Tax in Bangladesh
The taxation system in Bangladesh is based on the ability to pay theory and hence utilizes the progressive tax system. The revenue administrative body is the National Board of Revenue under the Ministry of Finance. The main responsibility of NBR is to collect domestic revenue for the government. However, revenue collection and management has been a perennial challenge for Bangladesh since its very inception.As a resource constraint nation coupled with limited capacity, we are confronted with persistent pressure to address that challenge. The implementation of an effective revenue system will involve the setting up of new organizational structures, the designing of new procedures and forms, writing of new instructions, arranging for the provision of better management information and statistics, etc.
This gives the administration the opportunity to develop new skills and abilities which can subsequently be deployed right across the tax systems.
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. 1 Objective The objective of this report is to propose a simplified taxation system which maximizes government revenue. In order to propose the new system, the current taxation system in Bangladesh and the trend in tax revenue of the previous five years would be analyzed and the hence the weaknesses of the current system would be detected. Based on the analysis, recommendations would be provided to improve the current system. 1. 2 Scope The report analyses the current tax situation of Income Tax, Import Duties and VAT.
The revenue trend analysis is limited to the last five years and references from the taxation system and reforms in neighboring countries have been taken in order to suggest the recommendations. 1. 3 Methodology The report is prepared based on information from both primary and secondary resources. Primary information has been collected from an interview with Dr. Md. Sajjad Hossain Bhuiyan, Additional Commissioner of Taxes of the National Board of Revenue (NBR). Secondary sources include the official websites of the NBR as well as published reports, papers and official data.
. National Board of Revenue: Structure and Functions National Board of Revenue was constituted under the national Board of Revenue Order, 1972 and is given the highest executive authority under the Internal Resources division (IRD) of the Ministry of Finance. NBR is responsible for formulation and continuous re-appraisal of tax policies and tax laws in Bangladesh. The NBR is empowered to make necessary rules concerning income tax matters but not authorized to give any interpretation of any word used in any section of IT ordinance (judiciary function).It is a body consisting of a chairman, members, officers and other secretaries. The chairman and members are appointed by the Government and work under the direct control of the Ministry of Finance. The NBR may appoint as many Directors-General of Inspection, Commissioners (Appeals), Commissioners, Joint Commissioners of Taxes, Deputy Commissioners of Taxes and such other executives or ministerial officers and staffs as it may think fit.
The NBR may also, with approval of the Government, appoint persons having appropriate professional experiences and skills as may be specified in the order issued on this behalf. Any other income tax authorities may also appoint income tax authority subordinate thereto subject to the orders and instructions as the board may issue from time to time. Currently the NBR has 3434 officers of various grades and 10195 supporting staff positions 2. 1 Functions of the NBR The main responsibility of NBR is to mobilize domestic resources through collection of Import Duties and Taxes, VAT and Income Tax for the government.The functions of the NBR outline the following: * It determines the functions of the Director-General of Inspection, the Commissioners (Appeals), the Appellate Joint Commissioner, the Commissioner (LTU), the Inspecting Joint Commissioner and to determine the jurisdiction of income tax authorities * It authorizes any person for assisting, guiding or instructing the Deputy Commissioner of Taxes in the course of any proceedings under this ordinance * It determines allowances, tax exemptions, tax holidays to approved industrial undertakings, income of a tourist industry, and income of co-operative sources * It determines place of assessment when jurisdiction of an assessee falls in more than one zone * It sets the qualification disqualification criteria of persons authorized representative of an assessee * It rewards an officer or employee of tax department or any other persons for furnishing information to detect tax evasion * It issues orders, directions, instructions from time to time for discharging the functions of all officers and other persons engaged in the performance of any functions under IT Ordinance Apart from these the NBR has some additional responsibilities.It facilitates international trade through quick clearance of import and export cargoes, negotiates tax treaties with foreign governments and participates in inter-ministerial deliberations on economic issues having a bearing on fiscal policies and tax administration. 2.
2 Structure of the NBR Income Tax Authority Administrative Judicial Appellate Tribunal National Board of Revenue Appellate Additional Commissioners of Taxes National Board of Revenue Directors General of Inspection Appellate Joint Commissioners of Taxes Commissioners Commissioners (Appeal) Inspectors Additional Commissioner of Taxes Deputy Commissioners of Taxes Joint Commissioners of Taxes Deputy Commissioners of Taxes Inspectors Inspectors National Board of Revenue (NBR) Administration Wing Research and Statistics Wing Customs Wing Value added tax WingIncome Tax Wing 3. Overview of the Taxation System in Bangladesh Taxation can be classified only the basis of incidence of tax into two ways 1. Direct Tax: Taxation, the effect of which is intended to be borne by the person or organization that pays it i. e. a direct tax is one paid directly to the government by the persons on whom it is imposed such as income tax, corporate tax, marriage tax etc. Direct tax is borne by the tax payer and cannot be passed on to any person, 2. Indirect Tax: Taxation that is intended to be borne by person or organizations other than those who pay tax.
Indirect taxes burden can be passed on others through price vehicles.The principle of indirect tax is VAT, which is paid by traders on goods and services entered into chain of production, but which is ultimately borne by the consumer of the goods and services. In practice the distinction is rarely clear cut. The corporation tax is direct tax but there is evidence that its incidence can be shifted to consumer by higher prices or to employees by lower wages. Indirect taxes do not develop any civil consciousness in the minds of tax payers because nobody feels that he is paying a tax as it is concealed in price, whereas direct tax create a civic consciousness among the tax payer; they feel that they are contributing towards the state expenditure. In the case of direct taxes, the relation between the taxpayer and the revenue authorities is direct personal.But there is an indirect relation between the tax payer and tax authorities in the case of indirect taxes, for the taxes are collected unofficially through the agency of merchants.
