In pursuit of a pro tax-payer revenue regime

Establishing a pro -Tax payer environment in an emerging economy like Bangladesh where Tax GDP ratio is hovering around 10-11 point, require very close review of existing rules and regulations one by one, if not word by word in fitting with present day demand of social norms and business practices.

If these regulations have to be effectively enforceable, prudently practiced, impartially implemented in a free and democratic environment unlike past colonial regime, it has to be such a public law framed by the lawmakers who should also be within its jurisdiction. Appropriate ownership has to be established for each item of law equally on every footing. The reform should not be limited to reduce or introduce new taxes, but to make the tax code simpler, fairer and better equipped to promote economic growth. Any proposal would have to be revenue neutral. Global good practices should not only be incorporated in the reorganized law, it is needed to take suggestions from the stakeholders. It has been appropriately argued that the reorganization proposals be made in stake holder’s vernacular (in Bangla) for their better comprehension and suggesting modifications. It has to be simple, comprehendible, non duality in meaning and interpretation, delegable, assertive but with adequate relieving and remedial provisions. Mindset of the tax collector and payer must be pro revenue and cannons of tax law should be digestible and implement-able across the board and be applied without fear and favor.

Taxation, as an influential instrument for revenue income for the state, was very much therein ancient and medieval India in different form and style but the modern Income Tax systems as we know it today was first introduced by the British government in India. After the Mutiny in 1857 the country was in a bad state financially when the British Government took over the power. James Wilson (1805-1860, the first Finance Minister in India introduced a Bill in the Indian Legislature to restructure tariff laws. Not just that, he also introduced the budgetary system and paper currency, he stood out for floating the Income Tax Act in India in his first ever Budget Speech on 7th April, 1860.

Though the modern income tax was introduced in 1860, first formal tax law was promulgated in 1882, compiled and finally the Indian Income Tax Law, 1922 came into being, which anthologized the entire annual amendments so far. The Income Tax Law of 1922 was adopted by India and Pakistan in 1947 and later by Bangladesh in 1972 just by replacing the word ‘India’ by ‘Pakistan’ and ‘Pakistan’ by ‘Bangladesh’ respectively. Republic of India reformed its own income tax law in 1961 and Bangladesh in 1984 as an ordinance as there was no parliament in session at that time. After a long demand and decree anew income tax law is now in the making and it is hoped that it will be enacted by the law makers in the parliament. The national income tax-reform panel submitted the proposed changes to the tax breaks people have come to expect -- as well as to the complexity and costs of filing that many have come to loathe.

To be sound, a tax system must be economically efficient, logistically economical and inflicting as little damage as possible on the economy. Every tax system distorts economic decisions and leads to less economic activity than otherwise would occur, resulting in what economists call “deadweight loss.” A sound tax system should be designed to minimize these losses. It should impose the smallest possible compliance costs on taxpayers otherwise people will not be encouraged to pay tax, rather they will be inclined to evade tax. Every tax system imposes direct costs on taxpayers in terms of time devoted to tax preparation or money to buy the services of CPA’s. Ultimately, every tax system diverts a portion of tax revenues raised by the tax to pay the cost of administering and collecting the tax and enforcing its provisions. A sound tax system would minimize these costs.

A nation’s tax system is often a reflection of its communal values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing the tax system, these choices reflect the type of community that the public wishes to create. In countries where the public does not have a significant amount of influence over the system of taxation, that system may be more of a reflection on the values of those in power.

Debates about taxes usually devolve into “the wealthy can afford it” or “it is unfair to be taxed so harshly”. Neither argument has merit. Tax the wealthy too harshly, and they will stop creating wealth. Tax them too leniently, and either society will be unable to govern itself, or the rest of society will be so harshly taxed that it will rebel. It is entirely a matter of practicality. Fairness never enters into it. As pundits of the past have put it “If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code, once you get to know it, embodies all the essence of life: greed, politics, power, goodness and charity.”

A sound tax system should be embedded with four outlook, principles, firstly Pay what you owe: an economically neutral tax is unbiased across the spectrum of economic activities. Removing complexity and limiting the collection points for taxation also makes the system more transparent, making the public more certain that everyone is paying what they owe, and more comfortable with the fairness of the system. Secondly, Transparency: A tax system is transparent to the taxpayers if it is clear how much the government is costing them (and who is paying for what). Without transparency, the public isn’t able to accurately asses how their money is being spent and thus isn’t able to hold their representatives appropriately responsible. Thirdly, Equal treatment under the law. Equality of opportunity should be the linchpin to our tax system, not equality of outcomes. The tax system shouldn’t be manipulated into an instrument of wealth redistribution or social engineering and or political vengeance. Fourthly, Simplicity: A tax system shouldn’t be gratuitously complicated beyond what is required Simplicity is the best sort of medicine for the tax-inflicted headache.

To be sure, the most visible, fluid tax systems are the most neutral and simple. Just a little bit effort by the citizens should be required in paying taxes. This is a necessary evil. Otherwise, the government could do and take whatever it wanted. Citizen-voters have a minimal responsibility, if not civic duty, to participate in this, a fundamental component of democratic society.

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