Home ›› 12 Oct 2021 ›› Opinion
Despite being one of the fastest growing economies even amidst the Covid-19, Bangladesh’s performance in terms of revenue earnings has room for much improvement. Bangladesh lags far behind the other South Asian countries in respect of tax to GDP ratio. Outdated tax system, now in practice, seldom generates expected amount of revenue earnings. As a result of a lopsided tax to GDP ratio, Bangladesh economy might face numerous challenges in the days to come. When it comes to addressing budget deficit, borrowing from external sources oftentimes takes precedence over state’s revenue earnings.
The introduction of VAT Law of 2012 was considered as a key tax reform. However, there are still snafus at regarding implementation. Reform of the income tax law, policies and procedures has also not happened as expected. The planned administrative reform of the NBR articulated in the Tax Modernization Plan of 2011 is yet to be fully implemented.
Against the backdrop of failure to achieve revenue earnings target in outgoing 7th Five Year Plan (FYP), the government is committed to bringing structural changes in tax related affairs. Tax law, tax collection, tax audit, tax policy will be modernised as part of tax reform by 2025.
Bangladesh is home to about 164.7 million populations. It is worrying that out of 5.62 million e-TIN holders, slightly more 2.5 million e-TIN holders have been recorded to file returns and pay taxes. As a result of this small proportion of tax payers, Bangladesh ranked lowest in terms of tax to GDP ratio in South Asia region. With more or less nine per cent tax to GDP ratio, the economy is struggling to get over unexpected calamities like Covid-19. The tax to GDP ratio for Nepal and India are 23.1 per cent and 16.8 per cent respectively. It is noteworthy that the 8th FYP has planned to expand tax revenue to GDP ratio by 9.8 per cent in FY 22, 10.6 per cent in FY23, 11.3 per cent in FY24, 12.3 per cent in FY 25. Besides, the government, through the Fiscal Framework of the Perspective Plan 2041, is set to attain a tax to GDP ratio around 17 per cent by FY 2031 and 22 per cent by FY 2041. If tax revenue target is not achieved within the stipulated time, the state has to borrow more from external sources aiming to address development and unexpected cost.
Due to arguably antiquated tax system now practiced in Bangladesh, the government is losing huge volume of taxable income. On the other hand, a majority of the foreign citizens, who work in Bangladesh, have already turned into tax dodgers. Transparency International Bangladesh (TIB) already voiced concern regarding the alleged tax evasion by foreign nationals who are working in different sectors in Bangladesh. The TIB study titled “Employment of Expatriates in Bangladesh : Governance , Challenges and Way-out” revealed that overseas employees working in Bangladesh remit around $ 3.1 billion through illegal means, evading government tax worth about $ 1.35 billion every year. Only a pragmatic and judicious tax policy can minimise the loss that Bangladesh economy is incurring.
An independent international organisation-Tax Justice Network revealed that Bangladesh is losing more than $ 703.40 million in taxes per year- third highest revenue loss in South Asia. The report prepared by Tax Justice Network titled “The State of Tax Justice 2020” indicated how much tax a country loses for private tax evasion and international corporate tax abuse. According to the report, the highest amount of tax loss in South Asia is faced by India ($ 10.32 billion) and Pakistan ($2.53 billion). The report pointed out that Bhutan ($ 0.09 million) saw the lowest amount of tax revenue loss per year in the region. The figures for Maldives, Nepal, Sri Lanka and Afghanistan are $0.69 million, $9.26 million, $ 104.81$ and 2.89 million respectively.
For the greater interest of the economy, many sectors have been brought under tax exemption coupled with tax deduction resulting in losing required amount of taxable income. In the budget for FY 2021-22, reduction of corporate tax, reducing of ransom on VAT dodgers, tax waivers on condition of establishing hospitals in remote areas have been introduced. According to media reports tax to GDP ratio in fiscal year 2019-20 was recorded about 9.9 per cent, but the figure was to hit 17.81 per cent if tax exemptions by the government were not applied.
It is pertinent to mention that the government in FY 2019-20 provided tax exemptions of around Tk 2.5 lakh crore in the aim of facilitating growth targeting different sectors. A newspaper report stated that the National Board of Revenue (NBR) recently offered tax benefit in order to popularise SUKUK, an Islamic financial bond. The report also revealed that
VAT waiver ranging from 7.5 per cent to 15 per cent would be granted for making SUKUK bond vibrant in Bangladesh economy.
According to the General Economic Division sources, 7th FYP projected that the tax-GDP ratio would be 13.7 per cent for FY 20. The actual ratio was 7.9 per cent. The 8th FYP made projection that Tax-GDP ratio would be 12.25 per cent at the end of fiscal year 2024-25. It is expected that within the tenure of 8th FYP, tax policy will have been reformed. The recommended reforms in the 8th FYP are noted here: 1) Full adoption and effective implementation of the original VAT and Supplementary Duty Act 2012 starting in FY2022; 2) Incorporating Alternative Dispute Resolution (ADR) in Income Tax, VAT and Custom Acts; 3) A thorough overhaul and simplification of Income Taxes with implementation in FY2023; 4) Adoption and implementation of the new Customs Act in FY2022; 5) By end of FY 2022, introduce a proper system of property taxes with revenues earmarked for local; 6) Separate tax planning from tax collection; 7) Starting FY2024, selection of NBR Chair and the new
Chair of the Tax Policy Unit should be done on a professional basis with a 5-year fixed term appointment; 8) Provide adequate resources and autonomy to NBR Chair and the Chair of Tax Policy Unit to modernise their respective offices with the latest technology, professional staffing and policy and research capabilities.
If tax revenue can be increased in a planned way, dependency on foreign loans would naturally come down. Meeting the expenses of mega projects requires a huge volume of foreign loans right now. In the context of Bangladesh, foreign loans now stand reportedly close to $ 50 billion. Many projects in Bangladesh are now awaiting external supports to be inaugurated. Failure to generate expected revenue primarily due to the catastrophic impacts of Covid-19, has made it difficult for the government to meet unexpected expenses with internal sources where tax revenue is a key source. We can be optimistic that reform of tax policy will help generate a sizeable amount of tax revenue in future that will ease the burden and help the economy to flourish.
The writer is an economic affairs analyst. He can be contacted at [email protected]
