Country's tax-GDP ratio not commensurate with state of development

The country's tax-GDP ratio continues to miss its target despite a fast-expanding economy.

Policymakers and analysts across the globe use the tax-to-GDP ratio to compare tax receipts year on year.

In most cases, they believe, taxes are related to economic activity. The ratio should stay relatively consistent. As the GDP grows, tax revenue should increase as well.

This inconsistent development of the key macroeconomic indicator came at the yearly "Fiscal Update" prepared by finance division under finance ministry.

It shows the tax-GDP ratio in the year that ended on June 30 last was just 9.27 per cent, down by 2.28 percentage point from its original estimate.

And it was also down by 1.06 percentage point from the revised target of the same fiscal year (FY).

However, FY 2018's tax-GDP ratio was slightly higher than previous year by approximately 0.3 percentage point.

Looking back to FY 2017, the ratio also fell by 1.64 percentage point from the original estimate to 9.0 per cent.

This is simply because of continuous failure by the tax authorities to mobilise the expected resources needed to fund the budget, said sources at finance division last week.

Meanwhile, economists and think tanks familiar with tax-related developments said this is happening at a time when mobilisation of domestic resources is the key to achieving the sustainable development goals (SDGs).

'Concession' to some sectors or misuse of tax holiday system should be stopped to enhance tax receipts, they told the FE.

Highlighting the importance of the ratio, the seventh five-year plan has a target to raise it to 16.1 per cent in 2020, just a fiscal year left.

Noted economist Dr Mirza Azizul Islam told the FE that Bangladesh's situation in terms of domestic resource mobilisaiton remains one of the "worst" in the world.

"Even Nepal has much higher tax-GDP ratio despite the fact that the Himalayan country's per-capita income is around half the people of Bangladesh," he observed.

Dr Islam, also a former caretaker government adviser on finance and planning affairs, said many key sectors including the RMGs get concessional tax benefits.

A critic of tax holiday system, Dr Islam, who now teaches at Brac University, said: "I saw many firms becoming losing concerns soon after the expiry of the five-year tax holiday facility."

The Centre for Policy Dialogue (CPD), the oldest privately-owned local think tank, said Bangladesh should focus on raising the share of direct tax.

It said the seventh five-year plan has given due significance to income tax collection with a target of tax-GDP ratio to 5.4 per cent in FY 2020.

The ratio remained much low than its 2020 target as it now stands halfway at 2.7 per cent in FY 2018.

The income tax-GDP ratio was the same in FY 2017 and it peaked in FY 2013 at 2.9 per cent.

The CPD in its recent study said Bangladesh needs to introduce wealth and property tax for combating the problem of rising income inequality as was shown in the latest household income expenditure survey.

Many now hold their wealth in real estate properties and lands instead of investing in productive sectors, it argued.

A wealth surcharge is in place over the past few years, but it needs a well-crafted property tax.

The CPD was critical of illicit financial outflows.

On the other hand, World Bank economist Dr Zahid Hussain said there is no way but to reform tax laws and its administration to improve the tax-GDP ratio.

Bangladesh should have at least 15 per cent tax-GDP ratio considering its present state of development, he told the FE.

Dr Hussain said taxpayers still face harassment while filing and appealing their tax files, adding: "Good governance in tax administration is a must."

The VAT Act passed in 2013 still remains non-functional, the economist said emphatically.

"It is believed that if the new VAT Act is implemented, the ratio will go up at least by 1.0 percentage point reaching it to double digit."

Dr Masrur Reaz, an economist at the International Finance Corporation, told the FE that there is no reform so far undertaken in the direct tax regime.

"We made some progress in it through drafting, but it now remains stopped," he mentioned.

Dr Reaz, however, said two laws -- VAT Act and Customs Act -- are almost in the final stage, the first one was passed in 2013 and the second one is awaiting the cabinet nod.

"I believe that if the two major segments of tax collection come into force, the tax-to-GDP ratio will increase."

In the meantime, growth in 'revenue-GDP ratio', which covers non-tax revenue, has also remained almost stagnant in recent years.

It stood at 10.3 per cent in FY 2018 and 10.2 in FY 2017.

Experts said this remains poor following low incomes in the forms of profits and dividends from different government-owned organisations.

However, total resource mobilisaiton, including non-tax revenue in FY 2018, was Tk 2.31 trillion against the GDP (nominal size) at 22.5 trillion.

In FY 2017, it was Tk 2.01 trillion against the GDP worth Tk 19.8 trillion.

Of the amount, tax revenue was Tk 2.09 trillion in FY 2018 and Tk 1.78 trillion in FY 2017.

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