Friday, May 03, 2024
The government has opted for rationalising tax expenditures which will play a useful role in collecting more revenue and ensuring forgone revenue (indirect public expenditure) is made to good use, according to an official document.
According to the Medium Term Macroeconomic Policy Statement (2023-24 to 2025-26) of the Finance Division of the Finance Ministry, the collection of sufficient and accurate data would be the next step for which interagency cooperation would be essential.
"To initiate tax expenditure analysis the first step would be to clearly define the benchmark tax rate and base for income tax and VAT," said the paper made available to UNB.
It is also necessary to create an exhaustive list of all different types of benefits and preferences given in VAT, income tax and customs.
The statement said given Bangladesh's low tax-GDP ratio, how much revenue is collected or lost and whether revenue collection growth is in tandem with GDP growth are important considerations to financing development and investment plans of the government.
The government allows various tax benefits to meet social or economic objectives, to spur growth in certain sectors or to attract investment.
"One tool that can be used to estimate forgone revenue is tax expenditure assessment," it said.
Tax expenditures are estimates of amounts of revenue not collected due to preferential tax treatment relative to a benchmark (or reference) tax system, which is supposed to be developed on principles of neutrality, efficiency, and equity.
Coverage of tax expenditures is wider than tax exemptions and includes tax exemptions, reduced tax rates, tax credits, tax holidays, tax allowances, tax deferrals etc.
Tax expenditure estimates help to identify potential avenues to ramp up revenue collection and increase transparency in the tax system by analysing the cost-benefit analysis of different special tax treatments.
Many countries have made tax expenditure assessments a part of their yearly budgetary exercise, it added.
Although Bangladesh is yet to formally start making tax expenditure estimates, the National Board of Revenue made a modest start in 2021 by conducting a tax expenditure analysis for the personal and corporate income taxes on a pilot basis.
Despite a small sample size and methodological limitations, the findings of that analysis were significant – about 36 per cent of GDP in 2018-19 FY was excluded from direct taxes, which translated to roughly Tk 58,000 crore worth of forgone taxes.
If one adds tax expenditure on the transfer of land, a major item under capital gains which is not covered in GDP calculation, another Tk 8,000 crore is lost as forgone revenue.
The figures added up to approximately 2.6 per cent of GDP for FY 2018-19.
Although tax expenditures are granted to meet certain desired social and economic objectives such as employment generation, greater access to health and education, reduced inequality, tax expenditure assessments shed light on the need to understand the trade-off between accrued benefits and loss of revenue.
In the case of VAT, the Medium Term Macroeconomic Policy Statement (2023-24 to 2025-26) said several sectors such as agriculture, livestock, fisheries, education, public administration, defence, and social work activities (total 21.2 per cent of GDP) are outside the purview of value-added tax.
In the case of manufacturing, many industries including light engineering, household electrical goods and consumables, medicine, computer items and peripherals, export-oriented industries etc are given preferential treatment to promote local industries, export growth and to attract investment. That's another 23 per cent of GDP.
At the retail and wholesale stage (15 per cent of GDP) a substantial part is VAT exempt. A significant part of transportation services (7.5 per cent of GDP) has been kept intentionally outside the VAT net to make transport costs affordable to the common masses.
At the Revenue Conference of the National Board of Revenue last year, a presentation estimated that no VAT is collected on goods and services on almost 50 per cent of Bangladesh's GDP.
Although Customs' contribution to revenue collection may decrease in the future, it still contributes a significant portion to the government exchequer.
A closer look at the composition of Bangladesh's imports in FY 2020-21 reveal that 15 per cent of all imports were done by 100 per cent export-oriented bonded factories, 7.4 per cent by factories in Export Processing Zones (EPZs) and 19.8 per cent of all imports benefitted from special tax treatment under SROs/orders.
In total, no customs duty was collected on 42.3 per cent of total imports during FY 2020-21.
