Low tax collection will make achieving the United Nation’s Sustainable Development Goals (SDGs) more difficult and implementing social safety net programmes almost impossible
Tax revenue is the oxygen for development. Yet, at a mere 7.9 percent of GDP, Bangladesh's tax-to-GDP ratio is the lowest in the world. It is less than half that of neighbouring Nepal and lags behind, both in the region as well as in comparison to other developing economies.
The National Board of Revenue (NBR), which collects 97 percent of tax revenue and about 85 percent of total government revenue, raised only Tk220,000 crore in 2019-20 fiscal year from the economy that has grown to more than Tk28 lakh crore.
Even war-torn Afghanistan and Pakistan did better than Bangladesh. Developing countries in Asia have tax-to-GDP ratios of 26.7 percent – several times bigger than Bangladesh. The tax-to-GDP ratio of sub-Saharan African countries (17.8 percent) is more than double that of Bangladesh.
The NBR acknowledged that tax collection levels are far too low and efforts to boost them are held back by lack of proper skills, collection methods, transparency, and accountability.
Ahsan H Mansur, executive director at the Policy Research Institute, a private research institute, said low tax collection will make achieving the United Nation's Sustainable Development Goals (SDGs) more difficult and implementing social safety net programmes almost impossible.
It is possible to increase the tax-to-GDP ratio without raising tax rates by changing the revenue structure, increasing operational efficiency, restructuring VAT, bringing more people into the tax net, and preventing money laundering.
Fixing these systemic problems will be far more effective than imposing punitive tax and excise increases, which will hit the poor far harder than the rich and are, due to widespread non-compliance, unlikely to make a material difference to revenue collection. To fix the system, the government and tax authorities have to think much bigger than just tax rates.
For example, according to a study conducted by the NBR, the government loses Tk40,000 crore in VAT every year.
NBR Chairman Abu Hena Rahmatul Muneem said revenues can be boosted, even during an economic slowdown, if tax evasion is thwarted by automating the whole process, ensuring collection of direct taxes in all sectors, and widening the personal and corporate tax net.
Expansion of tax net
Former finance minister Abul Maal Abdul Muhith said considering the size of the economy and people's income, at least 4 crore people (out of a 17 crore population) should be eligible to pay taxes. If they did, tax collection could double.
Even after adding 28 lakh new taxpayers in the last four years, there are still only 44 lakh e-TIN holders, with 22 lakh filing returns in the last revenue year. This can be increased through various initiatives, including making e-TIN compulsory to win government contracts and making return submission obligatory for eTIN holders.
Making BIN mandatory for all businesses and taking control of accounts
All businesses should have to register for VAT and add their accounts to the NBR's central database. According to the NBR, at end July 2020 there were 1,71,362 registered companies with only about 50,000 regularly submitting VAT returns.
On the other hand, there are 2, 27,000 institutions registered in RJSC. The number of trade license holders in three city corporations of Dhaka and Chattogram is 5,38,000.
According to an NBR review, if 95 percent of trade licence holders in city corporations registered with RJSC and BIN, it would be possible to collect Tk2 lakh crore in VAT.
However, in 2019/20, the NBR received only Tk95,000 crore in VAT.
NBR VAT policy member Masud Sadiq said they had plans to bring 2 lakh new companies under VAT registration this year.
Facilitating tax collection
Tax collection remains overly complicated. Taxpayers have to fill a 12-14 page form and go through the hassle of dealing with tax offices to submit income tax. Even when there is an online form, they still have to go to the circle office concerned to receive chalan and make payment.
As a result, they are vulnerable to harassment and bribery.
Sheikh Fazle Fahim, president of the FBCCI, the apex body of traders, told The Business Standard that traders wanted to pay taxes. However, they too are harassed and have to go through an extremely complex process.
Stopping foreigners evade tax
A study by Transparency International Bangladesh (TIB), an anti-corruption non-governmental organisation, estimates that 2.5 lakh foreigners are working legally and illegally in Bangladesh. The TIB calculated that tax evasion by foreigners was costing the country around Tk12,000 crore a year.
TIB Executive Director Dr Iftekharuzzaman said there is no reliable institutional information on the actual number of legal and illegal foreigners working in Bangladesh (and the amount of money being siphoned off), but he thinks the government can get at least an additional Tk10,000 crore a year from this sector.
Recruiting a skilled workforce for the NBR
Another reason for low revenue collection is the lack of skills in the NBR. A cell was formed in 2016 to prevent revenue evasion by foreign companies through transfer pricing. However, due to a lack of skilled manpower, while 981 foreign companies were selected by the cell, no initiatives could be taken to collect revenues by auditing them.
The NBR has also not been able to collect arrear revenues amounting to Tk50,000 crore from local companies because it has not been able to respond to the High Court case filed by the organisations concerned. As a result, tax evasion keeps on rising.
Establishing good governance among officials
There is a saying – chairs and tables in many offices take bribes. Just as the service seekers do not get proper services if staff take bribes, the state is also deprived of revenue. With good governance, harassment of taxpayers will fall and revenue collection will be as expected.
It is clear that, as Abdul Majid, former NBR chairman, told The Business Standard, even though personal and business incomes are down due to the Covid-19 pandemic it was "still possible [given Bangladesh's low tax-to-GDP ratio] to meet the declared target" as long as the NBR takes swift action.
These reforms are long overdue but are now more important than ever.
Abbas Uddin Noyon is a journalist.