Low tax-GDP ratio: Reluctant taxpayers, faulty structure

Illustartion:TBS

The tax-GDP ratio serves as a useful tool for assessing the fiscal health of a country. Going by Bangladesh's tax-GDP ratio then, our fiscal health seems far from favourable. 

At present, Bangladesh maintains a low tax-GDP ratio of 8%, ranking as the second-lowest in South Asia and lagging behind most lower-middle-income countries by nearly 5%. 

The International Monetary Fund (IMF) has set ambitious targets for Bangladesh — a ratio of 8.3% by the end of FY24 and 9.5% by the end of FY26. But even in FY23, the National Board of Revenue (NBR) faced a revenue shortfall of Tk44,000 crore, despite an 8.12% increase in revenue generation compared to the previous fiscal year. 

This trend persists, with Bangladesh's total tax revenue collection significantly trailing behind its peers like India, Vietnam, and Sri Lanka. Even Pakistan used to have a better tax-GDP ratio than ours, but in recent months, that number fell behind.

The dismal situation can be partly ascribed to the widespread reluctance of Bangladeshis to file tax returns, with a mere 1.4% of people doing so in FY22. 

However, there is more to the story. 

Significant problems in the country's tax structure contribute to the low tax-GDP ratio while people's aversion to filing tax returns is influenced by factors such as corruption, lack of trust, and the harassment they experience in the process. 

Why are people so reluctant to pay taxes?

Businessmen often put forward allegations of harassment at the field level. 

"We receive reports of alarming scenarios like seizure of documents, harassment, and demands or notices. They are not conducive to business," Mostofa Azad Chowdhury Babu, senior vice president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), said at a seminar earlier this year. 

Such complaints also led to the Prime Minister Sheikh Hasina herself asking tax officials to encourage people to pay taxes instead of harassment. 

"There should be no coercion. The people should not be put into any fearful situation. The people will have to be motivated," she said. 

However, according to all the experts we reached out to, people's reluctance to pay taxes is also because of corruption and a lack of trust as to where their hard-earned money is going.

According to Dr Iftekharuzzaman, executive director of Transparency International Bangladesh (TIB), a perception has been created over the years that tax is collected and used for the benefit of the government rather than serving public interest. 

"People don't see benefits of tax for themselves, nor do they have the trust that the collected revenue is used transparently and with accountability. People see public money being wasted or used for private gains of the powerful," Dr Iftekharuzzaman said. 

"Another reason is widespread allegations of corruption in the tax administration system," he added. 

"It is also public knowledge that those who want to evade tax can do so without any problems because of collusive manipulation and corruption, while those who want to pay honestly are often subjected to harassment. The level of tax awareness and provisions of rewards and punishments are also not robust enough to encourage a tax-friendly environment," he further said.

Shah Jalal, a member of Dhaka Taxes Bar Association, also agreed with this notion. "Any legal problem can be solved at the tax office by paying money. This is the main reason to be reluctant to pay taxes." 

Apart from this, Dr Muhammad Abdul Mazid, a former secretary to the Bangladesh government and former chairman of NBR, also pointed out the fact that the revenue board is not doing enough to bring more people — who are eligible to pay taxes — under the coverage. According to him, if the people were made to understand why it is important to pay taxes, then many more would willingly do so. 

"The focus of NBR is restricted to a small number of existing taxpayers. However, there is a need to expand its coverage to include a much larger segment of the population," he commented. 

Md Tuhin Ahmed, lecturer of economics at Mawlana Bhashani Science and Technology University, also spoke along the same lines. "People do not have symmetric information about the benefits of providing taxes and the benefits of tax exemption, thereby engaging in tax evasion." 

He also pointed out that the substantial expense associated with tax compliance is a major factor contributing to the general public's lack of enthusiasm to pay taxes. 

"I personally hire an income tax practitioner to submit my returns. Here, I need to pay around Tk3,000 as their remuneration," said Ahmed.

An alarming disparity

According to experts, an efficiently implemented tax system with the proper balance between direct and indirect taxes can contribute to sustainable government revenue and a healthy fiscal environment. 

However, in Bangladesh, the distribution of direct taxes within the overall revenue is notably disproportionate when compared globally. The predominant reliance on indirect taxes for revenue generation places significant burden on the population; indirect taxes contributed to 65-67% of the Tk3,01,633 crore revenue collected in FY22 in Bangladesh.

"Nearly two-fifths to half of tax revenue comes from taxes on goods and services, and another tenth comes from taxes on international trade. In contrast, only around a quarter of tax revenue comes from taxes on income, profits, and wealth," said applied macroeconomist Jyoti Rahman. 

"This is different from other countries in the region or at similar stages of development, where taxes on income, profits and wealth are higher relative to GDP," he added. 

In India, the indirect tax contribution in FY22 was just 53% (including goods and services tax); and 40% for Vietnam. 

According to Dr Ahsan H Mansur, executive director of Policy Research Institute (PRI), the tax policies in Bangladesh fail to tackle the problem of inequality since indirect taxes affect the rich and the poor indiscriminately, regardless of their income.

