Tax exemptions

For a developing country like Bangladesh, it is not advisable to thoughtlessly allow generous tax exemptions. We know that it is not easy to assess their economic impact or prevent their abuse by powerful vested interests.

When and where it is necessary to allow a tax concession as an incentive for investment or for any other reason, it should be done in a completely transparent fashion.

Not all tax exemptions — the indirect, off-budget expenditures governments accrue by removing or reducing assigned tax liabilities that a person or a business is required to pay on income, property or transactions — are bad. Policymakers everywhere use them to attract new investments in one or more sectors of the economy, support struggling businesses, develop infrastructure, help people or boost growth. Sometimes such exemptions are necessary to make a country’s tax regime simpler, more progressive and less opaque, and to reward compliance. But such concessions often become a drag on government budgets, undermine fair competition and discourage fresh investment, besides slowing down growth in underdeveloped countries like Pakistan. Why? Because the authorities don’t have the capacity or will to design tax expenditure in a transparent manner to affect firms’ investment decisions and fuel economic growth; instead, they cater to one power lobby or the other for various, including political, reasons.

Tax exemptions have always remained a popular tool for successive governments in Pakistan to shower favours on business lobbies for their support in spite of pressure from multilateral lenders to curtail these indirect expenditures in view of their impact on government budgets.

A report published in this newspaper on Monday reveals that the National Board of Revenue is giving in to the pressures of companies seeking tax cuts. Regarding this issue, World Bank Dhaka Office’s former lead economist Zahid Hussain said, “The government must drop rebates and exemptions down to a rational level, which is an IMF recommendation too.

“Rebates and exemptions are also the key factors behind rampant tax evasion. Some companies also go to the higher courts to avail facilities and settle tax evasion cases too, contributing to the growing outstanding dues which are claimed by NBR.”

According to the latest NBR data, the board is yet to recover Tk 74,539 crore out of Tk 94,607 crore in taxes and duties until FY2021-22, as claimed by the audit of the tax, VAT and customs offices. The exemptions and evasions have played a major role in leaving NBR behind its actual target.

One of the inbuilt unfairness in the taxation is the fact unfairness is that most of those who have to pay taxes or are fine with paying these taxes also feel they do not get much in return from the state. The state offers health and education facilities of average quality generally speaking.

Despite promises made by successive governments, the state has been unable or unwilling to expand the tax net. But the need for revenues and the pressure to generate revenues increases every year. The state, whether it likes it or not, ends up either relying on indirect taxes or on milking those who are already in the tax net even more.

The extensive use of tax exemptions, incentives and special provisions also limits revenue collection as the effective tax base becomes much narrower than that of the standard tax regime. Generally, it is argued that widespread exemption encourages tax evasion, erodes tax equity and creates distortions in the economy. Various other tax breaks legally keep many more people off the tax roll.

On the other hand, certain companies continue to get tax exemption. On a more positive note, NBR Chairman Abu Hena Md Rahmatul Muneem recently told the media that they cannot completely withdraw the tax exemptions all at once anytime soon but they plan to reduce them gradually.