Policy parameters of revenue regime

Bangladesh has beaten the initial pessimism about viability and prospect of the country with its resource limitations to feed a large population and the lack of energy and natural resources for developing industries. Fifty two years back, it was a war-ravaged economy facing the dire challenges of rehabilitation and reconstruction. Notwithstanding all hurdles, Bangladesh had surged forward and at in the recent decades, the country's average economic growth rates reached 7 per cent per year, and growth has been inclusive. Bangladesh now needs to focus on addressing growing socio-economic inequalities and the structural and institutional reforms as major agenda in the next fifty years. Bangladesh is to work on the issues of strengthening income and asset-based tax collection, enhancing private investment for economic diversification and growth of labor productivity based on upgraded technology. Bangladesh which has the lowest tax-GDP ratio among the South Asian countries needs to remove the mismatch between GDP and tax income, improve tax governance, increase tax net and coverage, analyze tax incidence, and enhance capabilities of NBR. And to make that happen, what is needed most is reform of tax administration and tax structure.

REFORM OF REVENUE REGULATIONS

Reorganizing tax revenue regulations should deserve a very close review of existing rules and regulations one by one, if not word, making those compatible with present day demand of society and business practices. If the relevant regulations are to be effectively enforced, prudently practiced, impartially implemented in a free and democratic environment unlike the past colonial regime, those should come in the form of law framed by the lawmakers who should also be within its jurisdiction. To be sound, a tax system must be economically efficient, causing the least possible damage to 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, application of different tax rates to different activities or to different producers exacerbates the level of distortion of economic decisions and increases the deadweight losses due to the tax system. 

A sound tax system should be designed to minimize these losses. There should be none to deny the fact a sound tax system should be logistically economical. It should impose the smallest possible compliance costs on taxpayers otherwise people will not be encouraged to pay tax, rather they will be inclined to evade tax. Every tax system imposes direct costs on taxpayers in terms of time devoted to tax return preparation or money to buy the services of tax lawyers.

It should not be reflected that there is no fairness in taxation. No one is going to say that taxes are unfair, but on the contrary, it is often observed that fairness does not drive into the matter. A sound tax system is removing complexity and limiting the collection points for taxation  making the system more transparent, making the public more certain that everyone is paying what they owe, and more comfortable with the fairness of the system .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 the tax burden -- who will pay taxes and how much they will pay -- and how the taxes collected will be spent. In democratic nations where the public elects 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 amount of influence over the system of taxation, that system may be more of a reflection on the values of those in power to enact law or to enforce collection.

MANAGEMENT OF TAX REVENUE 

The reality in Bangladesh suggests that it needs to increase tax revenues and improve fiscal discipline with a view to increasing self-reliance. The external environment influencing the tax performance of Bangladesh has changed remarkably as the country is getting more and more integrated with the global economy since the 1990s. In recent years, the government of Bangladesh has initiated some administrative and policy reforms in the tax system. An improved tax administration in association with some pragmatic policy initiatives has of late resulted in a modest improvement in the tax to GDP ratio. However, the performance is still below satisfactory as compared to other countries at a similar stage of economic development. The narrow tax base, widespread exemptions, and administrative inefficiencies are the main factors behind the low tax to GDP ratio in Bangladesh compared to the neighboring or comparative countries. This also implies why tax reforms over the last decades have not brought about significant changes in Bangladesh's tax efficiency and productivity.

The most basic challenge has been the overall weakness of the tax policy framework characterized by an enormous range of exemptions, incentives and special regimes. These range from simplified regimes associated with VAT to significant scope within the law for tax officials and political elites to grant discretionary benefits. This directly undermines revenue collection, but equally complicates administration, undermines equity in the system and introduces significant scope for officials to exercise discretion in both policy and administration. Hence, attaining an optimal income tax system becomes critical for revenue generation, required for accelerating growth and improving the quality of life of citizens. A long-term sustainable solution to enhance transparency, promote growth, improve tax compliance and thus to increase tax to GDP ratio remain a much desirable issue in the context of Bangladesh

One of the basic concepts of designing and implementing an equitable taxation regime is 'Broad Basing', meaning that the taxes should be spread over as wide as possible a section of the population, or sectors of the economy, to minimize the individual tax burden. While indirect taxes (e.g. VAT) levied on goods or services affect the rich and the poor alike, direct taxes may create burdens on a certain income group. Indirect taxation is commonly used to generate tax revenue paid indirectly by the final consumer of goods and services. It is paid by everyone in society, regardless their financial situation. Hence, indirect taxation can be viewed as regressive as it imposes a greater burden (relative to resources) on the poor than on the rich. In contrast to direct tax, the taxpayer and the tax-bearer are not the same person. Hence, to reduce an individual's tax burden, the taxation regime should be diverse and broad-based with an equitable balance of both direct and indirect sources.

Dr. Muhammad Abdul Mazid, former Secretary to the Government of Bangladesh, former Chairman, National Board of Revenue (NBR), [email protected]