"At present, individuals with low incomes often bear an unfairly high tax burden, whereas those with high incomes may not pay or contribute very little in taxes. The ideal should be the reverse to establish a social equilibrium," remarked Mansur.

Sustainable development writer Faiz Ahmed Taiyeb indicated that while the VAT collection rate is very high, tax slabs are "abnormally low".

While there are a total of five tax slabs in the country's tax structure, it lacks the anticipated 12 slabs, he said, further adding that the structure has been made horizontal by hiking VAT alongside giving tax breaks to the rich. 

"On the contrary, a vertical tax system is needed, where the income tax should be close to 50% as the income of the rich, businessmen, industrialists, institutions increases," said Taiyeb, author of books such as 'Fourth Industrial Revolution and Bangladesh' and '50 Years of Bangladesh Economy'.

He also pointed fingers at corporate tax abuse in Bangladesh. The extent of tax revenue loss resulting from corporate tax abuse in Bangladesh is 0.1% of the country's GDP.

Corporations divert $1.4 billion in profits annually to tax havens, leading to a yearly tax loss of $387 million for Bangladesh, constituting 1.5% of its tax revenue — a figure surpassing the regional average — according to a report released on 25 July by a London-based international tax fairness advocacy group, Tax Justice Network (TJN), in its State of Tax Justice 2023.

In Bangladesh, the corporate tax share is merely 16%, in contrast to India's 21% and Vietnam's 22% in 2016. Although current data for Vietnam is unavailable, it is unlikely to have decreased. 

India, in particular, has witnessed substantial revenue generation from the corporate sector. In the fiscal year FY23, direct tax collections in India surged impressively, reaching Rs16.61 lakh crore, reflecting a robust year-on-year growth of 17.63%. This collection exceeded budgeted estimates by a substantial Rs2.41 lakh crore, significantly surpassing the corresponding figures for Bangladesh.

Shah Jalal cited examples of some other inequalities as well. 

"A man who is the owner of inherited real estate is getting a huge amount of rent every month, but he has no e-TIN. The Finance Act of last year included a provision that to get utility connections, like gas and electricity, he has to submit proof of return, but it is not applicable for existing connections. So, there is a gap here," he described. 

Additionally, he complained that citizens in rural areas do not have to pay taxes in most cases, but some people earn huge amounts there, hence NBR should have gone to the field to discover the assets and identify these people with taxable income.

According to him, the universal tax-free income Tk3.50 lakh is not appropriate either, as it should be increased or decreased considering the residing area and number of family members. 

However, Taiyeb maintained that in spite of the aforementioned reasons, Bangladesh's tax-GDP ratio appears lower than it actually is, as "the government inflates GDP data and does not properly adjust inflation data to real GDP."

He went on to say, "In reality, the ratio is much higher. In the last year and a half, the value of Taka has fallen by 31%, but the numerical value of GDP has not changed much." 

To know how low the tax-GDP ratio of Bangladesh is, the statistical mistake must be corrected, he added.

Other issues in the country's tax structure 

Dr Muhammad Abdul Mazid also blamed tax exemption as a key factor behind Bangladesh's low tax-GDP ratio. 

He emphasised that the NBR was meant to function as an independent entity, free from the influence of those in positions of power. However, this ideal scenario is not being realised, allowing influential groups of businessmen involved in politics with the ruling party to effortlessly secure tax exemptions.

Dr Mazid further added that tax exemption for megaprojects is also a concerning issue, which is decreasing our tax-GDP ratio. He also cited the examples of neighbouring country India, where such practices have long been overhauled. 

"The costs associated with megaprojects should be factored into the overall calculation. It should be a standard principle that regardless of the nature of the activity, taxes must be paid. However, currently, consultants and construction companies involved in megaprojects are benefiting significantly from substantial tax exemptions, and this comes at the nation's expense," Dr Mazid explained. 

He also described the existing tax collection system as "outdated," pointing out that successive governments have not made significant investments in this sector. 

"While the scope of tax collection has expanded over the last 20 years, the necessary infrastructure to support it has not kept pace. In many district and sub-district towns, tax offices are still housed in rented spaces, which speaks volumes of how adequate the overall system is," he remarked.

In his view, another structural challenge is that the NBR is burdened with multiple responsibilities whereas the neighbouring country India has its tax administration divided into two entities: the Central Board of Direct Taxes (CBDT) handling direct taxes, and the Central Board of Indirect Taxes and Customs (CBIC) overseeing indirect taxes.

Dr Nasiruddin Ahmed, another former chairman of NBR, pointed out the significance of tax compliance, which refers to the registration of a taxpayer in the system, timely filing of tax returns, completion of accurate reporting and payment of taxes on time. 

According to him, committed compliance entails taxpayers fulfilling tax obligations willingly and without complaint, while creative compliance involves any actions by a taxpayer with the goal of minimising taxes by reducing their tax liability.

Bangladesh at the moment is grappling with both dimensions of compliances, resulting in tax avoidance and tax evasion. 

Jyoti Rahman blamed the government, saying it "lacks the political will to broaden the tax bracket and collect taxes from the wealthier section of the society."