Low tax base: a matter of happiness? There is a general perception that low tax base is good for people. This belief needs further scrutiny. Rich and wealthy may be happy on various low tax bases like low tax rates, exemptions, allowable deductions, rebates, credits, tax holidays, and so on. But it should be remembered that major portion of tax comes from the rich and wealthy; common people particularly in the developing country, do not have the ability to pay tax. Even in US, more than 80 per cent of tax comes from the rich and wealthy. Their average tax as a percentage of gross domestic product (GDP) is 35 per cent whereas in the least developed countries (LDCs) it is less than 12 per cent - and in Bangladesh it is 9.0 per cent. Top personal income tax in the US is more than 45 per cent whereas it was historically 25 per cent and just recently 30 per cent in Bangladesh.
Common people suffer if tax base is low. Their standard of living depends on government expenditure financed primarily from the tax revenue which comes mainly from the rich and wealthy. Government expenditure in Bangladesh is less than 15 per cent of GDP and less than 20 per cent in LDCs whereas it is more than 30 per cent in the developed countries. Worldwide, inequality is higher in countries with low tax base. By any measure of inequality, whether by 10 per cent or 20 per cent ratio or by Gini coefficient, countries with more inequality have lower tax-GDP ratio. Gini less than 30 per cent (more equal) is associated with tax-GDP ratio of 30 per cent or more whereas Gini more than 40 per cent is associated with tax-GDP ratio of 20 per cent or less. Importantly, Gini before tax and transfers in OECD (Organisation for Economic Cooperation and Development) countries is higher than 40 per cent whereas Gini after tax and transfers in the same countries is lower than 30 per cent (Income ratios and Gini indices, UN, WB, CIA list).
Thomas Pickety's Capital and Wealth Taxation, 2015. He argues that most of the inequality is due to growth in rent (land) and rent arising from the monopoly power and political influence. Inequality increases when r, the rate return on capital, is greater than the rate of growth of the economy (GDP). If those at the top save their income, their wealth grows further than income as a whole, and so too their income (if r does not diminish). Increase in the wealth-income ratio is essentially an increase in the capital-income ratio - capital deepening. And this inequality becomes acute when wages are low particularly in the developing countries.
House property. Rental income was exempt in different amount in different period for five years (Para 14 and 38, Part A of the Sixth Schedule). Income from house property is determined by deducting from rental value 25 to 30 per cent of rental value (too high a rate because the owner does repair and undertake maintenance once in three years on average) for repairs and maintenance, municipal taxes, service charges and interest on loan. In I.T.O (Income-Tax Ordinance) 1984 there was a cap on loan amount of TK 2.0 million (20 lakhs) but this is now omitted under section 25(1)(g) of the Ordinance. Construction period interest is also deductible in three years (25/1/gg). Indian I.T.A. 1961 does not allow construction period interest on borrowed capital (36iii). If house can be shown vacant (actually it was rented to relatives or friends without deed) then the house is not taxed under present law. These lapses in taxing house property can cause welfare losses and increase inequality because growth in real estate (r) is higher than the growth in GDP (Pickety 2015).
Capital gain on shares. In case of transfer of shares, capital gain tax of 5.0 per cent to 15 per cent is charged on the difference between transfer value and cost of acquisition (u/s 53O, 53M). There are however, other provisions (u/s 64 (2) and Para 27 of Part B of the 6th Schedule of the IT Ordinance which are inconsistent with the above laws. It provides that advance tax (TDS) will not be collected from 'agricultural income' and 'capital gains'. Thus capital gain tax on ordinary shareholders and immovable property is virtually exempt. Also Para 43 of the Sixth Schedule does not make sense where nonresidents do not pay capital gain tax on shares of plc (public limited company. In India, it is taxable. Only TK 54 million were collected from the sponsor shareholders u/s 53M (NBR Annual Report 2013-14). This is almost 0 per cent of GDP whereas in UK capital gain tax on shares was BPS3.32 billion which was 0.18 per cent of GDP in 2015-16 (HMRC Annual Report 2016-17). In Indonesia, capital gain tax rate is 5.0 per cent of sale proceeds, in Jamaica it is 7.5 per cent, in India it is 20 per cent of the difference between sale price and acquisition price adjusted for inflation. Most of the benefits of lower taxes on dividends and capital gains go to the highest quintile of the income distribution. Lightly taxing capital gains undermines the progressivity of the income tax because capital gains are exceptionally concentrated among the highest-income taxpayers.
Percentage of deed value (Rule 17II) and amount per square meter (19BBBBB) as property transfer tax: an alternative to capital gain tax u/s 32. Since there is no provision for inflation index in our IT Ordinance or Rules, acquisition cost is not used in practice for computing capital gain. Rather 4.0 per cent to 1.0 per cent of deed value or TK 1.08 million to TK 30000 per 1.65 decimal area, depending upon the location, is taken for determining capital gain tax on transfer of land and other establishments (Rule 17II and 53H). The higher of the two values is taken as the capital gain tax and this is the final settlement, that is, there will be no more capital gain tax imposed on this asset at the time of final assessment (82c(2)(q). Capital gain tax based on the size of the property, that is, the rate per 1.65 decimal area has not been used so far because it is relatively difficult to hide the size of the asset than the market price and the deed value. But for investment in residential building and apartment, property transfer tax or capital gain is taxable at TK 7000 to TK 600 per square meter depending upon location and plinth area (u/s 19BBBBB). During 2012-13, NBR collected TK 10.28 billion as advance capital gain tax (and also final settlement) which is 0.08 per cent of GDP. Capital gain tax (CGT) is 0.6 per cent of GDP in other developing countries and 2.1 per cent of GDP in OECD countries (Slack 2013). Worldwide, average CGT as a percentage of GDP is 0.5 per cent. In UK, 18 per cent CGT rate applies for lower than 20 per cent PIT (personal income tax) band and 28 per cent for band 40 per cent and above.
Local government property tax. 2016-17 Dhaka City Corporation budget shows total revenue, excluding foreign aid, at TK 10580. Major source was holding tax (property tax), TK 4800m and property transfer tax, TK 1350m, the total being 58 per cent. Per capita own revenue was TK 2196 or $28. It was TK442 or $6.0 in Cumilla City Corporation during 2015-16. Own local government revenue per capita was $15 in Africa, $245 in Asia, $2763 in industrialised countries during 1993 (Mott 2011). In Kolkata, per capita own revenue was INR3743 (Tk 4678) which was more than double of Dhaka.
Dr. Dhiman Chowdhury is Professor of Accounting, Dhaka University
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