Reforming the taxation system

It was quite a befitting observation a noted economist made early this week about the National Board of Revenue (NBR). Taking part in a seminar on tax policy and public finance in Dhaka, the economist, who is one of the key figures in a private think-tank, likened the Board to a graveyard 'littered with tombstones of reforms'. The comparison might appear a bit harsh, but it does represent facts.

Despite some amendments made to tax laws and rules and improvements achieved in tax administration, country's taxation system, when compared with that in many countries, is archaic and unfriendly to taxpayers, to a large degree. The scope for indulging in irregularities and harassing taxpayers is there and the efficiency level of taxmen is yet to be up to the mark. The deficiencies, obviously, take a toll on the government's tax revenue collection; the actual collection of revenues, in most financial years, falls far short of the targets set in the national budgets. However, the administration, for reasons best known to it, tends to be ambitious while setting tax revenue targets.

Introduction of value added tax (VAT) in 1991 was a watershed in the country's taxation system. Barring that nothing notable has happened though there were lots of promises to make the system efficient and taxpayer-friendly. That actual achievements were far short of promises is amply reflected on the country's poor tax-GDP (gross domestic production) ratio.  The ratio is one of the lowest in the region. However, it would be unfair to say there were no reform initiatives on the part of the government. In fact, there was a plenty of them. But most of the initiatives have remained half-done or shelved because of resistance and subtle non-cooperation from different vested interest groups.

Automation is a part of donor-driven reform initiative aimed at making the service delivery on the part of taxmen fast and transparent. Besides, an automated system helps reduce irregular practices. However, the progress in areas of automation is far short of the target. The government, in line with the desire expressed by the multilateral donors, tried to reform VAT which is now the largest revenue earner. The government passed in 2012 a law in parliament introducing a few major changes in the VAT law, including introduction of a uniform rate of VAT. But it had to backtrack following resistance from the businesses and now the new law in a diluted form is set to be enforced from July next.

Undeniably, the tax revenue earning potential in Bangladesh is much higher than what is fetched now. The rate of tax evasion is high among the existing taxpayers and many individual taxpayers and companies that have taxable income, consciously avoid paying tax. However, motivation is an issue that cannot be overlooked as far taxation is concerned. More and more people would be encouraged to pay tax if they see their money being utilized in a fair and transparent manner by the government. Taxpayers do also expect some benefits, including health-related ones, particularly during their old age.

Reform is demanding and unsettling for certain quarters. That is why reform initiatives do face opposition from various vested interests. But should it go on like this? Should poor and low income people continue to shoulder the tax burden of others because of the government's lukewarm attitude towards the need for reforming the tax system? Under the circumstances, the policymakers should actively consider the experts' suggestion to form a tax reform commission that would overhaul the tax regime.