Why is tax-GDP ratio so low in Bangladesh?
Tax compliance means registration of a taxpayer within the system, timely filing of tax returns, completion of accurate reporting and payment of taxes on time. It are often voluntary or enforced.
There are two dimensions of voluntary compliance: committed compliance and artistic compliance.
Committed compliance is that the willingness to discharge tax obligations by taxpayers without grumbling. On the opposite hand, creative compliance refers to any act by a taxpayer aimed toward reducing taxes by reducing one's liabilities .
With tax-GDP ratio of 9.3 per cent, Bangladesh's tax-GDP ratio is far below the typical of developing countries (15 per cent).
This is mainly due to poor tax compliance rate in both tax and VAT (VAT), which contribute about 85 per cent of the revenue collection of the National Board of Revenue (NBR).
In Bangladesh, an outsized number of people and firms are unregistered and therefore the overwhelming majority of registered individuals and firms fail to pay right taxes.
Out of quite 10 million potential individual income taxpayers, 3.8 million are registered within the system, but about 1.5 million people file tax returns along side tax, consistent with NBR data.
Therefore, the private tax compliance rate is 14 per cent. On the opposite hand, out of about 213,505 companies registered with the Office of the Registrar of Joint Stock Companies and Firms, only 45,000 companies submit returns with taxes. So, the compliance rate of corporate tax is 21 per cent.
Personal tax contributes only about 40 per cent of the income tax revenue. The remaining 60 per cent of the revenue comes from corporate tax .
The compliance rate of VAT registered firms is 11.56 per cent. The figure doesn't include those firms which are neither registered nor do they submit monthly VAT returns to the NBR (non-filers).
Bangladesh faces the issues of both creative compliance (tax avoidance) and enforced compliance (tax evasion). aside from this, tax exemption and evasion are rampant.
Litigation management may be a key issue of taxation. Moreover, the dimensions of the informal economy constitutes 35 per cent of GDP.
The Eighth Five-Year Plan for financial year 2020-21 to financial year 2024-25 has set the target of raising the tax-GDP ratio to 14.2 per cent by 2025.
The plan underscores the necessity for consolidating efforts for revenue mobilisation, which may eventually be used for public investment.
More generally, the investments in health, education and social protection largely depend on the dimensions of the govt revenue.
In order to achieve the sustainable development goals (SDGs) by 2030, the NBR must prepare and implement a five-year tax modernisation plan. The plan may aim at reforming both tax program and tax administration so as to enhance tax compliance within the country.
The present tax Ordinance, 1984 is outdated to stay pace with the changing need of your time . So, a replacement tax code is required to place in situ an efficient and modern tax regime within the country.
The design of the new code will encourage wide voluntary compliance by the overwhelming majority of taxpayers. this may be achieved by a robust and efficient third-party reporting system.
Moreover, the new act must give emphasis on withholding .
It is gratifying to notice that by replacing the worth Added Tax Act, 1991, the govt implemented the worth Added Tax and Supplementary Duty Act, 2012 from fiscal 2019-20.
The new act is certainly an improvement over the previous one in terms of coverage, registration, payment, audit, refund etc.
However, the multiple VAT rates have created distortion in taxation, which require to be reviewed. The new act are going to be fully operational when the VAT system goes digital.
The Customs Act, 1969 must be modernised with the launch of provision for full implementation of Revised Kyoto Convention, introduction of WCO SAFE Framework of Standards, introduction of authorised economic operators, and tariff rationalisation to market investment and stop mis-declaration and eliminate distortions.
The NBR has taken an innovative programme like holding tax fair. Similar programmes could also be undertaken in cases of other taxes. The NBR has put in situ the mechanism of other dispute resolution (ADR) to scale back the tax pendency within the courts.
Now time has come to strengthen the mechanism by bringing all related stakeholders in compliance.
IGC research findings show that social incentives and peer effects are an efficient thanks to improve tax compliance. the govt may proportion the programme to a bigger geographical area for enhancing tax income in Bangladesh.
The NBR should link electronic government (e-GP) with the legal system .
The NBR could also be strengthened by redefining its status and regulatory powers and its relationship with the govt , restructuring it and its field formations by function and sort and by providing customer services to all or any taxpayers through a web-enabled tax administration (e-registration, e-filing of tax returns, e-payment and e-refund).
The tax administrator also can be strengthened by developing a strategic communication and taxpayer outreach and education programme and developing human resources and institutional capacity of the NBR.
The government may form a platform of think tanks for undertaking research and advocacy on taxation.
