Tax exemptions should be granted through the parliament, not SROs

'Nothing is certain but death and taxes,' Benjamin Franklin stated in a letter in 1789. But it seems, that is not entirely true, at least when it comes to the tax system in Bangladesh.

Nowadays, giant companies remain out of the tax net even after being profitable, violating the fundamental principle of tax – Equality. The term 'tax exemption,' which refers to the practice of shielding types of income, revenues, or even taxpayers from taxation, is increasingly being used to infringe upon this fundamental principle.

Bangladesh is set to become a developing country in 2026 as it has fulfilled most conditions. But the country has been faring badly in one particular area: Tax-GDP ratio. The International Monetary Fund (IMF) has shown concern regarding the low tax-GDP ratio, while negotiating the $4.5 billion loan sought by Bangladesh from the International Monetary Fund (IMF). 

Among the hundreds of questions put forward by the IMF to nearly a dozen government offices and regulatory bodies in a recent visit to Dhaka, most were reserved for the National Board of Revenue (NBR), which got 38 questions. The IMF advised caution about corporate income tax incentives, exemptions, and tax holiday systems. The IMF had the same concerns during prior visits.

There should be a systemic estimate for knowing how much of a financial hit we are taking on account of this tax exemption, which includes complete relief from tax, lowered rates, or tax on only some things, but we do not have one. To determine how much the state coffers are losing because of this act of benevolence, we have to depend either on a 16-year-old policy note by Bangladesh Bank, or on some newspaper article on the internal study on tax exemptions done by NBR during the preparation of the budget for FY21.

Tax exemptions in Bangladesh appear to be extremely high. The analysis undertaken by the Bangladesh Bank in 2006 estimated that the tax exemption was Tk 9,375 crore in FY05, 2.52% of GDP, and according to the most recent internal study by NBR during the preparation of the budget for the fiscal year 2020-21, tax exemptions given in various sectors every year amount to around Tk. 250,000 crore, which is 7.88% of GDP as per the GDP of FY20. 

It seems tax exemptions are in competition with our country's apparent economic growth. According to the Global Tax Expenditure Database (GTED), tax exemptions by India were 4.81% of GDP in 2006 and .40% in 2020. In fourteen years, the tax exemption-GDP ratio fell by 11.02%. What a good run India - outpaced by Bangladesh on the key economic indicator - is having on limiting foregone tax revenue!

According to estimates of NBR, our tax-GDP ratio would have been 17.81% had the government not provided tax exemptions. 

Tax exemption is not completely detrimental to a nation. It drives GDP (Gross Domestic Product) growth by encouraging more investments. They serve to attract capital flow in preferred locations and sectors of the economy or to engage in specific investment activities.

Now the question that needs to be answered at this point is whether companies enjoying these tax exemptions through different Statutory Regulatory Orders (SRO) - subordinate legislation by the persons or bodies to whom Parliament has delegated some of its law-making powers - are in need of these benefits or whether these exemptions are just a means to evade taxes and to transfer money to a tax haven country?

According to recent reports, a well-known online delivery company has been accused of making fraudulent use of a service code. The business registered itself under code 99.10 for the service, which allowed them to avoid paying VAT (Value Added Tax) on rent, even though it was abundantly clear that the code did not apply to the business's circumstances.

An investigation of the income tax wing reveals that about 34 SROs were issued to give tax exemptions during FY2018-2019, following the adoption of the budget. Why are such large incentives, which come with significant foregone revenue, provided through the issuance of SRO rather than the budget? 

Each order giving a waiver must mention the amount of revenue lost, to determine the volume of tax incentives. Policymakers should not offer tax incentives without assessing both the positive and negative impacts. All tax exemptions should be granted through parliamentary debate, budget, and the opinion of economists, as opposed to issuing SROs after the budget has been passed. To offer or renew tax exemption for a company or industry, a strategic approach, rather than an ad hoc basis, is required. 

One of the largest electronics manufacturers in Bangladesh has been exempted from income tax for 12 years, beginning in FY21, after being designated a private Hi-tech Park. In FY20, this corporation paid Tk215 crore in income tax. Why are firms being allowed to enter a tax-free period lasting more than a decade when they have the capacity to make a profit and to pay taxes? Isn't it contrary to the canon of taxation that Adam Smith established? Isn't it going to encourage companies to evade taxes?

According to an NBR survey, 88% of shops in Savar, Narayanganj, and the capital do not pay VAT. Why wouldn't small businesses be tempted to avoid VAT and taxes if large corporations with resources are allowed to do so with the blessing of the government? The level playing field in our country is being disrupted by tax exemption provisions. The numerous provisions for tax exemption, as well as the extension of the period during which tax exemption can be claimed, are becoming financially burdensome for our nation. 

Tax exemption benefits should be granted exclusively to those with special needs. Tax incentives should fundamentally be a set of fiscal policy weapons used by governments to achieve desired economic and social policy goals, rather than a set of policies used to build empires in tax haven nations. 

Amenda Philomina Purification is currently working as Programme Associate in Centre for Policy Dialogue (CPD) 

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