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The Financial Express

Tax policy reform should be country-specific

Jamaluddin Ahmed | Published: May 10, 2017 19:34:37 | Updated: October 17, 2017 14:15:04


Tax policy reform should be country-specific

The VAT rates in 19 Asian nations vary from the lowest 5.0 per cent to 20 per cent. Taiwan, Japan and Iran have the lowest rates. The rates in other countries are: South Korea - 10 per cent; Mongolia, Papua New Guneia and Labanon. India, Kazakstan, and Sri Lanka - 12-12.5 per; Nepal - 13 per cent; Bangladesh and Turkmenistan - 15 per cent; Pakistan and Jordan - 16 per cent; the  People's Republic of China - 17 per cent; Kyrgyzstan and Uzbekistan - 20 per cent. 
In the ASEAN countries VAT rates range from 7.0 per cent to 12 per cent: Indonesia -10 per cent; Thailand - 7.0 per cent; Singapore - 7.0 per cent (began with 3.0 per cent in 1993); Philippines - 12 per cent (began with 10 per cent in 1998;   Cambodia, Vietnam and Laos - 10 per cent.  
VAT SCENARIO IN BANGLADESH: Widely considered to be one of the efficient taxation system, VAT, if introduced in place of more narrowly based indirect taxes, can lead to significant efficiency gains. Across the Asia-Pacific region, there has been a de facto broadening of the VAT tax base through targeted compliance programmes. Bangladesh introduced VAT in 1991, but many exemptions have hindered its revenue-raising potential, thus, there is a strong argument for broadening the base of VAT in the country. Effective mobilisation of internal revenue is crucial for the ongoing economic development of Bangladesh, as government-provided welfare can assist in achieving poverty alleviation. Mobilisation of internal revenue sources can also help to ensure the long-term fiscal sustainability, as it can help reduce the country's dependence on foreign funding sources, and therefore reduce government deficits. 
Similar arguments have been made in Great Britain and Northern Ireland in the context of economic recovery from the global financial crisis, where it was proposed that the VAT rate be increased to 20 per cent to assist the government's fiscal consolidation and debt reduction. 
Revenue collections of Bangladesh as a percentage of tax revenue are shown by tax category in Table- 4. It shows that VAT stands is the largest source of revenue collection in Bangladesh; however, the share is limited and has ranged between 32 per cent and 39 per cent since fiscal year 2000/01. In addition, the data presented in the following table also show a gradual growth in income tax collection and a decline in international trade tax, such as customs duty and supplementary duty.
The table also indicates the country's heavy reliance on indirect tax, more specifically on VAT. The argument that personal income tax, generally considered to be the most effective means of taxing the rich, is relatively unimportant in most developing countries holds convincingly true for Bangladesh. The predominance of indirect taxes in revenue yield over direct taxes is evident as direct taxes accounted for only 35 per cent of the tax revenue in 2013/14 while indirect taxes accounted for about 65 per cent. 
The number of people within the personal income tax net equally indicates the malnourished tax culture of the country. For instance, only 1.17 per cent of the Bangladesh population is registered for personal income tax and of those, less than 1.0 per cent actually pays any income tax. VAT is one of the largest taxes in the country. It accounts for a substantial share of its tax revenue even though only 13 per cent of the businesses are registered under VAT (Bangladesh, National Board of Revenue, 2014).
The United Nations ranked Bangladesh in the low human development category in 2012, but it also highlighted the country for having made substantial progress since their last evaluation in 2011 (UNDP, 2013). Given the extremity of the development problems experienced by Bangladesh, policies that work in the country are likely to provide guidance to other developing economies experiencing less extreme conditions. According to the Asian Development Bank (2004) and others (IMF, 2011a; Kim, 2005), effective fiscal policies directed at achieving sustainable economic development are crucial for poverty alleviation in developing countries, such as Bangladesh. 
However, such tax policy reform should be country-specific, as taxes that work in one country may not be effective in another country context. Bangladesh is highly vulnerable to the impacts of climate change, owing to its location and large proportion of low-lying land subject to inundation as sea levels rise. The country's vulnerability to climate change poses a serious impediment to long-term economic development. To mitigate this vulnerability, significant internal and external funding is required. The Bangladesh Climate Change Resilience Fund, which was established in 2010, is enabling the Government to channel more than $188 million in grant funds to millions of Bangladeshis to build their resilience to the effects of climate change.
Apart from the climate change issue, Bangladesh also faces the mounting task of increasing funding for education and human capital development, which can help long-term economic development. The country's new education policy has addressed this issue and has notably received much attention in recent years as a key mean of improving its gross domestic product (GDP) growth and redressing inequality. It is estimated that between 42 and 51 per cent of the population is currently illiterate, and that 38 per cent of the population has received no formal education (Bangladesh Bureau of Statistics, 2010; aBangladesh, Ministry of Education, 2010). The National Education Policy 2010 of Bangladesh acknowledges the importance of expanding the provision of quality education in this country, which according to education policy experts, would require more than TK 30 (approximately US$37.5 billion). Finding a new tax base to fund and implement such an important policy is a daunting task
VAT AND GROWING DEMAND FOR PUBLIC EXPENDITURE: This paper have dealt with various facets of VAT considering it as an ideal tax from the conservative point of view. Many say that VAT is money machine that will lead to higher taxes and bigger government precisely because it is such a good tax. Politicians are also mindful that leaders those impose VAT often suffer electoral loss as a consequence, for example, in Japan (1986), Canada (1993) and Australia (1998). Using a broad concept of tax costs, introduction of VAT increases social welfare because it reduces compliance costs, rent seeking, and efficiency costs. 
Increased usage of VAT during the 20th century should be understood as a collective choice to accommodate growing demand for public expenditure. Since introduction in France in 1954, VAT has been adopted as the main form of indirect taxation by the most countries in different parts of the world  and at different stages of economic development. It has become the standard element of national fiscal system in the industrialised countries. By now, over 141 countries use VAT system, leading to the conclusion that VAT is unique in fiscal history. A generation ago, it was virtually unknown. Now it is approaching universal.
In Bangladesh, the current debate on the application of uniform VAT rate is a part of political decision which needs a review at the highest level of consultation among the ruling coalition, professional trade bodies, economists, accountants, and lawyers. Considering the optimum number of registered VAT licensees' compliance in paying VAT, the National Board of Revenue (NBR) should calculate the alternative scenarios applying different rates starting from 11 to 15 per cent and evaluate the results of expected total volume of revenue that would ensure the required funding to finance the development expenditure.  Moreover, the government should form a Revenue Commission to advise on the critical issues on Central Revenue Management of the country.
Jamaluddin Ahmed PhD FCA is the General Secretary of Bangladesh Economic Association and a member of the Board of Directors of Bangladesh Bank. 
jamal@emergingrating.com

 

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