Increasing the tax net in Bangladesh

Illustration: TBS

Increasing the tax net is a fundamental issue, one that has been discussed at length. But even after concerted efforts and policies, we have still failed to increase the contribution of direct tax to the GDP.

To increase the direct Tax-GDP ratio from about 1% to at least 3%, we must ensure that all taxable income slabs pay their taxes regularly. Taxpayer numbers should be increased and tax exemption would need to be removed. However, tax policy would need to be friendly so that it encourages taxpayers to pay taxes. 

To increase the tax net, the National Board of Revenue (NBR) has taken several policies. These policies have been successful in raising the number of taxpayers to approximately 7.4 million, but the return submission number remains low at 2.3 million only.  

Based on the available information, in Pakistan, the number is higher - out of 10.3 million taxpayers the  return submission is 3.38 million. In Nepal, it is 2.2 million out of 3.05 million taxpayers. Nepal's population (29.67 million) is much lower than Bangladesh, about 10.28% of their total population pays tax, while in Bangladesh it is 6.32%.  

In India, out of 82.28 million taxpayers, returns are submitted by 58.9 million. Similarly in Sri Lanka, out of 1.7 million taxpayers, about 1.5 million submit returns. In Bhutan out of 0.10 million, 0.88 million  submit returns. 

The tax–GDP ratio of Bangladesh is also the lowest among South Asian countries. In the year 2022-23, targeted revenue earnings from income tax is about 33%. Over the years, policymakers have discussed how to increase direct tax and reduce dependency on indirect tax. 

A recent seminar held in Dhaka discussed the one hundred-year-old history of income tax laws in the region, starting from the Income Tax Act which was first introduced in  1860. 

Both the governments of India and Pakistan adopted the Income Tax Act, 1922. In this Act, for the first time, a specific nomenclature of income tax authorities and organisational history of income tax authorities was introduced. Heads of income were salary, interest, house property, business income, professional earning and other sources. However, there was still no capital gain tax.

After the independence of Bangladesh, income tax was made effective under the Income Tax Act, 1922. This was replaced by new legislation named Income Tax Ordinance 1984 (ITO) and Income Tax Rules 1984 with seven heads.  

Now, a draft of Income Tax law 2022 has been prepared and posted on the NBR website. The main objectives of the new law is to increase the tax network and simplify the tax structure by introducing automation. This law is awaiting further discussion with the concerned parties.

Some of the new features that have been included are computer-generated e-Tin (introduced in 2013), mandatory proof of submission of returns (PSR) for certain services, settlement of tax based on tax deducted at source (TDS), a minimum tax on gross receipts irrespective of loss, TDS being minimum tax for respective income head, self-assessment (introduced in 1990) limited to the certain assesees and universal self-assessment (introduced in 2007). To bring transparency, transfer pricing was introduced in 2014.

NBR expanded areas of TDS as one of the measures to collect tax. Now there are almost 70 areas for TDS. E-TDS has also been introduced and returns can be submitted online. The Document Verification System (DVS) in collaboration with ICAB has also been put in place to bring transparency to audited reports. 

The scope of collecting income tax through TDS has been increasing gradually. In 2011-12, the amount was 52.75%, which increased to 58.90% in 2014-15. It then grew to 60.94% in 2018-19 and this figure remained relatively the same at 59.10% in 2019-20. 

In 2019-20, the amount of tax deducted at the source and advance income tax under Section 64 was about 86% of the total income tax collection while the number of refunds was only 0.33%. 

There are about 120 services on which TDS has been imposed. As per income tax law 82C, there are about 76 items on which minimum tax has been imposed. Because of the mandatory tax registration system for 38 services such as loan applications beyond taka five lakh, directorships and sponsorships should have their TIN certificates. 

On the other hand, in 2022-23, as per tax law 184-A, there has been a new system for submitting proof of submission (PSR) with the tax return. NBR has published a list consisting of which TDS is deducted at different rates.

For 38 out of 120 items on which TDS is deducted, it is mandatory to submit tax returns with proof. The remaining taxpayers from which tax has been deducted do not feel it important to submit tax returns, since it is non-refundable and they do not want to go through the hassle of submitting a return. 

Those under minimum tax do not have to show proof such as - dividend issues, interest on savings, or contractor, as they all have TIN.  On the other hand, some may have one-time businesses but due to several reasons, they do not submit returns. 

If all these TDS payers could be in the tax loop, the number of return submissions would have been much higher. 

There are other areas for deducting tax at the source such as - trade licence, export-import licence, supplying and procurement, for which while the VDS and TDS have been deducted, TIN holders feel reluctant to submit returns.  

Policies would need to include changes that encourage taxpayers to submit their returns. TDS should not be treated as final tax. If the tax deducted at sources is easily adjustable, taxpayers could be more open to submitting tax returns and contribute to increasing the tax net.

On the other hand in the economy, there remains a huge amount of money outside banks or informal channels. In a recent report, it was seen that the amount is increasing - in 2022-23 the amount increased to BDT 23.99 trillion from BDT 14.09 trillion in 2017-18.  

There are debates in regard to exemption, which is also questionable. In the case of small entrepreneurs, there is a policy of tax exemption of a business turnover of up to taka seventy lakh for female entrepreneurs. This was only fifty lakh earlier.

Tax exemptions have been provided regarding the import of some materials used in manufacturing industrial goods to protect SMEs. Based on our studies and surveys, it has been seen that most of the declared supportive policies cannot be enjoyed by the CMSMEs because of stringent procedural constraints and the significant implementation gap. 

If the policies remain in the paper only, they will not create new entrepreneurs to provide employment. 

NBR has another policy which binds female entrepreneurs to be VAT registered, irrespective of turnover. In the circular, a list of CMSME businesses has been included such as - hotels, restaurants, beauty parlours, sweet meat shops etc.

People would like to pay taxes in a simple and transparent manner. But they do not know the tax payment benefits, which are not clearly defined in Bangladesh. Social benefits, health benefits, education benefits, security of life and accidents all are uncertain for a taxpayer. 

The payment of taxes to the government can not assure a secure life for a taxpayer, even though taxpayers would surely be happy to pay taxes if the policies are simple and meaningful.

Sketch: TBS

Ferdaus Ara Begum is the CEO of BUILD, a public-private dialogue platform that works for private sector development.

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