Taxation, undoubtedly, is one of the major sources of revenue for meeting the country's budgetary expenditures with a view to accomplishing socio-economic objectives, such as redistribution of income, price stabilisation, discouraging harmful consumption and ensuring proper representation of the tax-payers in macro-economic management. It supplements other sources of public finance, such as issuance of currency notes and coins, charging for public goods and services, and borrowings.
The term 'tax' has been derived from the French word 'taxe'; and etymologically, the Latin word 'taxare' is related to the term 'tax', which means 'to charge'. Tax is 'a contribution exacted by the state'. It is a non-penal but compulsory and unrequited transfer of resources from the private to the public sector, levied on the basis of predetermined criteria.
According to Article 152(1) of the Constitution of Bangladesh, taxation includes the imposition of any tax, rate, duty or impost, whether general, local or special, and tax is construed accordingly. Rate is a local tax imposed by local government on its residents or the property owners of the locality; a duty is a tax levied on a commodity, and an impost is a tax imposed for entry into a country. Under the provision of article 83 of the Constitution, "no tax shall be levied or collected except by or under the authority of an Act of Parliament". Bangladesh inherited a system of taxation from the past British and Pakistani rulers. The system, however, developed based on generally accepted canons, and there had been efforts towards rationalising the tax administration for optimising revenue collection, reducing tax evasion, and preventing revenue leakage through systems loss.
The tax structure in Bangladesh consists of both direct (income tax, gift tax, land development tax, non-judicial stamp, registration, immovable property tax etc.) and indirect (customs duty, excise duty, motor vehicle tax, narcotics and liquor duty, VAT, Supplementary Duty (SD), foreign travel tax, TT, electricity duty, advertisement tax etc.) taxes.
The present land revenue system of Bangladesh has its base in the East Bengal State Acquisition and Tenancy Act 1950, which established a direct contract between the taxpayer and the government. The most important tax on the value of transferred property is the non-judicial stamp tax (levied under the Stamp Act 1899), which has been in existence since January 1899. Current rates of non-judicial stamp duty are provided in the First Schedule of the Finance Act 1998, ranging from Tk. 4 to Tk. 10,000 in case of absolute rate, or from 0.07 per cent to 1.5 per cent of the value of consideration in case of ad valorem rate. The judicial stamp tax is being levied under the Court Fees Act 1870, although the levy of court fees originated from the introduction of the Bengal Regulation No. 38 of 1795. The first sales tax was introduced in the former Central Provinces of India in 1938. In Bengal, sales tax was adopted in 1941. In 1948, sales tax was transferred as a central tax under the General Sales Tax Act of 1948. The Sales Tax Act 1951 came into force on July 01, 1951 by repealing the Pakistan General Sales Tax Act of 1948. Until 1982, sales tax was being collected under the 1951 Act, which was replaced by the Sales Tax Ordinance 1982. The VAT law was promulgated by repealing the Sales Tax Ordinance in 1991.
Income tax was first introduced in the subcontinent by the British in 1860 to make up for the revenue deficit caused by the Sepoy Mutiny, 1857. After independence of Bangladesh, income tax was made effective under the Indian Income Tax Act 1922 which was formulated on the basis of recommendations made by the All-India Income Tax Committee appointed in 1921. To convert and adopt Income Tax Act 1922, the Final Report of the Taxation Enquiry Commission was submitted in April 1979. Finally, income tax has been imposed under the Income Tax Ordinance 1984 (ITO) promulgated on the basis of Act-1922. Income tax-payers (assessees) are classified as individuals, partnership firms, Hindu undivided families (HUF), associations of persons (AOP), companies (publicly traded and private), local authorities, and other artificial juridical persons. Tax rates and scope of taxable income differ based on residential status of an assessee (resident or non-resident). There remains a filing threshold of annual total income applicable for individuals (including non-resident Bangladeshis), partnership firms, HUF, AOP and assessees other than companies and local authorities. In case a group-entity has a total annual income less than the threshold level, he is not required to submit tax return; but if someone's income is higher, he has to pay a minimum tax determined by the government from time to time.
The use of the terms 'tax avoidance' and 'tax evasion' can vary depending on the jurisdiction. In general, the term "evasion" applies to illegal actions and "avoidance" to actions within the law. The term "mitigation" is also used in some jurisdictions to further distinguish actions within the original purpose of the relevant provisions from the actions that are within the letter of the law, but do not achieve its purpose. Most states impose taxes on income earned or gains realised within that country regardless of the country of residence of the person or firm. Many countries have entered into bilateral double taxation treaties with each other to avoid taxing non-residents twice - once where the income is earned, and again in the country of residence. However, there are relatively few double-taxation treaties with countries regarded as tax havens. To avoid tax, it is usually not enough to simply move one's assets to a tax haven. One must also personally move to a tax haven (and, for Bangladeshi nationals, renounce one's citizenship) to avoid taxation. Double taxation on the professionals is accumulated through VAT and Income tax
Reforming tax revenue laws and regulations requires a close scrutiny of existing laws and regulations one by one, if not word by word, in order to attune those with present-day demands, social norms and business practices. If these laws and regulations are to be effectively enforced, prudently practised, and impartially implemented in a free and democratic environment, they have to be framed by the lawmakers who should also be under their jurisdiction. Appropriate ownership has to be established for each item of law equally on every footing. Rules should not be framed only for the ruled, nor should it be a tool for applying discretionary powers by the enforcement officials. Rather, it should be equally applicable for all indiscriminately. Canons of tax laws should be digestible and implement-able across the board and applied without fear or favour. It has to be simple, comprehendible, unambiguous in meaning and interpretation, assertive but with adequate relief and remedial provisions. The views of stakeholders should be taken into account to make it user-friendly.
To be sound, a tax system must be economically efficient, causing as little damage as possible to the economy. Every tax system distorts economic decisions, and leads to less economic activities than would otherwise occur, resulting in what economists call "deadweight loss." These are the costs caused by distortions to work, investments, entrepreneurship, and other productive activities. It has been argued that typical estimates of the economic cost of a taka of tax range from 20 paisa to 60 paisa over and above the revenue raised. Harvard's Martin Feldstein has gone so far as to conclude that the deadweight burden caused by incremental taxation "may exceed one dollar per dollar of revenue raised, making the cost of incremental government spending more than two dollars for each dollar of government spending" (National Tax Journal, June 1997)
What is more, applying different tax rates for different activities or to different producers exacerbates the distortion of economic decisions and increases the deadweight losses due to the tax system. A sound tax system should be designed to minimise these losses. None should deny the fact that a sound tax system should be logistically economical. It should impose the smallest possible compliance costs on taxpayers. Otherwise, people will not feel encouraged to pay tax; rather they will tend to evade tax.
The potential of tax revenue rises when properly mobilised and against which transfer payment is assured. Revenue expenses are proper when appropriately spent. Both revenue income and expenditure should be transacted by ensuring transparency in mobilisation and accountability in spending.
Dr Muhammad Abdul Mazid is a former Secretary to the Government of Bangladesh and former Chairman, NBR.
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