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5 years ago

Introducing a pro-taxpayer revenue regime

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Establishing a pro-taxpayer environment in an emerging economy like Bangladesh where tax-GDP ratio is hovering around 10-11 per cent, requires a very close review of existing rules and regulations keeping in view present-day social norms and business practices. If these regulations have to be effectively enforceable, prudently practised and impartially implemented in a free and democratic environment, tax law should be made by   lawmakers in parliament who should also be within its jurisdiction. The reform should not be limited to reducing or introducing new taxes, but to make the tax code simpler, fairer and better equipped to promote economic growth. Any proposal would have to be revenue-neutral. Not only global good practices but also suggestions from stakeholders should be incorporated in the reformed law. It has been appropriately argued that reorganisation proposals be made in stakeholders' vernacular (in Bangla) for their better comprehension and suggesting modifications.  Mindset of the tax collector and payer must be pro-revenue and canons of tax law should be understood across the board and be applied without fear or favour.

Taxation, as an influential instrument of revenue income for the state, was very much there in ancient and medieval India in different forms and styles but the modern income tax system was first introduced by the British government in India. James Wilson, the first Finance Minister in India, proposed Income Tax Act in his first-ever Budget Speech on April 07, 1860. He also brought a Bill in the Indian Legislature to restructure tariff laws, besides introducing budgetary system and paper currency.

Though the modern income tax was introduced in 1860, the first formal tax law was promulgated in 1882, and finally the Indian Income Tax Law in 1922. The Income Tax Law of 1922 was adopted by India and Pakistan in 1947 and later by Bangladesh in 1972 just by replacing the word 'India' by 'Pakistan' and 'Pakistan' by 'Bangladesh'. India framed its own income tax law in 1961 and Bangladesh did the same in 1984 as an ordinance as there was no parliament in session at that time.

A new income tax law is now in the making in Bangladesh, and it is hoped that it will be enacted by lawmakers in parliament. The national income tax-reform panel has already submitted a report.

To be practical, a tax system must be economically efficient, logistically economical. Every tax system distorts economic decisions and leads to less economic activity than otherwise would occur, resulting in what economists call "deadweight loss." A sound tax system should be designed to minimise these losses. It should impose the smallest possible compliance costs on taxpayers, otherwise people will not get encouraged to pay tax, rather they will be inclined to evade tax. Every tax system imposes direct costs on taxpayers in terms of time devoted to tax preparation or money to buy the services of Certified Public Accountants (CPAs). Ultimately, every tax system diverts a portion of tax revenues raised by the tax to pay the cost of ministering and collecting the tax and enforcing its provisions. A sound tax system would minimise these costs.

A nation's tax system is often a reflection of its communal values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden-who will pay taxes and how much they will pay-and how the taxes collected will be spent. In democratic nations where the people elect those in charge of establishing the tax system, these choices reflect the type of community that the people wish to create.

Debates about taxes is usually on the issue whether "the wealthy can afford it" or "it is unfair to be taxed harshly". Neither argument has merit. Tax the wealthy too harshly, and they will stop creating wealth. Tax them too leniently, then either society will be unable to govern itself or the rest of society will be so harshly taxed that it will rebel. It is entirely a matter of practicality. Fairness never enters into it. As pundits of the past have put it: "If you know the position a person takes on taxes, you can tell their whole philosophy.  The tax code, once you get to know it, embodies all the essence of life:  greed, politics, power, goodness and charity."

A sound tax system should be embedded in four principles. Firstly, pay what you owe: an economically neutral tax is unbiased across the spectrum of economic activities. Removing complexity and limiting the collection points for taxation also makes the system more transparent, making the public more certain that everyone is paying what they owe, and are comfortable with the fairness of the system. Secondly, transparency: a tax system is transparent to the taxpayers if it is clear how much the government is costing them (and who is paying for what). Without transparency, the public isn't able to accurately asses how their money is being spent and thus isn't able to hold their representatives appropriately responsible. Thirdly, equal treatment under the law: equality of opportunity should be the linchpin to our tax system, not equality of outcomes. The tax system shouldn't be manipulated into an instrument of wealth redistribution or social engineering and or political vengeance. Fourthly, simplicity: a tax system shouldn't be gratuitously complicated beyond what is required. Simplicity is the best sort of medicine for the tax-inflicted headache.

To be sure, the most visible, fluid tax systems are the most neutral and simple. Just a little bit of effort by the citizens should be required in paying taxes. This is a necessary evil. Otherwise, the government could do and take whatever it wanted. Citizen-voters have a minimal responsibility, if not civic duty, to participate in this-- a fundamental component of democratic society.

Dr Muhammad Abdul Mazid, former Secretary to Government of Bangladesh and former Chairman, NBR.

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