct taxes, agricultural land has not been a buoyant source of revenue as the rates have not been revised periodically (McCarten, 2005).  A significant number of tax expenditure measures exists in both direct and indirect taxes which creates an adverse impact on the overall revenue effort.4

4. Low Revenue Productivity and High Administrative Costs

Empirical studies have found that poor logistics, lengthy procedures, unofficial payments, etc. of Bangladesh tax system lead to high administrative costs and low revenue productivity (McCarten, 2005).

Tax Effort Index of Bangladesh

Bangladesh is a lowest tax effort country among the developing countries. According to a study conducted by policy analysis unit of Bangladesh Bank found that Bangladesh as the lowest tax effort country in the sample, with an average tax effort index of 0.493. This has important policy implications that Bangladesh and other countries having low tax effort (less than unity) are not utilizing their full capacity of tax revenue, and therefore, have the potential for financing budgetary imbalance through raising tax revenue. The tax effort index for both direct and indirect taxes is below 0.6, implying that Bangladesh has the potential for raising revenue collection from both direct and indirect taxes. In terms of tax buoyancy, Bangladesh ranks the second highest among the sample countries, with a tax buoyancy ratio 1.235, meaning that tax revenue is quite responsive to GDP and effort has been made to increase tax revenue over the period.

Table 3: Index of direct and indirect tax effort of Bangladesh FY 2000-FY05

FY	Direct Tax Effort Index	Indirect Tax Effort Index
2000	0.614	0.468
2001	0.588	0.477
2002	0.612	0.504
2003	0.609	0.520
2004	0.56	0.540
2005	0.513	0.553

Source: A Panel Study on Tax Effort and Tax Buoyancy with Special Reference to Bangladesh, Lutfunnahar Begum, Policy Analysis Unit Bangladesh Bank, Working Paper Series: WP0715, June 2007

Distribution of tax burden among different categories

Taxpayers can be categorized into three main groups; corporate tax payers, salaried tax payers and other tax payers. The elite group consists of corporate taxpayers, in terms of no. their percentage is very low. In 2000 it was 3.02 percent, the salaried taxpayers share is about 18.81 percent and the largest group consists of remaining all others and mainly those who have income from business and profession is about 78.18 percent.

Corporate tax payers      

Corporate sector though has a poor number of taxpayers paying almost major portion of total income taxes and the majority come from small no. of foreign companies.  The corporate tax in Bangladesh is 45%, in-fact it is effective 23.3%. According to marginal effective tax rate (METR), the METR for a 4 year tax holiday is 23.3 percent; it falls to 9.6 percent for a holiday period of 8 years and to zero for 12 years. Besides, If any publicly traded company declares more than 20% dividend, 10% rebate on total tax is allowed. 

  

Table 4: Incidence of tax for company/corporate sector, FY2010-11

Type/category	Tax rate
Publicly traded company	27.5%
Non-publicly traded	37.5%
Bank, Insurance and Financial Company	45%

Source: National Board of Revenue

Tax holiday and revenue losses

The existing tax law permits, extension unit of an industry to be entitled to tax holiday. Such facilities of granting tax holiday have been found ineffective. A mechanism of internal transfer pricing could be arisen as a vehicle for perpetual tax holiday. As observed, the present income tax act is full of rebates and exemptions (Hussain, 1999). It is now needed to minimize and to come straight to a threshold of income, which is taxable. The present scheme of granting tax holiday has not been a very good experience.

Under the tax holiday, revenue loss arises from two main sources. The first is direct loss due to exemption of company income during the holiday period. The second is the loss due to the transfer of profits from companies under standard tax rules to companies benefiting from tax holidays. The transfer of profits has been commonly observed in countries where tax holidays are granted.

The NBR has attempted to estimate the size of revenue forgone under tax holidays. A major problem was encountered, however, as a large number of companies under tax holidays failed to file tax returns as required. Based on the partial data available, the NBR placed the amount of tax revenue loss over a five-year period (from FY1980 to 1984) at TK 40 million per annum. In an alternative estimate by World Bank, the expected revenue loss is about TK 126 million per annum

Tax holiday creates distortion in taxation mechanism

The benefits of the tax holiday are being enjoyed mainly by the garment industries. Their growth has enhanced due to external factors. Even if the incentive of tax holiday were not given, the garment industry would have grown up and the state would have earned quite a substantial amount of revenue from the industry. Thus the revenue foregone does not appear to be fiscally efficient (Waresi, 1998). However this has not been able to foster industrial growth in different regions of the country. Such a perpetuating provision for tax holiday creates distortion in taxation mechanism and against the norms of equity and neutrality. It is thus important to restrict such unbound opportunities for the sake of better future of the country. 

Black money is being laundered through the mechanism of tax holiday

Under the present arrangement any income accruing from poultry, fishery, livestock etc. is exempted from income taxes until June 2011. This provision is being abused indiscriminately. A lot of black money is being laundered into the market through this mechanism. One potential remedy should be to allow an initial support to this sector then bringing back them under the purview of taxation.

Registration in stock exchange and its affect on tax revenue

In case of Bangladesh, publicly traded companies or companies listed to the stock markets usually enjoy some extra privileges.  If any publicly traded company declares more than 20% dividend, 10% rebate on total tax is allowed.

