Is increasing the highest tax slab rate the correct approach?

Illustration: TBS.

Historically, the individual highest tax slab rate was 25% in Bangladesh.  

In 2014, the highest tax slab rate was increased from 25% to 30% but since the burden fell on certain taxpayers who were already paying taxes and due to the impact of Covid-19, it was reduced back to 25% in 2020. However, there are now indications that the government may increase the highest tax slab rate to 30% again.

So has our condition improved compared to 2020 to justify the increase from 25% to 30%? 

Let's delve into certain statistical data: The inflation rate in 2020-21 was 5.65% and 9.69% in 2023-24. The wages rate general index was 6.12% in 2020-21 and 7.8% in 2023-24. The GDP growth rate was 7.03% in 2020-21 which decreased to 6.4% in 2023-24, with a further projected decrease to 5.4% in 2024-25.

Currently, individuals with an annual income above Tk16 lakh are taxed at a rate of 25%. In the fiscal year 2020-21, the National Board of Revenue (NBR) reported 89,290 taxpayers in this high tax bracket. These taxpayers contributed Tk1,963 crore in income tax, accounting for nearly 31% of the total revenue from direct taxes. 

Among those taxed are businessmen/entrepreneurs from the elite class and certain individuals with a higher salary. However, considering the current economic and geopolitical conditions, the proposed increase in the highest tax slab rate from 25% to 30% may not be justified and could lead to further burden.

Instead, the government should prioritise efforts to expand the tax base by encouraging cashless transactions and enforcing mandatory links of NID to TIN. These measures will help bring untapped taxpayers into the tax net and ensure a fair and sustainable tax system.

The changes 

After the new Income Tax Act 2023, there has been an increase in tax liability compared to 2020-21 in several aspects.

Based on tax law applicable in 2020, Leave Fare Assistance (LFA) was exempted from payment of income tax. It is now fully taxable.

Based on tax law applicable in 2020, the first Tk50,000 dividend income from listed stocks was exempt from payment of income tax. It is now fully taxable.

Based on tax law applicable in 2020, Income from Workers Profit Participation Fund (WPPF) income was exempt from payment of income tax as long as it did not exceed Tk50,000. Now it is fully taxable. 

Previously there was no environmental surcharge for individuals owning multiple cars. In the Income Tax Act 2023, the newly imposed environmental surcharge is set to Tk25,000 to Tk3,50,000 for each additional vehicle based on the car(s) with the highest cubic capacity (CC). 

Finally,  the imposition of tax on retirement funds under the Income Tax Act 2023 has also reduced the future income of the individuals. 

The potential impact of raising the highest tax slab

Increasing the highest tax slab rate from 25% to 30% would have a significant impact on individuals whose income falls under the highest slab. With high inflation, lower wage growth and the withdrawal of previous exemptions (mentioned above), real income would be significantly lower compared to the 2020-21 financial year. This could lead to significant dissatisfaction among affected individuals.

To illustrate the situation, let's consider a hypothetical example: Mr X holds a high-level position in a Bangladeshi organisation. If his monthly salary in 2020 was Tk100, it would increase to approximately Tk126 in 2024, assuming an average increment of 6% (although in reality, it may be even lower). However, when taking into account the average inflation rate of 7.6% from 2020 to 2024, his real income would actually decrease to 94.

Now, if we raise the highest tax slab rate from 25% to 30%, Mr X's take-home salary would be further reduced, adding to the additional tax burden mentioned above.

Additionally, due to the retrospective application of any change in tax rates, employees will have to surrender 50% to 60% of their salary in the form of tax, which will lead to further dissatisfaction.

Despite our hopes for a return to normalcy after the Covid-19 pandemic, we cannot ignore the significant challenges posed by geopolitics. The ongoing conflict between Russia and Ukraine, the escalating tensions in the Middle East, and issues in the Red Sea have had far-reaching effects.

These effects include expensive shipping charges as goods are being rerouted through safer routes which has led to higher prices and a weaker local currency. Additionally, limited imports, as a result of dwindling foreign currency reserves have placed a heavy burden on businesses.

In this difficult reality, many companies are struggling to survive. Salary increases, if they happen at all, are minimal due to the challenging economic conditions.

So, what are the alternatives?

There are huge untapped taxpayers of more than 30 million who still do not pay taxes. We have to take the initiative to bring them under the tax net. 

Promoting cashless transactions is one way to achieve this. While the government has already initiated this, they need to focus on enforcement. Then there is the option of making all transactions linked with the NID, which can subsequently be linked with TIN.

Additionally, strengthen the audit process to tap taxable income on cash salary payments in private organisations. And, reconcile tax returns based on transaction summary to ensure proper payment of tax. Finally, the Implementation of prospective application of tax rate change may prove helpful to bring more citizens under the tax net. 

We believe that introducing the above will not only ensure the increase of the tax GDP ratio but also ensure a significantly high increase in tax collections, far more than what the government is expecting from this 5% increase in the highest tax slab rate.
 

Sketch: TBS.

Debabrata Roy Chowdhury is a fellow member of the Institute of Chartered Accountants of Bangladesh.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.