Theoretically the government’s tax revenue should rise with a rising GDP. But in case of Bangladesh, that is not the story
In order to uplift a nation's economy, higher Tax-GDP ratio is indispensable. The correlation between tax revenue and GDP is extremely straightforward. The higher ratio does not only ensure sustainable growth but it also guides a society through the path of becoming a more equitable society.
Tax to GDP ratio is computed by dividing the total revenue collected by the government from income taxes, value added taxes, payroll taxes, social service contributions and other items with Gross Domestic Product (GDP) of a country. For a well-functioning budget, a fine amount of revenue is a prerequisite, which comes from internal (tariffs) and external sources (financial aid, loans etc.)
Theoretically a government's tax revenue should rise with a rising GDP. But in case of Bangladesh, that is not the story. Whereas Bangladesh's neighbours India and Nepal's average tax to GDP for the last 10 years were 15.8% and 19.6% respectively, its only 8.7% in Bangladesh; which is very low comparative to its GDP growth.
Several statistics reveal that less than 1% (1.25 million) of the total population of Bangladesh pays Income tax, whereas according to the recent Household Income and Expenditure Survey the number of entitled tax paying households should not be less than six million.
As a result of this low tax-GDP ratio, inequality in Bangladesh is amplifying over the years. Without safeguarding an equitable distribution of wealth across the economy, an all-time high 8.13% GDP growth rate will not be sustainable and significant.
A high degree of informal jobs, which is a prominent characteristics of most of the developing countries, is one of the rudimentary causes of continuous low-slung Tax-GDP ratio in Bangladesh.
According to the recent Labor Force Survey, the share of informal sector (day labourer, unpaid family labour, self-employed, piece-rate workers etc.) is almost 80 percent to the total labour force.
In the formal sector, there is a clear framework and policies for income tax collection from individuals and firms. However, absence of these gives the informal sector and undeclared work an opportunity to evade taxes.
A too narrow tax base hinders the path to achieving the intended Tax-GDP ratio in Bangladesh as well. Discriminatory forms of tax paying structure between private and government employees also motivate people to avoid income taxes.
Harmonisation of tax structures for government, local government, bank and non-bank financial organisations, and a survey of potential tax payers can come in handy to expand the current tax base in Bangladesh.
Less equitable distribution of income is also a contributor to the low Tax-GDP ratio in Bangladesh. According to Trading Economics recent data, 95 percent of total income is seized by top 5 percent of the population, which indicates that the number of people who falls into the tax net is relatively truncated.
And, thus, even though Bangladesh has achieved an encouraging GDP growth rate of more than 8 percent, its tax to GDP ratio still lags behind.
To carry out various development projects, governments rely mostly on revenue collection aside from financial aid. Enhancing tax revenue has been on the priority list of the government of Bangladesh for several years.
Despite the resource constraints and administrative bottlenecks, the government is trying relentlessly to expand the Tax-GDP ratio. The Seventh Five Year Plan aims to take the ratio of Tax to GDP to 14 percent by Fiscal Year 2020.
With a focus on building a more transparent, effective and modernised IT-based tax collection system, National Board of Revenue (NBR), with the assistance of World Bank, has taken up a Strategic Development Plan (SDP).
Raising awareness among taxpayers and creating tax compliance can have a positive impact on the whole tax collection scenario. Transparency and accountability at the government level about how the revenue collected from tax is spent as public services can boost the willingness to pay taxes.
Increasing spending in social protection schemes including health and education can help Bangladesh draw that picture. Indonesia has adopted an evolutionary self-assessment system in order to make tax collection procedure more people friendly and reliable.
Among the South Asian countries, Nepal has been maintaining an extraordinary Tax-GDP ratio for quite a few years, with an average of almost 19.6 percent. Instead of snowballing the tax rate, broadening the tax net to bring more people under the tax umbrella will be more helpful in increasing Tax-GDP ratio, and furthermore, alleviating the growing inequality.
Since its very inception, Bangladesh as a country has been struggling with its fiscal management. Without strengthening the tax system, achieving Sustainable Development Goals (SDG) within the promised time period will be challenging for us.
Research indicates that at least 15 percent of Tax-GDP ratio is essential for achieving SDG through domestic resource mobilization, which means Bangladesh has a long journey ahead in terms of doubling its current Tax to GDP ratio.
The writer is a research associate at South Asian Network on Economic Modeling (SANEM)