Tax regime in Bangladesh: An evaluative essay

Illustration: TBS

Taxation, as an influential instrument for state revenue, has a deep-rooted history in ancient and mediaeval India, albeit in different forms and styles. However, as we know them today, the British rulers in India first introduced the modern tax system. 

There is a general perception that Bangladesh's existing tax revenue regulations, such as Income Tax, VAT, and Customs laws, have British origins, are overly intricate in attitude, and are curiously cumbersome for enforcement. 

The Indian Mutiny exploded in 1857, leading the British government to take over ruling power in India from the East India Company. The country was in a dire financial state. James Wilson (1805–1860) was posted in Calcutta as a Member (Finance) in the Viceroy's Council, equivalent to the Finance Minister. After taking over his assignment in India, James Wilson introduced a bill in the Indian Legislature to restructure tariff laws. 

Additionally, he implemented the budgetary system and paper currency, standing out for floating the Income Tax Act in India during his first-ever Budget Speech for FY 1860–61. Two months after the historic introduction of income tax in India, Wilson died in Calcutta from dysentery.

Wilson studied the revenue law laid down by Manu, the sacred authority, and a version of ancient Hindu law. Although Wilson drew on the logic of ancient Indian pundits, he imported the British regulatory framework for the revenue collection mechanism, imposing it on the natives of India. 

The first general income tax was levied for a period of five years to address the difficulties caused by the mutiny. It followed the English model, taxing all incomes above Rs 200 per annum arising from property, professions, trades, and offices at a rate of 2%. For income between Rs 200 and 500 per annum, a 3% tax was imposed, with an additional 1% for local development.

Reorganising tax revenue regulations should undergo a very close review of existing rules and regulations, one by one, if not word by word, fitting with the present-day demand for social norms and business practices. 

For these regulations to be effectively enforceable, prudent practised, and impartially implemented in a free and democratic environment, unlike the past colonial regime, they must be public laws framed by lawmakers within their jurisdiction. 

Appropriate ownership has to be established for each item of law, equally on every footing. Global good practices should not only be incorporated into the reorganised law, but suggestions from stakeholders should also be considered. 

It has been appropriately argued that reorganisation proposals be made in stakeholders' vernacular for better comprehension and to suggest modifications. 

The reorganised law should be simple, comprehensible, non-dual in meaning and interpretation, delegable, and assertive, but with adequate relieving and remedial provisions. Stakeholders' views at large should be taken into consideration to make it more user-friendly. Canons of tax law should be digestible and implementable across the board and be applied without fear or favour.

A tax system must be economically efficient, inflicting the economy as little damage as possible. Every tax system distorts economic decisions, leading to less economic activity than would otherwise occur, resulting in what economists call "deadweight loss." 

Moreover, applying different tax rates to different activities or producers exacerbates the distortion of economic decisions and increases the deadweight losses due to the tax system. 

A sound tax system should be designed to minimise these losses. There should be no denying that a sound tax system should be logistically economical, imposing the smallest possible compliance costs on taxpayers; otherwise, people will not be encouraged to pay tax, and instead, they will be inclined to evade tax. 

Every tax system imposes direct costs on taxpayers regarding time devoted to tax preparation or money spent to buy the services of CPAs. 

Ultimately, every tax system diverts a portion of tax revenues raised by the tax to pay the cost of administering, collecting, and enforcing its provisions. A sound tax system would minimise these costs.

A sound tax system involves removing complexity and limiting the collection points for taxation, making the system more transparent, ensuring the public is more certain that everyone is paying what they owe, and making them more comfortable with the system's fairness. 

An economically neutral tax is unbiased across the spectrum of economic activities. A tax system is transparent to taxpayers if it is clear how much the government is costing them and who is paying for what. Without transparency, the public isn't able to accurately assess how their money is being spent and thus can't hold their representatives appropriately responsible.

A nation's tax system often reflects its socio-economic and cultural values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent; in democratic nations, where the public elects those in charge of establishing the tax system, these choices reflect the type of community that the public wishes to create. 

In countries where the public does not have a significant amount of influence over the system of taxation, that system may be more of a reflection of the values of those in power to enact laws or enforce collections.

Dr Muhammad Abdul Mazid is a former secretary to the government of Bangladesh and former chairman of NBR.

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.