It's overdue for Bangladesh to introduce progressive taxation to collect tax from people with the ability to pay and reduce the burden on the poor to pay tax as regressive sales tax that requires the poor to bear a larger load compared to the wealthy.
Progressive taxation is a way to mitigate the societal ills in countries with high income inequality.
According to the National Board of Revenue, until June 2018, there were about 35 lakh tax-identification number (TIN) holders of whom about 19.5 lakh submitted tax returns.
But, this does not mean that those who paid tax did not evade tax.
In Bangladesh, businesses which collect value-added tax (VAT) from consumers also dodge tax by underreporting what they had collected. Many importers rely on under-invoicing to avoid full tax payment.
Many people don't pay tax out of a feeling that their money won't be spent for the right cause. They also feel that the tax system is complicated to breed corruption and reward the tax-dodgers. They also feel demoralised to see the rich and big companies not paying their taxes properly. Another reason they find is that successive governments offered the opportunities to legalise undisclosed money by paying lower than the normal tax.
Due to loopholes and irregularities in tax-assessment and-collection systems, the exchequer does not even get a fraction of what the personnel manning these systems allegedly pocket. This frustrates honest taxpayers out of the feeling that government policy is unfair to them.
Bangladesh needs to overhaul its tax policy and collection system to make it fair, efficient and flawless to increase collection to its full potential and create the culture of tax payment and discourage dodging.
Now the burden of tax payment is on a limited number of people, mostly salaried ones, and companies that cannot evade. And roughly 62 per cent of income-tax revenue comes from tax deducted at source.
Bangladesh ought to introduce progressive taxation, as is the practice in many countries, to make collection fair and equitable to all the citizens.
Also, the tax rates need to be brought down to encourage each and every citizen with taxable income to pay their income tax and thus widen the tax net.
An extensive use of tax exemptions, incentives and special provisions also limited revenue collection, narrowed the tax base, eroded tax equity and created distortions in the economy. The extensive use of the so-called 'infant-industry theory' also made many entrepreneurs in this country lazy to stay away from global competition.
The NBR needs to be modernised and equipped with information communications technology to gather flawless information to assess individuals' or organisations' tax liabilities. Economists find it shocking that only 10 million people pay taxes or at the most 25 per cent of 40 million taxable people pay tax in Bangladesh to make it one of the lowest tax-GDP ratios in the region.
During 2015-2019, the tax-GDP ratio was around 9.90 per cent on average, far below the developing-country average of 25.60 per cent.
A big flaw is that 98.68 per cent traders in Dhaka do not pay value- added tax and over 85 per cent do not even have business- identification numbers, investigations by the VAT intelligence wing of the National Board of Revenue found out.
During a survey done in recent months, NBR's VAT Audit, Intelligence and Investigation Directorate found that only 175 out of 13,245 traders at Pink City Market, Mouchak Market, Rajdhani Market, New Rajdhani Market, Chawkbazar, Armanitola, Bangshal and Sutrapur in the capital city had submitted VAT returns and only 1,937 traders had VAT-registration numbers.
The survey also found that no traders at Mimi Supermarket in Chattogram submitted VAT returns and only 22 per cent of them had VAT-registration numbers, though the law has made VAT registration and return submission mandatory for businesses with an annual turnover exceeding Tk 3.0 crore.
The law makes it mandatory for traders with annual turnover between Tk 50 lakh and Tk 3.0 crore to file their VAT returns every month with detailed information of sales and VAT deduction.
Bangladesh's personal income tax collection dropped to 25 per cent from 30 per cent, corporate tax to 25 per cent from 32 per cent but sales-tax collection remained static at 15 per cent. It's pointer to the inherent flaws with the system needing a thorough overhaul.
Customs duties, value-added tax, supplementary duty, income tax and corporate tax continue to be the principal tax-collection sources for Bangladesh.
The Finance Bill 2017 made no changes to tax holidays for various categories of industries in export-processing zones and economic zones depending on location, coal-based and non-coal-based private power-generation companies.
Tax holiday, until 2024, for companies providing information technology-based services also remained unchanged, though the Finance Bill 2017 specifically defines these services.
In the early days of Roman Republic public taxes consisted of assessments on wealth and property. For Roman citizens, the tax rate under normal circumstances was one per cent of property value, and could be as high as three per cent during war.
In India, Dahsala system was introduced in 1580 by Akbar's finance minister Todar Mal. Under the Dahsala system land revenue or tax would be collected on the basis of land fertility split into four categories.
Polaj land for one crop per year was never allowed to remain fallow, parati land for one crop every two years, cachar land for one crop every three to four years and banjar land or evacuee trust agricultural land lying barren which could be used for raising crops.
The first modern income tax was introduced in Britain by Prime Minister William Pitt the Younger in his budget of December 1798, to pay for weapons and equipment for the French Revolutionary War.
Pitt's new graduated or progressive income tax began at a levy of two old pence per Pound or 1/120 on incomes over £60 and increased up to a maximum of two Shillings or 10 per cent on incomes of over £200. He expected to use the new income-tax system to raise £10 million, but actual receipts for 1799 were a little over £6 million.
His progressive income tax had been levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens after Addington took over as prime minster in 1801, after Pitt's resignation over Catholic Emancipation.
Pitt's income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo.
Under the Income Tax Act 1842, Sir Robert Peel re-introduced this system of taxation to meet budget deficits, though as a Conservative he had opposed income tax in the 1841 general election. The new income tax, based on Addington's model, was imposed on incomes above £150.
Although this measure was initially intended to be temporary, it soon became a fixture of the British taxation system. A committee was formed in 1851 under Joseph Hume to investigate the matter, but failed to reach a clear recommendation. Despite the vociferous objection, William Gladstone, Chancellor of the Exchequer from 1852, retained the progressive income tax, and he extended it to cover the costs of the Crimean War. By the 1860s, the progressive tax had become an accepted element of the English fiscal system.
In the United States, the first progressive income tax was established by the Revenue Act of 1862. The bill was signed into law by President Abraham Lincoln to replace the Revenue Act 1861, which had imposed a flat income tax of three per cent on incomes above $800.
The 16th Amendment to the United States Constitution, adopted in 1913, permitted the Congress to levy all income taxes without any apportionment requirement.
By the mid-20th century, many countries had implemented progressive income tax in some form or the other. German marginal and average income-tax rates are forms of progressive tax structure.
Progressive taxation has a direct effect on reducing income inequality and facilitating progressive government spending, including for increased social-safety nets.
If educational attainment is at the root of economic mobility, progressive tax rates on high-income groups reduce the burden on the poor, improve income inequality and ensure social justice.
In the United States, there are seven income-tax brackets, ranging from 10 per cent to 39.6 per cent. Canada's federal tax rates on income in 2021 vary between 15 per cent and 33 per cent on incomes. Denmark's vary between 12.11 per cent and 24.971 per cent and Germany's personal-income-tax rates vary between 0 per cent and 45 per cent, Sweden's between 0 per cent and 25 per cent while the UK's between 0 per cent and 46 per cent, and New Zealand's between 0 per cent 45 per cent.