In Bangladesh direct taxes include Income Tax and indirect tax consist of mainly Value Added Tax (VAT) and import duty (Customs Tax) 3. 1 Overview of Direct Taxation-Income Tax Among direct taxes, income tax is one of the main sources of revenue and it has taken various forms of reforms to be in the state it is on today. It is a progressive tax system. Income tax is imposed on the basis of ability to pay. The more a taxpayer earns the more he should pay is the basic principle of charging income tax.It aims at ensuring equity and social justice. For the purpose of computation of total income and charging tax thereon, sources of income can be classified into 7 categories, which are Salary, Interest on Securities, Income from house property, Income from agriculture, Income from business or profession, Capital Gains and Income from other sources.
3. 1. 1 Rates of Income Tax Bangladesh personal income tax rates for assessment year is progressive up to 25%. Tax rates in Bangladesh also differ between male and female individuals. Bangladesh Income Tax Rates for individuals other than female taxpayers, senior taxpayers of 65 years and above and retarded taxpayers –First BDT 1,65,000 Nil Next BDT 2,75,000 10% Next BDT 3,25,000 15% Next BDT 3,75,000 20% Rest Amount 25% Bangladesh Income Tax Rates for female taxpayers, senior taxpayers of age 65 years and above First BDT 1,80,000 Nil Next BDT 2,75,000 10% Next BDT 3,25,000 15% Next BDT 3,75,000 20% Rest Amount 25% Bangladesh Income Tax Rates for retarded taxpayersFirst BDT 2,00,000 Nil Next BDT 2,75,000 10% Next BDT 3,25,000 15% Next BDT 3,75,000 20% Rest Amount 25% Minimum tax for any individual assessee is Tk. 2,000, non-resident Individual is 25% (other than non-resident Bangladeshi) an 20% on dividend income. Corporate tax: Publicly Traded Company 27.
5% Non-publicly Traded Company 37. 5% If any publicly traded company declares more than 20% dividend, 10% rebate on total tax is allowed. Tax rates on other companies: Bank, Insurance & Financial Company 45% Mobile Phone Operator Company 45% Publicly Traded Mobile Operator Company 35% 3. 1. 2 Tax Assessment ProceduresIncome Tax is filed by submitting the Income Tax Return form which can be filled either under the “Normal” scheme or the “Universal Self Assessment” scheme. When the return is submitted under normal scheme, assessment is made after hearing. For returns submitted under Universal Self-Assessment Scheme, the acknowledgement slip is determined to be an assessment order but it is of course subject to audit.
Appeal against the order of Deputy Commissioner of Taxes (DCT) : A taxpayer can file an appeal against DCT’s order to the Commissioner (Appeals)/Additional or Joint Commissioner of Taxes (Appeals), to the Taxes Appellate Tribunal against an Appeal order and to Commissioner of Taxes of the respective taxes Zone for the revision of DCT’s order. Time to Submit Income Tax ReturnCompanies: By fifteenth day of July of the year following the income year or, where the fifteenth day of July falls before the expiry of six months from the end of the income year, before the expiry of such six months. Other than Company: By the thirtieth day of September next following the income year. Consequences of Non-Submission of Return * Imposition of penalty amounting to 10% of tax on last assessed income subject to a minimum of Tk. 1,000/- * In case of a continuing default a further penalty of Tk. 50/- for every day of delay. 3.
1. 3 Tax Withholding Functions and Advance Payment of Tax In Bangladesh withholding taxes are usually termed as Tax deduction and collected at source.Under this system both private and public limited companies or any other organization specified by law are legally authorized and bound to withhold taxes at some point of making payment and to deposit the same to the Government Exchequer. The taxpayer receives a certificate from the withholding authority and gets credits of tax against assessed tax on the basis of such certificate. Every taxpayer is required to pay advance tax in four equal installments falling on 15th September; 15th December; 15th March and 15th June of each year if the latest assessed income exceeds Taka four lakh. Penalty and interest are imposed for default in payment of any installment of advance tax. 3.
1. 4 Fiscal Incentives There are several tax incentives available to tax payers such as Tax Holiday, Accelerated Depreciation and Tax Rebate. Tax Holiday: Tax holiday is allowed for industrial undertaking, tourism industry and physical infrastructure facility established between July 1, 2008 and June 30, 2011 in fulfillment of certain conditions for the following period according to the location of the establishment. i. In Dhaka and Chittagong Divisions (excluding 3 hill districts): 5 years. Period of Exemption| Rate of Exemption| For the first two years (first and second year)| 100% of income| For the next two years (third and fourth year)| 50% of income| For the last one year (fifth year)| 25% of income| ii. In Rajshahi, Khulna, Sylhet and Barisal divisions: 7 years Period of Exemption| Rate of Exemption|For the first three years (first, second and third year)| 100% of income| For the next three years (fourth, fifth and sixth year)| 50% of income| For the last one year (seventh year)| 25% of income| The period of such tax holiday will be calculated from the month of commencement of commercial production.
The eligibility of tax holiday has to be determined by the NBR and the time of the commencement of commercial production has to be certified by the respective sponsoring agencies. The industrial establishment should be registered under the companies Act. 1994. In addition, 30% of the exempted income should be invested in the undertaking or in any new industrial undertaking. To see the list of undertakings eligible for Tax Holiday, refer to Appendix A. Accelerated depreciation: Accelerated depreciation on cost of machinery is admissible for new industrial undertaking. Rate of allowable depreciation in the first year of commercial production is 50%, in the second year 30% and in the third year 20%.
* Tax Rebate on Investment: Tax payers can receive a rebate on taxable income if they invest in some specific instruments, industries or charities. