14 days ago

Raising tax-to-GDP ratio

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Though the country's economic growth in terms of the Gross Domestic Product (GDP) has been showing a rising trend over the past decade, the contribution of tax to this growth has remained one of the lowest in the world. Going by the record of the country's tax collection authority, National Board of Revenue (NBR), during the past 12 years between FY11 and FY22, revenue earnings on an average have shown a 12 per cent growth.  But when it comes to calculating the earnings as a percentage of the country's GDP, those have put up a poor show. In the previous fiscal year (FY22), for instance, the tax-to-GDP ratio was 7.9 per cent, whereas in the current fiscal (FY23), it is projected to decline to 7.4 per cent. The government's recent austerity measures including restrictions on import to protect foreign exchange reserve may be cited as a reason for FY23's unimpressive record in this regard. But then the performance (tax-to-GDP ratio) of the past decade which got stuck around 7.6 per cent cannot be justified. However, the government will now have to take the issue seriously and address the mismatch in the economy's growth vis-à-vis tax-to-GDP ratio. The reason is, the credit support worth US$4.7 billion that the International Monetary Fund (IMF) has extended to Bangladesh requires the government, as one of the multilateral body's conditions, to increase the tax-to-GDP ratio by 0.5 per cent in FY24 and FY25 and by 0.7 per cent in FY26.

But how is the government going to achieve this feat? Obviously, the solution lies in increasing the amount of tax collection. In this connection, the government has set a target of increasing revenue collection in FY24 by 16 per cent, though experts believe it should be raised to 36.3 per cent, if the government is to meet IMF's conditions. Imposing higher tax on the existing taxpayers, who are overburdened with high cost of living despite their incomes remaining stagnant, is certainly not going to work. What is more, as some experts have pointed out, the prevailing tax rate is already high, though it has not translated into a higher tax-to-GDP ratio. Even worse, a high tax regime risks encouraging tax-dodging. Higher tax, especially on trade, which is the case in Bangladesh, stifles business and discourages Foreign Direct Investment (FDI). In fact, among the other developing economies export plays a major role in growth, Bangladesh's higher trade tax does not do so. So, any further increase in trade tax may prove counterproductive. Also, especial care needs to be taken in the case of the Multinational Corporations (MNCs) so they might cooperate duly in paying taxes. Otherwise, it would negatively impact the inflow of FDI.

In fact, stress should be more on widening the income tax and the Value-Added Tax (VAT) net. The culture of tax exemptions/waivers, tax breaks/ holidays that, according to an estimate, eat up around 2.0 per cent of the GDP should be discouraged. Particularly, the government should rethink its policy of amnesty to offshore assets through payment of 7.0 per cent tax as it has not so far helped increase the forex reserve as expected.

As a matter of fact, a comprehensive reform of the tax administration towards stronger mobilisation of domestic revenue resources is the answer to the tax-revenue's increased share in the country's GDP. To that end, the government should formulate an appropriate strategy, preferably a midterm revenue strategy, as recommended by the IMF.


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