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The Financial Express

Making tax regime efficient and fair

| Updated: October 22, 2017 18:31:40


Making tax regime efficient and fair

Financing the incremental size of recurrent and development expenditures has become more challenging in the country in the context of limited domestic resource mobilisation. To overcome the limitation, the government, the tax authority to be precise, has decided to move aggressively. The argument behind such move is that a large number of people, organisations and entities are still not covered by the tax net.
The most problematic area of the revenue generation policy is that it is largely driven by neo-liberal philosophy where free market is the ultimate goal, not the long-term welfare of the people. So, required reforms in the taxation system and tax efforts are not necessarily following the four main characteristics of an effective tax system. Literature on public finance generally mentions four characteristics: efficiency, fairness, simplicity and adequate revenue. While this is not an easy task due to the given nature of complexity in taxation structure, it is also not impossible if designed rightly.
The tax policy in Bangladesh clearly lacks synchronisation of these four characteristics. Tax authority prioritises required revenue ignoring the three other elements. Moreover, excessive reliance on indirect taxation makes the tax structure unfair and inefficient. Around 70 per cent of the total tax revenue in Bangladesh originates from indirect sources.
Indirect tax is a type of tax where the incidence and impact of taxation doesn't fall on a particular entity. Rather, the burden of tax can be shifted to someone else by the original tax payer. So, it is the final or end consumer or user who has to bear the brunt of indirect tax in most cases. Indirect tax has the effect to raising the prices of products and services on which they are imposed. Customs duty, excise duty and value added tax (VAT) are examples of indirect tax. Proponents of radical fiscal reforms argue that higher revenue growth is possible by reducing the reliance of taxation policy on indirect tax.
Indirect tax is comparatively easy to collect and applicable to all without considering income or affordability. Those who go for obtaining a certain service or purchase a good has to pay such tax. It is, thus, generally regressive as households with lower income pay a higher proportion of their income in indirect taxes than households with higher income.
There is a long list of such taxes. No one in the country can maintain a bank account without paying some additional taxes. For example, there is a 15 per cent VAT on the charge of account maintenance. When a bank issues a debit or credit card in exchange of certain amount of charge, there is also a VAT. Even, charge of online banking is subject to VAT.  
The new VAT and supplementary duty act, designed to increase reliance on indirect taxation, will come into effect from July 01, 2017 which was earlier scheduled to be effective from the current fiscal year. The trade bodies vehemently opposed the act. The act, drafted under the guideline of the International Monetary Fund (IMF), brings almost every product and services under a uniform VAT rate of 15 per cent. Businesses are demanding multilayer VAT to give some breathing space to the small and medium entities.
Though the new VAT act will help bring greater transparency in the taxation system due to extensive automation, it will no doubt increase the cost of living and aggravate income inequality.
For the current fiscal year (FY17), the National Board of Revenue (NBR) has prepared a strategy paper to realise the target of Tk 2.03 billion in revenue. The overall strategy is in line with on-going reform.  
As increase in the revenue from direct taxation requires continuous effort and some creativity, it is naturally a difficult task. Without adequate reform and good governance in the tax administration, it is difficult to obtain the desired outcome in direct taxation.
Good governance is the key to achieving the ambitious target of increasing the number of taxpayers from the existing 1.2 million to 2.0 million by 2018.  Obviously there is a risk of harassment to potential taxpayers. So, it is important to ensure fair treatment to the taxpayers which is challenging and will require some time.
Existing discrimination in direct taxation is another area that needs attention. Government officers and employees enjoy some additional tax benefits which are not available to others. Such practice is not helpful to encourage people to pay taxes.
The tax authority is mostly focused on collecting taxes and pays little heed to expenditure and transparency aspects of taxation. While tax collection is the primary responsibility, revealing information on expenditure and detailed data on taxes collected is also integral to the professional obligation of the tax authority.
But there is no revenue or tax expenditure statement from the NBR. So, it is almost impossible to know the actual amount of revenue forgone. The only estimation of revenue foregone in Bangladesh is available for FY05. Bangladesh Bank, in a policy note titled 'Tax Expenditures in Bangladesh: An Introductory Analysis' made an estimation which showed that there were 106 fiscal incentive measures in FY05 in the form of tax holiday, exemptions, deductions, reductions, deferrals and tax credits. Costs of these measures were calculated as tax expenditures.
The policy note also showed that in FY05 revenue foregone due to fiscal incentives through direct tax measures accounted for 0.28 per cent of the gross domestic product (GDP) and 3.44 per cent of total revenue collection in the country. Incentives through indirect tax measures accounted for 2.24 per cent of GDP and 27.81 per cent of total revenue collection.
Reluctance of the tax authority to disclose income tax data is another policy failure and goes against tax transparency. Disclosing tax data will make it clear how many people are paying taxes and how much, what is the ratio of taxpayers of the total population or how much the wealthy people are paying and whether all wealthy people are taxed properly. India has responded positively to Thomas Picketty's call to release tax data and unveiled tax data of 15 years this May.
Producing tax expenditure statement and revealing tax data simultaneously, the NBR can enhance transparency in taxation system and bolster taxpayers' confidence. These will also help address the issue of income inequality in the long run and curb corruption and irregularities in tax administration.  
Finally, it requires a welfare approach to turn tax regime efficient and fair. Welfare can be ensured if the government spends tax money judiciously and efficiently.
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