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That the National Board of Revenue (NBR) cannot hit the annual tax revenue earning targets set in the national budgets is no secret. The failure, though unintentional, makes the estimated budget deficits bigger, leading to higher bank or non-bank borrowing by the government. Yet the Board has been setting its annual earning targets at ambitious levels, allegedly, under the influence of the Ministry of Finance (MoF), its controlling authority.
The tax revenue earning potential is much more than the NBR earns annually. Lax tax administration, propensity among a section of taxpayers to evade tax payment and inadequate campaigns to motivate the eligible taxpayers to pay tax are the main barriers to exploitation of the tax revenue potential.
The direct-tax revenue potential is more than the amount of tax people usually collect. But, the tax authorities are more interested in mobilising resources through indirect tax sources such as value-added tax, import duty, regulatory duty etc., since those are easier to deal with. Getting revenues using direct-tax sources involves more efforts and persuasion.
Hence, the volume of revenues earned through direct taxation remains smaller compared to other sources, particularly VAT and import duty.
Being hard-pressed by the International Monetary Fund (IMF) to do away with large-scale tax exemptions enjoyed by individual and corporate taxpayers, the NBR has come up with some interesting facts. That the volume of revenue involved in tax exemptions enjoyed by corporate taxpayers is more than what the NBR collects from them in taxes is one such bewildering fact.
The exemptions of direct tax granted to individuals and corporates amounted to Tk 1.26 trillion in the fiscal year 2020-21, which was equivalent to 3.56 per cent of the country's gross domestic product (GDP). During that FY, corporate taxpayers had enjoyed tax exemptions worth Tk 853.14 billion as against the actual collection of Tk 852.24 billion in taxes from them.
The corporates pass on the indirect taxes such as VAT, import duty, regulatory duty and surcharges to the consumers. Direct taxes hurt them, as there is no way to shift the burden on to the consumers.
If exemptions of direct taxes on corporates remain higher than what the NBR collects from them, one has reasons to raise questions about overall objectives of the taxation system. Such a tax regime is nothing but regressive, for it prefers dependence on indirect taxation.
Some exemptions are essential for growth of industries and entrepreneurship in a country like Bangladesh. None would raise objections to such fiscal support. But, as businesses got involved in politics and started influencing the decision-making process in recent years, the size of direct tax exemptions has grown notably. The process is still on.
It has now become imperative for the government to reduce the size of the exemptions. If it is done meticulously, the government's revenue earnings would increase. Besides, the disproportionate emphasis on indirect taxes will also lessen to a great extent. Such a development will also help the cause of poor consumers.
The NBR has been facing pressure from domestic and external sources to rationalise tax exemptions to help boost its revenue earnings. The NBR's tax department has formed a committee to develop clear guidelines to grant tax breaks to only those who are genuinely in need of that. The committee is supposed to complete its work soon. The NBR would prepare a tax exemption policy on the basis of the committee's report and other ground realities. Given the power and clout that corporates enjoy these days, there is no option other than keeping one's fingers crossed that undue tax exemptions will get eliminated.