The Financial Express

High corporate tax fails to bring benefit

| Updated: January 01, 2023 22:41:13

High corporate tax fails to bring benefit

A study presented recently by the Research and Policy Integration for Development (RAPID) on the corporate tax receipt regime unsurprisingly finds that despite the country charging one of the highest corporate tax rates in the region, the share of the same has remained dismally low at around 1.6 per cent of GDP. This has been the case for many years now. Until 2019-20, the average corporate income tax per company was about Tk 15 million which rose by a third to about Tk 20 million in 2020-21.

Globally, the use of direct taxation by governments has had a two-fold result. First it is a primary source of revenue for the exchequer, and second, the regime of progressive taxation is used precisely as a means to tackle income equalities in society. Unfortunately, as things stand now, the very high rate of corporate taxation levied has resulted in distortion of financial statements by companies in order to pay lower amounts of tax. This defeats the whole purpose of taxation to begin with.

Experts in the field including former top tax officials, academics and bureaucrats belonging to the finance division have suggested various ways to tackle this problem. If one looks at the current regime of corporate taxation, ranging anywhere from 12 to 45 per cent, it begs the question as to why the revenue body is sticking to this mantra despite its failure to yield the desired results. Looking at what has been presented, it is easy to see that the present progressive income tax regime has not benefitted from the rapid growth of the economy, primarily because the tax authority has kept its focus on a narrow tax base. Indeed, only 15,000 individuals paid the wealth surcharge amounting to Tk 6.0 billion, which is a spit in the ocean. In a country of around 170 million people working in an economy that has crossed the US$400 billion mark, it is obvious that more than 15,000 people should be paying the wealth surcharge.

What is understood from recent media reports is that the National Board of Revenue (NBR) is seriously understaffed, lacking in manpower, logistics, infrastructure and technology to keep abreast of the fast expanding individual tax-payer base that has increased to more than 240,000 from about 50,000 a decade ago. The NBR is stretched too thin to service the existing (individual) tax payers. Added to that is the entire corporate world, which in theory, should be paying much higher taxes than individuals, but not to the extent that it becomes convenient for companies to distort financial records.  Thus the national exchequer is being deprived of billions of taka in taxation. Again, the NBR's inability to properly scrutinise individual / company tax returns does not help matters.

All this leads to widening the rich-poor divide. According to the Household Income-Expenditure Survey (HIES), income share of the bottom 40 per cent of the population fell from 17 per cent in the '90s to 13 per cent in 2016. But income share of the bottom 5.0 per cent declined from 1.03 per cent to just 0.23 per cent. Since the revenue base is shrinking, it is natural for public expenditure to follow suit and this is fuelling inequality. The country needs proper direct taxation as it is directly correlated to public spending for public benefit. For any meaningful change to happen, it is necessary to revamp the NBR, equipping it with the tools and technology so that it can address the loopholes and expand the direct tax base. It is time to move away from indirect taxation, reduce corporate taxation and increase the tax spread. This way the government has more resources to expend for public good and reduce the widening inequality.

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