It has been experienced in Bangladesh that a number of companies are reluctant in paying dividend to the shareholders so regularly rather retain their earning for tax purposes. As a result, not only the shareholders are deprived, the general investors are also discouraged from investing in capital market. It seems government might has to use some tax instruments to cope with such problem. It is really necessary to reduce the corporate tax rates to level for improved tax compliance and also to promote investment and industrialization. The challenge is thus now to obtain an optimal rate of taxes for the corporate sector that might not be hindering the countries economic growth. 

Secondly not all the companies invest equally in share market, in 2006 the Barger Bangladesh (a multinational company) got tax holiday TK 3.8 crore only investing 5% primary share and the rest of the company invested 20%.

It was also found that a portion of privately owned companies paying no taxes for the government and showing negative income and revealed as losses (13% in FY 2000).

Personal income tax

Narrow tax base

The present income-tax base of Bangladesh is one of the lowest even among the developing countries. Less than 1 percent of are within the tax net. In case of personal income taxes, the burden is unevenly distributed among the registered taxpayers. In reality a major portion of taxes is paid by a small group of people with higher marginal rates. A number of registered taxpayers always remain in lower income groups for either due to mainly more available tax incentives or tax exemptions and share a little burden of taxes often at lower marginal rates. In case of Bangladesh, such taxpayers are small and medium traders and manufacturers. A lot of investment remains untaxed due to tax amnesty is a problem too for Bangladesh. Substantial amount of taxpayers having business income remain in losses those are subject to set off for several years also remain outside actual tax net. In that sense, the wage earners seems rightly taxed as such taxes are withheld by employer and paid by them

Table 5 : Incidences of personal Income Tax  (FY 2011)

Income Classification in TK	% of payable tax for male	% of payable tax for female
First, 1,65,000/-	Nil
First, 1,80,000/-		Nil
Next 2,75,000/-	10%	10%
Next, 3,25,000/-	15%	15%
Next, 3,75,000/-	20%	20%
Rest Amount	25%	25%

Inequality in taxing Wages between Private and Public Sector

In Bangladesh, income tax for government employees is deemed paid by their employer that is government. However, if a private employer pays income tax for its employees, such payments are considered income, which creates additional tax  burden for the employee of the private firm. This seems discriminatory, that encourages employees of private firms to avoid or evade taxes.

Conclusion

Bangladesh is 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.  There are unlimited tax exemptions and tax holidays, poor tax base, inequality of taxing, repeated tax amnesty etc. Therefore, it is important to place greater emphasis on administrative reinvention and policy reform in order to identify and remove the loopholes in the revenue generation process.

Corporate tax collection might face a blow in the current fiscal as taxmen predict a poor growth in businesses of the large companies including private commercial banks and mobile phone operators.

Income tax officials said achieving the target for the current fiscal would be a big challenge as it is quite ambitious considering the sluggish performance of the economy and poor investment.

In a recent letter, the large taxpayers unit (LTU) requested the National Board of Revenue (NBR) to revise its target for corporate tax collection for the fiscal year (FY) 2012-13.

The government has set the target of tax collection at Tk 123.50 billion for the LTU. Banks, financial institutions and cell phone companies are the main areas of business that come within the operational domain of the unit for the purpose of tax collection.

According to the official figure, the LTU missed its target of revenue collection in the first half of the current fiscal. It collected Tk 42.91 billion in revenue against its target of Tk 43.85 billion for July-December period.

A senior tax official said the government had set the target for the current fiscal expecting 31.31 per cent growth over the previous year’s revenue collection, but the economy was not moving at the projected pace of growth.

From fiscal 2009-10 to fiscal 2011-12, the corporate tax collection witnessed an average 23.68 per cent growth over the correspondingly relevant previous FY, but for fiscal 2012-13 the government has targeted 31 per cent growth which, as the current trends indicate, is difficult to achieve.

There are 1040 taxpayers, including corporate and individual, under LTU. In the current fiscal, the government transferred a big revenue-earning sector to another tax zone. Last year, the LTU received the revenue as Advance Income tax (AIT).

Analysing the quarterly reports of banks and one major telecom operator, the taxmen found that the profits of Grameenphone and the banks were not increasing significantly, causing a shortfall in the collection of corporate taxes.

“Even, it is a challenge to collect the amount of the previous year’s tax as a large revenue-collecting sector dealing with at-source tax, has been transferred to another tax zone from LTU,” the LTU’s letter said.

Last year, deduction of tax from commission, discount or fees to distributors was under the LTU that had contributed Tk 2.0 billion to the national exchequer, it said.

In the letter, the LTU said the NBR had set 39.29 per cent growth in July-December period of the current fiscal over the corresponding period of the previous one.

For January and February this fiscal, the NBR set Tk 5.75 billion and Tk 10.34 billion as revenue collection targets respectively, expecting 39.82 per cent and 89.72 per cent growth likewise over the corresponding period of the last fiscal.

“The target for February has been estimated, envisaging a 90 per cent growth in corporate tax collection,” the letter added.

Usually, the LTU receives corporate tax in quarterly installments from banks in September, December, March and June in every fiscal.

“Usually in the last month of any fiscal year that ends in June, the NBR receives the highest amount of tax as it is the deadline for submission of tax returns of many companies. Also, a large amount of revenue comes as AIT from the development works of the government,” the letter said.

In a review of last three years’ revenue collection target, it has been found that 33 per cent of the annual revenue earnings was collected in the July-December period, while tax collection was poor in January, February, April and May.

Tax officials said the NBR has equally distributed the revenue collection target for all months that will cause shortfall in revenue collection target for those four months.

Usually in the month of June in every fiscal year, the tax offices collect 25 per cent of their annual revenue earnings.