Credibility of public financial management is a prerequisite for tax-sensible generation

The South Asian region has a history of income tax laws of more than one hundred years. Since 1972, Bangladesh has gone through a long path of strong resilience and dynamism. Bangladesh has become a lower middle-income country and aspires to achieve upper middle-income country status by FY2031. In recent years, the tax to GDP ratio has yet to be completed as planned which has become the lowest tax performance in South Asia.

People's mindset on tax payment

In accordance with statistics of 2023-2024 of Bangladesh, tax revenue is only 8.7% of GDP which is around 25% of a developed country. Around 30% of tax revenue comes from income tax as opposed to around 54% in the case of a developed nation. Tax evasion and tax avoidance are more or less a common practice in Bangladesh.

Generally, the multinationals are found compliant in tax payments, whereas most of the local corporate houses play with numbers to pay less than actual payable taxes.

The National Board of Revenue (NBR) has been trying to bring tax-evading firms under the tax net for a long but has yet to achieve notable success.

The management of the organized manufacturing and services sectors, at the end of every month, deducts the tax amount from the salaries of their employees and deposits the same in the public exchequer.

Most others are the opposite of this as the management and employees are found reluctant to pay taxes. This is why the contribution of direct tax could be better in the total tax collection, and the share of tax paid by individuals is not significant in the total direct tax collection of Bangladesh.

In order to achieve expansion of the tax net to help generate more revenues for the government, it will be important to find out the reasons behind people's reluctance to pay taxes.

A quick evaluation of the Bangladesh Taxation System

Many characteristics have been discussed by different scholars which were thought to be the pillars of an effective tax system. The five, namely Fairness, adequacy, simplicity, transparency and ease of administration, are the minimum. 

To assess the merits of a tax system, it must be considered as its whole. A good taxation system is one that mostly carries good taxes and meets most tax canons. If the above pillars are taken into consideration, a quick review of the present taxation system of Bangladesh might result in the below assertions.

Bangladesh's taxation system is regressive, allowing it to collect more money from the poor than from the rich. Through the taxation system, the government of Bangladesh always needs a collection of adequate revenue to support its need for regular expenditures and implementation of development goals which results in a huge deficit budget in every fiscal year.

The taxation system of Bangladesh is the most complex and unfriendly system, which encompasses fierce processes, bureaucratic complexities and unclear guidance to taxpayers.

Openness and accountability in the taxation system werewere never emphasized by any government of Bangladesh to make this impactful and appreciable by different peoples' forums of the country.

The budget discussion by NBR once a year is the only effort that has so far been made by the previous governments, which is perceived as eyewash by the stakeholders.

Towards the reformation

This is true that corruption, administrative weakness, complex tax rules, lack of awareness, the scope of money laundering, cash transactions in business, etc., are the significant causes of the low tax-to-GDP contribution in Bangladesh.

The structural reform of the taxation system is obvious to curve out all these problems. Still, a question that exists, will the general people of Bangladesh intend to pay their due tax to the government? 

Most probably not. Because, the absence of a culture of tax payment and pro-tax mindset is responsible as a poor incentive for people to become a tax payer.

People's expectation vs reality

In Bangladesh, people need to learn the tax payment benefits, which need to be clearly defined. Social benefits, health benefits, education benefits, security of life and accidents are all uncertain for a taxpayer. Corporate houses do not enjoy a level playing field and policy support from the Govt. The payment of taxes to the government cannot assure a secure life for a taxpayer.

Bangladeshis are unwilling to pay taxes because they do not feel that resources are used effectively. This has been evidenced that politicians and the system encourage the pilferage of government funds sourced from taxes to a large extent when used in the implementation of public projects.

In the recent past regimes, the trust of the people of the country in the truthfulness, trustworthiness and efficiency of the revenue collection and utilization of the same has dropped to virtually zero.

More than the reformation

Aiming the greater revenue collection, actions should be taken to reform the entire taxation system of Bangladesh to implement basic and modern features.

In addition, with a view to earning the trust of the citizens, reform must take place in the entire Public Financial Management, covering revenue collection and government spending in all the sectors, aiming to establish accountability, efficiency and honesty.

In the short term, reforms on the tax systems should be aimed whereas longer time is required to gain the inclusiveness of people through extensive consultations with the stakeholders, massive publicity campaigns, creating awareness among the taxpayers about the reforms, transparent information and safeguarding the enhanced rights of the people.

The transitoriness of the income and the expenditure of the government, which would never exist if founded, can play a major role in enhancing the tax net, thereby increasing tax and non-tax revenues in Bangladesh.

Md. Abid Hossain Khan FCA (Fellow member of ICAB, Enrolment No 996) & Ex-Faculty, Independent University, Bangladesh. E-mail: [email protected]