South East Asian economies like India and Bangladesh have unreasonably high rates of both these forms of taxes. A more inclusive fiscal policy of eliminating the burden of paying both direct and indirect taxes will definitely help
"Nothing is certain but death and taxes" – this idiomatic expression by Benjamin Franklin has always been relatable to the rapidly evolving world. According to numerous historical sources, the first recorded cases of organized taxation dates back to around 3000 B.C in Egypt.,. The Pharaoh would send commissioners on his behalf to take one- fifth of all grains being harvested by the poor as taxes.
The purpose of tax collection by the Egyptians was similar to what was followed by the Romans and other nations later on: entitling the King to a luxurious life and protecting his empire by financing for wars. Nothing much has changed if we notice the most advanced countries and their national defence spending annually.
In the modern era, taxes levied on citizens are circulated through fiscal policy to ensure that the utilization of government spending and tax policies achieve macroeconomic stability. Besides macroeconomic stability, developing countries like Bangladesh face numerous challenges when deciding to allocate a percentage of the revenue to certain sectors. Providing for Vulnerable Group Feeding (VGF) programme and other different relief programmes cannot be achieved solely through indirect taxes. During 2012-17, 64.73 percent of tax revenue was collected as indirect taxes.
During the post-independence period, the country had been heavily reliant on different types of grants and foreign aid. The tax structure could not be altered to include the entire population since the focus was rebuilding a war-torn nation and adding more people to the tax net would have meant greater income inequality for the masses. Due to these socio-economic reasons, prices of most goods could not be rationalized, despite higher production costs, and most state-owned enterprises ran on government subsidies, further widening the budget deficit every year.
Regular deficit financing, normally undertaken through borrowings from abroad, Bangladesh Bank and other scheduled banks, has become a basic feature of the fiscal policy of the country. Even with the risk of higher inflation, an inadequate savings rate had prompted the government to finance most of its operations through bank borrowing. Regardless of crowding out investments for the private sector. This malpractice continues even today no matter what the size of the budget deficit is, a part of it cannot be financed by external borrowing. Adding the criteria's of maintaining LDC status just makes things all the worse.
Various exemptions and rebates have been provided to businesses every time they run into financial difficulties. When banks ran into trouble in early 2018, tax slabs for both listed and non-listed banks were bought down by 2.5 percent. But were income tax slabs of the ultra-poor bought down? The answer is no.
Governments of developed countries try to achieve inclusive economic growth as they move forward. Countries in the European Union have been long known for their large welfare programmes. Germany and Denmark for example have progressive income and capital taxes that go up to 45 percent and 55.8 percent respectively. The Gini coefficient, which is a statistical measure of how income and wealth is distributed within a country, was 0.29 and 0.287 for these two countries respectively in 2018. Whereas for Bangladesh, the Gini coefficient was 0.395 in 2018, rising to 0.482 as of 2019.
With globalisation standing still in front of a red light, customs and other value-added taxes have also ceased to exist. Progressive taxes can help but what will be of more assistance are schemes to redistribute the excess income to the bottom 50 percent. Schemes as "inheritance tax" is still in its infancy. Although there is a slab of up to 20 percent on gifts exceeding Tk2 million, how does one ensure that these gifts are accounted for? On the other hand, higher estate taxes, corporate taxes, and income taxes may discourage new taxpayers from coming under the tax net. In order to better finance the deficit, an increase in the "tax net" is needed. This could include bringing the local tea-stall vendor and similar people under the net. Corporations will be more interested to disclose their real incomes if the tax rates are reduced, and more people will find it difficult to evade taxes once the system is digitized.
Multilateral donor organizations such as the World Bank and IMF have a limit of up to $1 trillion for emerging market economies out of which Bangladesh can avail $700 million and $100 million respectively. The ADB has pledged $600 million so far. A free-floating exchange rate regime will enable the country to avail grants and other privileges on exports and imports if it were to readjust the value of its currency in the short run.
With a possibility of reduced tax revenue from the NBR, borrowing at low costs seem to be the only way out. Albeit, inflation is a concern, but a bigger concern will be how the government allocates the tax revenue. Agriculture and health should have gotten higher priority. Not just having enough money to finance the salaries of the doctors and nurses, the country also needs sufficient funds to purchase quality health equipment from abroad if needed.
The allocation for health is Tk 22 crore less than the original ADP standing at Tk2,925 crore or 28.94percent higher in comparison to the revised ADP.
On the other hand, the allocation towards agriculture has been revised down to Tk7616 crore from the originally proposed amount of Tk8382 crore in the current fiscal year.
Saving on mega-projects for the time being in addition to ensuring transparent distribution of the "cash to the poor" programmes through mobile financial services must also be on top of the agenda list. The new ADP has a total of 1673 projects out of which 1456 are investment projects. Reallocating funds from long, overdue and untimely projects will only aid the recovery process. If the government does not obtain sufficient taxes from corporations, one way through which corporations can contribute is by utilizing Section 50 of the Income Tax Ordinance, 1984 (the Ordinance). The provisions employers use to deduct a portion of employees' tax from their remuneration can be rather paid out to its employees directly, serving as their "cash aid" instead, but this would definitely require a high degree of transparency.
A more inclusive fiscal policy of eliminating the burden of paying both direct and indirect taxes will definitely help. In the EU countries they may have forms of high direct taxes such as income tax, but they have low or no levels of indirect taxes such as sales and service charges, VAT, etc. South East Asian economies like India and Bangladesh have unreasonably high rates of both these forms of taxes. India has received a tremendous amount of FDI in the last 2 years simply by reducing the rates of corporate taxes, which further proves the point that reducing the slabs will only bring more people under the net. Redistributing to the bottom 50percent will only help an informal economy like ours to prosper. FDI can be attracted easily and more people would be willing to contribute in taxes if they see no discrimination in distributive justice. Pilferages in revenue collection, wealth and inheritance taxes, mismanagement of public resources, and illegal capital flights will make it all the more challenging in the coming years if these leakages cannot be contained.
The writer is a former investment analyst and a Senior Lecturer of Finance at American International University Bangladesh (AIUB).