In the Addis Ababa 2015 Agenda for Action, which aims to provide a global framework for funding the Sustainable Development Goals, countries committed to improving revenue management through modernized, advanced tax systems, improved tax policies and more efficient tax collection.
It also pledged to improve the fairness, transparency, efficiency and effectiveness of tax systems, including through broadening the tax base and continuing efforts to integrate the informal sector into the formal economy as appropriate to the country’s circumstances.
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With a tax-to-GDP ratio of around 10 percent, the tax-to-GDP ratio in Bangladesh is far below the average for the South Asian countries (16.4 percent). This is mainly due to poor tax compliance rates in both income tax and value added tax (VAT), which accounts for about 80 percent of the National Board of Revenue’s (NBR) revenue collection.
The eighth five-year plan for fiscal year 21 to 25 aims to increase the tax-GDP ratio to 12.26 percent by 2025.
The Covid-19 pandemic underscores the need for a strong, resilient domestic financial system that is stable, enables an inclusive economy, and provides public goods such as the universal health system. Effective public revenue generation is critical to funding a system that can better handle the pandemic.
Against this background, the NBR must draw up and implement a five-year plan for tax modernization. The plan could aim to reform both tax policy and tax administration to improve tax compliance.
REFORM TAX LAWS
The 2012 VAT and SD Act, implemented in July 2019, appears to be largely a return to the 1991 structure. It is widely seen as a missed opportunity to reform the task in a positive direction. Although the standard VAT rate under the VAT Act is 15 percent, there are currently a variety of applicable VAT rates.
The most fundamental criticism is that there are too many VAT rates which can lead to lost revenue and serious economic distortions. The evidence available shows that VAT performance compared to other taxes has not improved since the new law was introduced.
The law needs to be revised and efforts can be made to revert as much as possible to the original VAT and SD Act of 2012 by bringing together various differentiated rates and sales-based rules into a unified structure.
This 1984 Income Tax Ordinance is out of date to keep up with the changing times. Therefore, a new income tax law is needed to introduce an efficient and modern income tax system.
BROAD CONTROL NETWORK
Voluntary compliance can be increased through a strong and efficient third-party reporting system. The tax network can be expanded by focusing on withholding taxes, reducing tax exemptions and linking various services with the tax system.
CHECK TAX EXEMPTIONS
There are numerous provisions on tax exemptions in the amended VAT Act of 2012. This is also the case with the 1984 Income Tax Ordinance. It is time to examine the exemptions available to individuals or corporations in the case of income tax and goods and services in the case of VAT. The government should limit tax exemptions.
IMPROVEMENT OF TAXES ON DEFECTIVE GOODS
Significant tax increases on defective goods such as tobacco products, alcohol and polluting goods deserve policymakers’ attention.
The Addis Ababa Agenda for Action also highlights tobacco tax and price measures as key mechanisms for reducing demand and saving lives, as well as increasing domestic development resources.
Research shows that government interventions in the form of price increases and SD of the low cigarette section and the introduction of a specific tax are expected to generate significant additional revenue in a year.
FIGHTING TAX AVOIDANCE AND EVIDENCE
Tax avoidance and tax evasion are widespread in Bangladesh. According to the Economic and Social Commission for Asia and the Pacific (2014), the estimated tax gap is 7.5 percent of gross domestic product.
Some multinational corporations try to move money to their headquarters through the transfer pricing mechanism.
The NBR should strengthen its central intelligence cell and other intelligence agencies to combat tax avoidance and tax evasion that exploit loopholes and inconsistencies in tax regulations.
DIGITIZATION OF THE CONTROL SYSTEM
Income tax and VAT registration are currently being automated. A low level of automation of the tax processes leads to a low level of tax compliance. Therefore, the NBR must fully automate the control system and integrate information technology into the three control wings in order to create synergies.
TAX DISPUTE
Settling disputes is a key issue in taxation. According to the NBR, 33,318 tax cases were pending in various courts by mid-March 2021, in which around 66,114 thousand crore were involved.
When it comes to resolving tax disputes, the NBR can take a two-pronged approach: taking the initiative to resolve the pending cases and reducing tax dependency in court by strengthening the Alternative Dispute Resolution (ADR) mechanism.
This will likely put a large chunk of the money in the treasury. We can follow the South African model, which uses the ADR mechanism to eliminate more than 80 percent of tax cases.
STRENGTHENING NBR
The government should redefine the status and regulatory powers of the NBR, delineate the relationship between the internal resources department and the NBR, reorganize the NBR and its field formations by function and type, ensure adequate coordination between the three tax wings, and serve taxpayers Introduce incentive systems for NBR officials through a web-enabled tax administration (electronic registration, electronic filing of tax returns, electronic payments, electronic refunds), develop a strategic communication and taxpayer contact and education program, and develop human resources and institutional capacity of the NBR.
FINANCIAL INCLUSION
According to the 2016-17 Labor Force Survey, more than 85 percent of people are employed in the informal sector, of which around 92 percent are women. The pandemic has added more people to the informal sector. The government can generate additional income by bringing the informal sector into the formal sector through financial inclusion.
IMPROVING REVENUE GOVERNMENT
There are allegations of corruption in the revenue sector. Hence, the fight against corruption is needed to reduce business costs and increase revenues.
ESTABLISHMENT OF THE REVENUE REFORM COMMISSION
The government can set up a Revenue Reform Commission to analyze the tax system and make specific, measurable, achievable, realistic and timely recommendations on reforming tax policy and tax administration.
The author is a past chairman of the National Board of Revenue. He can be reached at ahmed.nasiruddin@gmail.com.