The Financial Express

Tax regulations: Curbing discretionary powers of officials

Tax regulations: Curbing discretionary powers of officials

There is a general perception that the existing income tax regulations in Bangladesh are British in origin -- intricate in nature and cumbersome for enforcement.

Though taxation as an influential instrument for revenue generation of the state was very much present in ancient and medieval India in different forms, the modern tax system as we know it today was first introduced by the British rulers. The Indian Mutiny had just ended in 1857. The British government took over the ruling power from the East India Company.  James Wilson (1805-1860), founder of The Economist, was posted in Calcutta as Member (Finance) in the Viceroy's Council, a post equivalent to that of Finance Minister. Wilson, soon after taking over his assignment, introduced a bill in the Indian Legislature to restructure tariff laws. He also introduced the budgetary system and paper currency. He presented the Income Tax Act in India in his first Budget Speech for FY 1860-61 on April 07, 1860. Two months after the introduction of income tax in India, Wilson died.

The first general income tax was levied for a period of five years in order to meet the difficulties caused by the mutiny. It was levied, on the English model, on incomes above Rs 200 per annum arising from property, professions, trades and offices. The rate was 2.0 per cent on income between Rs 200 and Rs 500 per annum, and 3.0 per cent on larger incomes which also bore an additional 1.0 per cent to be used for the purpose of local development.

The basis for income tax calculation was made cumbersome from the very start where an embedded scope for creating and applying discretionary power by tax officials led to harassment and revenue dwindling. This is largely because the income tax laws and methods of collection were framed by the British bureaucrats, who were exempted from tax payment and the responsibility of collecting taxes was assigned to another such class of bureaucrats who also got the impression that they would not be liable for paying tax rather they would get commission for collecting more. So, the regulation and the method of calculation and collection were designed only for imposing on the natives. Unfortunately, this attitude as a legacy still prevails in a free democratic society and independent nation. 

Reorganising tax revenue regulations deserves a close review of existing rules and regulations in order to meet the present-day demand of social norms and business practices. If these regulations are to be prudently practised and impartially implemented in a free and democratic environment unlike in the past colonial regime, they must be incorporated in a law framed by the lawmakers who should also be within its jurisdiction. Appropriate ownership has to be established for each item of the law.  Rules must not be a tool for applying discretionary power by officials and should be applicable for all indiscriminately. Global good practices should be incorporated in such a reorganised law. It is also needed to take suggestions from the stakeholders.

To be sound, a tax system must be economically efficient causing as little damage as possible on the economy. Every tax system distorts economic decisions and leads to less economic activity than otherwise would occur, resulting in what economists call "deadweight loss." What is more, applying different tax rates to different activities or to different producers exacerbates the distortion of economic decisions and increases the deadweight losses.

A sound tax system should be designed to minimise these losses. A sound tax system should be logistically economical. It should impose the smallest possible compliance cost on tax-payers, otherwise people will not feel encouraged to pay taxes. Every tax system imposes direct cost on taxpayers in terms of time devoted to tax return preparation or money to buy the services of tax lawyers. Ultimately, every tax system diverts a portion of tax revenue raised by the tax to pay the cost of administering and collecting the tax and enforcing its provisions. A sound tax system would minimise these costs.

A nation's tax system is often a reflection of its socio-economic and cultural values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of tax revenue -- who will pay taxes, how much will they pay, and finally, how the taxes collected will be spent. In democratic system where the public elect those in charge of establishing the tax system, these choices reflect the type of community that the public wishes to create. In countries where the public does not have a significant influence over the system of taxation, that system may be more a reflection of the values of those in power in enacting laws or  enforcing collection.

Dr Muhammad Abdul Mazid is a former Secretary to the government and a former Chairman, NBR.


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