The critical issue of low tax to GDP ratio

The tax-to-GDP ratio is a ratio of an economy’s tax revenue relative to its gross domestic product (GDP), or the market value of goods and services a country produces. The higher the GDP, the more tax a nation should collect. It is a cardinal aim to increase the tax-to-GDP ratio to address deficiencies in the budgets.  Analysts, economists, and government leaders can review the tax to GDP ratio to see the rate at which taxes fuel a nation's economy. The tax-to-GDP ratio is also used in conjunction with other metrics to measure how much a nation's government controls its economic resources. Tax revenue is income collected by governments through taxation. It includes revenues from income taxes, product sales tax, payroll taxes, and other items. Tax revenue in underdeveloped and developing countries is typically insufficient to fund state operations. Tax GDP ratio is a crucial determinant in assessing the vibrancy of the government to meet the various socio-economic needs of a country to ensure both growth and equity in the distribution of income. A higher tax GDP ratio with a narrow tax net imposes a burden on the honest tax payer; tax evasion may be rampant and the revenue target may not be achieved

The tax gap refers to the difference between taxes receivable and taxes collected. Generally speaking, the tax gap is the gap between the amount that should be levied and the amount actually levied. In Bangladesh, the account of tax gap seems to be the same as the amount of tax evasion, but there is a certain difference, the two cannot be replaced with each other.

The actual tax revenue includes the tax overdue payment and fine, so the calculated tax gap is smaller than the required gap.

In macroeconomic models and statistics, there is generally no underground economy. If take into account the underground economy, taxes should be increased.

The taxpayer declares the project that should be declared, but he does not have the funds to pay taxes. This tax has passed the examination and approval of the taxation authority and does not belong to tax evasion. With this factor in mind, the gap should be reduced.

If the taxation authority does not levy taxes, the fault of the reduction in tax revenues should be borne by the taxation authorities, which means that the taxpayer has not violated the law. With this factor in mind, the gap should be reduced.

From the above analysis, it is clear that the tax gap cannot explain only the tax evasion and tax non-compliance. However, the tax gap can be used to carry out horizontal comparisons between countries (regions) to reflect the severity of tax evasion and tax non-compliance between countries (regions), or be used to carry out vertical comparisons of countries (regions) to reflect that countries (regions) do not at the same time, the severity of tax evasion and tax non-compliance.

Bangladesh's tax to GDP ratio is one of the lowest in the South Asian region. Close studies show that high tax rates, multiple tax rates, complexity of tax laws, corruption among tax payers and collectors and inefficient tax authorities are the main causes of high tax evasion in Bangladesh. As many as two-thirds of the eligible taxpayers evade taxes. Tax evasion occurs when individuals deliberately do not comply with their tax obligation. Cuts in tax rates, simplifications of tax laws, removing loopholes in the tax system and proper processing of information available under the annual information return are seen as the best tools for improving tax compliance. There is also a need to educate the people and their elected representatives about the tax law and create taxpayer-friendly environment such that they pay their due taxes, do not evade the tax and feel proud in making a financial contribution to nation-building.

The size of the informal economy remains large despite structural transformation from agriculture towards more formal industry and services. For instance, over 85 per cent of total employment is informal employment. Income generated by the operators in the sector, in many cases, is not officially captured in the tax net of the NBR. Informal sector forms the greater percentage of tax defaulters, increasing cases of tax evasions. The revenue potential from the informal sector comes with significant administrative costs due to a large number of informal firms and entrepreneurs and the difficulties in monitoring them. Also, many firms often prefer to remain informal to avoid the regulatory complexities that come with formalization. The SoEs in Bangladesh, the public sector entities and projects do not pay tax in proper amount and on time. There has been a huge amount of tax dues returnable to NBR.

An important way to study the tax gap is to examine the size of the tax gap in a country by analyzing the size of the underground economy and its influencing factors. The size of the underground economy is directly related to the institutional infrastructure. The institutional infrastructure of a country mainly includes the intensity of government regulation, the establishment and implementation of laws, the degree of judicial independence, the size of effective tax rates, the effective provision of public goods or services, and the effective protection of property rights. It is generally believed that the higher the level of government regulation, the greater the size of its underground economy and the greater the tax gap and vice versa. When government over-regulation occurs, an alternative relationship exists between the size of the underground economy and the size of the official economy. Some believe that higher tax rates can raise higher tax revenues, and the government can provide higher levels of public services accordingly, thereby attracting more companies and individuals out of the underground economy, resulting in a healthy balance of “high tax rates, high taxes, high public services, and small-scale underground economy,” but low-tax countries, because they do not have enough income to provide high levels of public services, will form a vicious balance of "low tax rates, low taxes, low public services, and high-scale underground economy." In the above-mentioned healthy balance, the tax gap is relatively small; in the vicious equilibrium, the tax gap is relatively large.

The writer is a former Secretary and Chairman, NBR. He can be contacted at [email protected]