Tax exemption facility eroding tax-to-GDP ratio

Bangladesh simply cannot afford to overlook the global recognition of a fast-growing economy accorded to her name, and not to act for further expansion of economic activities.

Foreign direct investment inflow has to be an indispensable part of Bangladesh’s economic development. Looking for new export markets as well as diversifying exportable products is equally important. The government is continuously offering tax exemption facility for the sake of economy. But, tax exemption eats up significant portion of the country’s GDP. Bangladesh’s revenue earnings scenario looked miserable with significant volume of revenue loss. It is worrisome to note that Bangladesh’s tax-to-GDP ratio is the lowest in South Asia. Bangladesh even ranked low among the low-middle-income countries in respect of tax-to-GDP ratio. Even among the countries set to graduate as developing countries, Bangladesh has the lowest tax-to-GDP ratio. Bangladesh ranks 165 out of 183 countries in terms of tax-GDP ratio, putting the spotlight again on Bangladesh’s dismal picture regarding tax-to-GDP ratio.

Over the last decade, Bangladesh saw annual GDP growth of 6.5 per cent on average. In the same period, average annual growth of tax collection in Bangladesh was recorded around 11 per cent. According to finance ministry sources, Bangladesh’s tax-to-GDP ratio in FY 2021 was 7.64 per cent. In FY 2013 and FY 2017, Tax-to-GDP ratio was 8.90 and 9.0 per cent respectively.

Many reasons are behind the falling trend of tax-to-GDP ratio. Alongside GDP, per capita income is also on the rise. Despite rising per capita income, revenue earnings have not increased as expected. There are around 17 crore people in Bangladesh. A total of 74 lakh people has tax identification numbers. But, not more than 25 lakh people do not submit tax returns file. According to a paper presented at a seminar on ``100 years of Income Tax Law of Bangladesh- Expectation and Achievement’’, India sees 71 per cent submission of tax return, 33 per cent in Pakistan, 88 per cent in Sri Lanka, 72 per cent in Nepal, 44 per cent in Bhutan. In Bangladesh, tax return submission is 31 per cent among TIN holders-lowest in South Asia.

The planning minister of Bangladesh in the seminar expressed dissatisfaction over the present scenario of revenue earnings in Bangladesh. “Why tax exemption practice is still continuing is unknown to me”-the minister said. Recently, the IMF visiting team expressed dissatisfaction over poor tax management system in Bangladesh. Modernization of taxation system came under IMF conditions among others. Full-fledged implementation of VAT law is mandatory right now. The IMF wants to see fiscal flexibility as early as possible prior to disbursing $ 4.5 billion loans in the form of installment. Tax holiday is allowed to industries subject to the relevant rules and procedures set by the National Board of Revenue (NBR).

The government plans to promote made-in-Bangladesh brand. As part of the move, export-oriented goods have been brought under VAT exemption and tax holiday facilities. If any exporter can explore new destinations in exporting Bangladesh-made goods, he or she will be eligible for VAT exemption and tax holiday facility. A tax holiday programme, taken by the government, encourages economic activity. Tax holiday programme is termed as investment incentive also. A tax holiday is a temporary reduction or elimination of tax for a period.

The decision of providing tax exemption is taken considering the need of the economy. But, tax incentive for longer period never brings good result for economy. A study paper titled ‘’Rise of ineffective incentives: New empirical evidence on tax holidays in developing countries” stated that tax incentives can be effective in attracting FDI but does not have an effect in increasing gross capital formation, indicating that it might not be beneficial for real economic growth. Malaysia, Ireland and Mauritius are success of gaining investment and growth from tax incentives. Other case studies find that incentives are largely redundant and does not lead to higher growth- the paper outlined.

Research and Policy Integration for Development (RAPID) in its study said that revenue to GDP ratio will be 2 percentage points higher if the tax authority removes tax exemptions. With a view to attracting foreign capital, tax exemption facilities are being offered. Only tax incentive facility never brings success in bringing FDI. Congenial business climate is needed in bringing significant volume of FDI. In Doing Business Index revealed by the World Bank in 2020, Bangladesh lagged far behind. So, the attention should be given on ensuring congenial business environment in attracting FDI before announcing tax incentive. Currently, personal income tax collection-to-GDP ratio is 1 (one) per cent.

It must be increased anyhow. The National Board of Revenue (NBR) prepared a report ‘Tax Expenditure Analysis: An overview of Tax Expenditure through Personal and Corporate Income Tax Policy of Bangladesh in 2021’. The report stated that approximately 2.28 per cent or Tk 578.78 billion GDP is lost for offering tax exemptions. The study stated a 2.28 per cent tax expenditure-to-GDP ratio is a concern for economy like Bangladesh. Tax-breaks caused losses of about Tk 80 billion per year from transfer of land property, the study said.

Despite having lowest tax-to-GDP ratio in Bangladesh, tax exemption on development projects are being provided. Three wings of the NBR- income tax, VAT and customs duty- gave tax exemptions for development projects through Statutory Regulatory Order (SRO) resulting in increasing revenue loss. Is the decision right considering current tax-to-GDP ratio? In FY 2020, the government provided tax exemption of Tk 2.5 lakh crore in a bid to foster growth. Afterwards, the NBR estimated that tax-to-GDP ratio was supposed to stand 17.81 per cent if tax exemption was not provided in FY 2019-20. During the period under review, tax-to- GDP ratio was 9.90 per cent.

The 7th five-year-plan aimed to expand the ratio by 13.7 per cent in FY 2020 but failed to achieve. The 8th five-year-plan made projection of 12.25 per cent tax-to-GDP ratio in FY 2025. Is it possible to materialize 8th five-year-plan projection amidst a wide range of tax exemption practice?

Fiscal deficit in Bangladesh is on the rise. The government has to borrow from both domestic and external sources on condition of paying high interest rate. Budgetary support are sought from multilateral financiers in view of fiscal deficit. The government is on the track of achieving sustainable development goals (SDGs) that needs huge financing. Furthermore, the running government aims to see smart Bangladesh by 2041. Unless tax-to-GDP ratio is on increasing trend, there is little possibility to achieve goals undertaken by the government. Tax exemption has become key barrier in increasing tax-to- GDP ratio. Tax payers-friendly taxation system and tax law can help increase tax-to-GDP ratio.

The writer is economist.

He can be contacted at: mazadul1985@gmail.com