Modernising trade tax regime

Bangladesh's trade tax is high and its structure is complex. Though formal customs duties might appear lower, extensive use of para-tariffs (supplementary and regulatory duties) has made the tax structure overly complicated. That has resulted in a large number of (some 50) effective tax rates. But why is this extensive and complex trade tax system in existence in the country? Such a highly complex trade tax regime has to do with the fact that the government is mainly dependent on import duties for its revenue income rather than direct taxes. The reason for such dependence on indirect taxes is the country's low (below 10 per cent) tax-to-GDP ratio. So, the government is compelled to rely on import-based taxes, turning trade taxes as a primary source of revenue income.  At the heart of it is also a protectionist mindset that aims to shield the domestic industries. The domestic industries do also lobby for their protection creating an anti-export bias that seems to make local sales more profitable than export.   

In last financial year, as reported in the Monday, February 16 issue of this paper, finished consumer goods were subjected to about 2.4 times higher tariff than intermediate goods (materials and services required to make the final product). The high average nominal tax imposed on finished consumer goods in the last fiscal year was far higher (by 25 percentage points) than on intermediate goods. This has created a permanent structural imbalance in the trade regime. 

In fact, the tax system of the country has suffered from a lack of, long-overdue, reforms and limited digitisation, resulting in a system that is opaque and inefficient. Therefore, it needs total restructuring for it to contribute to building a dynamic trade-oriented economy that can create jobs and ensure inclusive growth. Such views were expressed by the members of the task force, namely, National Task Force for Tax Reforms (NTFTR), formed by the interim government to formulate tax policies conducive to both domestic and foreign trade. In this connection, the tax reform body also recommended a gradual reduction in the share of trade taxes in the total revenue from its present level of 28 per cent to 7.5 per cent in 2035. In fact, that is a logical step to be taken. Notably,  lower and middle-income countries on an average draw 5.0 to 15 per cent of their revenues from trade taxes. High tariffs on finished consumers goods lead to punishing the local consumers by raising domestic prices and protecting inefficient local industries. But such protectionism has been in place for long in the name of ensuring competitiveness of local products in the international market. Oddly though, some local businesses still cannot support the idea of any reduction in protective tariffs. But it is time they came of age and got exposed to global competition. 

Against this backdrop, the expert tax reform body in its report has argued that the existing trade tax can be gradually phased down without risking any fiscal shortfall. What is more, a lowering of trade taxes would reduce anti-export bias, encourage domestic value addition and better integrate the country into the global value chain. In sum, to modernise its tax system, the government would do well to expand its tax net, strengthen tax administration by reducing its reliance on trade taxes. Since it is rather easy to collect and administer, the government's dependence on trade taxes  is understandable. But the fact remains that it  is widely regarded as a very convoluted tax system. So, to be effective in the international market, the prevailing trend of duty adjustments to keep goods tariffs high in order to protect local consumer industries has to be reversed.