No economy can move forward with so few revenue resources

The revenue-GDP ratio in Bangladesh is lower than in almost all countries and experts believe it is not possible for a country with a healthy economy to move forward with so few resources.

At a pre-budget discussion organised by The Business Standard recently, they said the tax-GDP ratio should be increased to make the ongoing development sustainable and that major reforms are needed in the revenue sector.

Executive Director of the Policy Research Institute Dr Ahsan H Mansur said in any growing economy, money moves fast. As economic activities increase, revenue growth increases more, but the opposite happens in Bangladesh.

"Our tax buoyancy should be like 1.2 but it is around 0.8, which is not desirable at all. In 2010, our tax-GDP ratio was about 10%. When we formulated the Sixth Five Year Plan, our goal was to raise it to 15%.

"But during the Seventh Five Year Plan, it went down to around 8%. This is a very scary picture. It is not possible to move forward with such a small amount of resources in a healthy economy," he said.

Quoting Amartya Sen, he said, "Almost all indicators of Bangladesh's economy are good. One thing that worries me is how a country can move forward with this tax-GDP ratio."

He also said major reforms are needed to increase the tax-GDP ratio.

"It is a big challenge and cannot be ruled out by going ahead with just positive thoughts. The thinking that it will get better automatically will not work. For this to happen, we need major tax reforms.

"Compared to any other country in the world, it would be like we have no way back now. We have to plan to go from 7% to 17%. No high-middle-income country has a tax-GDP ratio below 16-22%," he said.

Proposing reforms, he said administrative reforms are needed more.

"The administration with which we collect taxes dates back to the British era. We may have extended the office but could not change the characteristics."

He said tax commissioners call all the shots in Bangladesh.

"They are registering taxpayers, doing tax assessments, reassessing paid taxes, imposing penalties, and holding trials of cases filed against taxpayers. They also conduct tribunals and are giving verdicts as they wish. This creates a reluctance to pay taxes among taxpayers. One cannot call all the shots."

Dhaka Chamber of Commerce and Industry (DCCI) President Rizwan Rahman agreed with him, saying there is no accountability because commissioners and tax collectors have been given absolute power. "Transparency will automatically come if making laws and enforcing them are administered by different people."

Revenue reform big challenge

Mansur said the National Board of Revenue's (NBR) revenue reform is a big challenge and none of the reforms initiated was successful.

He said reforms are almost dead. A major reform took place in 1991 with the formulation of the VAT system. After that, nothing much happened.

"We had high hopes for the 2012 VAT act. But I did not see its reflection after its implementation in 2018. The new law is regressive compared to the 1991 law. We have been talking about automation since 1990 but that is not happening. The whole system is not changing because everyone wants to retain power."

That is why tax policy and tax administration should be separated, said former NBR chairman Dr Muhammad Abdul Mazid. He said the NBR has the word national in it and that means it is not a government institution. "They should function autonomously but that is not happening."

"The NBR has to be kept free from administrative pressure. NBR officials are given project responsibilities. But when they work on projects, they do not enjoy field work. Thus, they take up another responsibility with that work and project work does not progress. After a while, they get a new posting and project work stops," he said.

Thus, two sections have to be separated so that the tax policy department will study the whole year and announce the policy in the budget, he added.

Asked whether there is any interference of the donor agencies in new law formulation and the reform of the revenue department, Mansur said there is no problem in donor support in reforms. "If the government puts forward a clear proposal, donors will not have problems financing it."

Expectations in upcoming budget

Traders have high expectations from the government in the next budget to deal with the coronavirus pandemic.

On behalf of traders, Rizwan said despite the negative GDP of almost all the countries in the world during the pandemic, Bangladesh showed more than 5% growth and that happened because of the private sector.

"The budget for the current fiscal year came within three months of the coronavirus outbreak. I did not see anything effective for the private sector as budget activities began earlier. The next budget will be based on the one-year experience of dealing with the pandemic. So, we have expectations."

Rizwan thinks cottage, small, and medium enterprises should be given more importance in tax policy besides reducing corporate tax in the next budget. He wants guidance in the upcoming budget for export diversification.

He said people are still doing garment business in the hope of various benefits. "If benefits are given in other sectors, there will be new entrepreneurs there as well."

He also said he wants policy support in several sectors, including leather, ceramics and tableware, and ICT. "The government has given bond licence to the garment industry for three years but for leather, it is one year. Why two different policies?"

The former NBR chairman also hoped there would be directions concerning the pandemic in the next budget.

He said the term Covid-19 was used 116 times in this year's budget but the pandemic was not reflected in allocations and policies. "We think this happened as there was not enough time to address these before the budget."

Mansur proposed a reform of the existing wealth tax surcharge system, saying it is not ethical.

He said the owner of a piece of land in Gulshan bought it in 1970 for Tk1 lakh and is still paying taxes on that amount.

"On the other hand, if a person buys a flat built on the same land for Tk5 crore, he has to pay tax on that amount. The owner of the land now pays tax based on Tk1 lakh even though the property is worth Tk100 crore."

At the same time, without raising the minimum tax, he proposed imposing an additional tax on those who earned more money during the pandemic. But he said this should be abolished after the pandemic is over.

Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office and the moderator of the discussion titled Revenue Reform, said the challenge of revenue mobilisation in Bangladesh is getting more and more difficult lately.

"We usually look at the index of revenue growth with nominal GDP growth. In recent years, revenue is lagging behind GDP growth. As a result, the balance between revenue and GDP is in question," he said.  

Dr Zahid said the corporate tax for general RMG factories is 12% and for green factories, it is 10%. He suggested considering whether other companies in the export sector could be given this facility.

No more chance to whiten black money

Economists no longer want the opportunity to whiten black money to stay. They said this discourages honest taxpayers and results in tax injustice.

Dr Mazid said the government got some revenues as black money was whitened. "But as a result, the government was also deprived of 20% tax. This caused losses."

He thinks it is normal that some money will be whitened this year, saying those who launder money could not do so because of Covid-19 and money was not transferred by hundi.

"That is why so much money was whitened this time. But it was not right."

The man who invested undisclosed money this year, whether he paid taxes properly next year needs to be controlled, said Dr Zahid.

Bringing adverts of foreign companies under VAT

The Business Standard Executive Editor Sharier Khan said online sales increased much after the coronavirus outbreak and large e-commerce companies were founded in the country.

On the other hand, foreign companies, including Facebook and YouTube, are taking away a huge amount of money from ads. He thinks the government has an opportunity to collect huge revenues from this.

Former NBR chairman Dr Mazid proposed imposing taxes on the foreign advertisement media instead of taxing the country's e-commerce companies now.

He said the NBR should bring the advertising income of these organisations under proper accounting. "Proper VAT needs to be collected from their advertisements just like the local media."

Rizwan said he thinks incentives should be given to f-commerce and local e-commerce firms for the development of small industries.

Revenue target should be realistic

Mazid said the traditional rule of revenue target is to set a goal by considering the collection of the previous year and the expenditure of next year and that was the case before 2010-11.

"But the situation changed in 2012 as the government prepared an expenditure list and based on that, the NBR was given a target. But whether it is feasible or not is not checked."

"Unplanned targets are set and then revised at the end of the year. But setting a big target at the beginning of the year creates mental pressure on revenue officials. So, the target must be realistic," he added.

Rizwan said when the revenue target is given, it is not specified.

"We give a target to increase the revenue target, but we do not give a target to increase the tax net. The government should set a target to increase the tax net instead of raising taxes."