Check evasions, raise tax-GDP ratio to 9.6pc, suggests IMF

Salaried individuals constitute less than one-third of the total individual taxpayers in Bangladesh despite drives by the revenue authority to ensure payroll-tax compliance, according to the country's latest financial health check.

As a detailed report on the revenue front was placed before an International Monetary Fund (IMF) mission reviewing Bangladesh's creditworthiness, the Fund spelt out a course of dos to the National Board of Revenue (NBR), including raising the tax-GDP ratio-billed one of the lowest by even regional standards for reasons like evasions and window-dressing of financials.

The income-tax wing of the revenue board showed data on ratio of its types of taxpayers where 29 per cent constitute salaried taxpayers, 3.0 per cent corporate, 1.0 per cent firms.

Other individuals like contractors, businessmen, entrepreneurs and non-salaried individuals constitute 67 per cent of the total taxpayers.

The income-tax-policy wing prepared the report for its recent meeting with the IMF, as the Fund mission rummaged through entire financial records of the country in spot assessment pending a 44.5-billion loan the government has sought for budgetary support at this hour a global crunch.

The country is specially witnessing its foreign-exchange reserves deplete largely for high import costs amid world market volatility and both lower export and remittance earnings. Reserve came down to around 34 billion dollars by official count, if calculated with $7-billion EDF investment.

The wing has sought technical assistance for tackling base erosion and profit shifting, checking transfer mispricing and ensuring digital taxation.

It has pointed out four areas where attentions should be given on priority basis: financial preparedness, technical assistance, tax gap, expenditure analysis and draft tax law.

In the report, the income-tax policy wing said there must be sector-wise tax potential study in the NBR. "Tax-expenditure study should be part of budgetary process."

The policy wing also gave emphasis on reduction in the size of informal economy through devising direct-tax measures.

On direct tax law, made public last year, the report says the final review by external stakeholders of the draft law is under process and it might come in force as law by June 2023.

Regarding payroll tax or withholding tax, a senior NBR official said the NBR had tried to check evasion of payroll tax through its electronic tax- deducted-at-source system or e-TDS system, launched last October.

"Through the system, scrutiny of monthly payouts is possible so that taxmen can find out tax evasion by employers or employees," he says.

Economists, however, underscore widening the tax net to hook potential taxpayers onto the net to increase revenue instead of hammering on those who pay taxes.

The taxmen set a target to register 5,000 companies under the e-TDS system, mopping up Tk 10 billion in taxes by June 30, 2022.

In Bangladesh, payroll tax or withholding tax contributes only 3.0 per cent of total TDS, which is around 30 per cent in neighboring countries, the NBR official mentions.

He notes that the highest-taxpayer award goes to contractors in Bangladesh as they are compelled to pay tax at source automatically at import stages and against their bills.

However, there are no available data on volume of tax collected from salaried taxpayers only.

Officials said the IMF suggested that the NBR raise the tax-GDP ratio by two percentage points in next four years from 7.6 to 9.6 per cent.

The IMF's Fiscal Affairs Department sent a set of data requests regarding 'Bangladesh Tax Expenditure Assessment' to the NBR to get back with the answers by November 17, 2022.

On the data request, the IMF wants to know about the total tax reliefs and tax deductions by categories for the last three years.

It IMF sought the number of income taxpayers from 2019 to 2021, information of personal income taxpayers by gross income.

It wants to know whether there is any basic allowance for personal income taxpayers, in addition to the zero-rated threshold of Tk 0.3 million.

IMF sought to know how capital losses are treated in income-tax law.

"Please clarify whether companies that benefit from tax holiday are still required to file an income tax," says the data request from the IMF.

It also queries the procedures for approving tax incentives, tax holidays and related law/provisions.

Also, the IMF wants to know whether there is close collaboration between pertinent agencies that serve to promote tax incentives such as the ministry of industries, Bangladesh Economic Zones Authority, the Ministry of Finance etc.

The IMF also wants to look into historical corporate income-tax revenue data of last five years.

Furthermore, the IMF wants to know whether it is correct to impose a reduced VAT rate (5.0 per cent) on electricity.

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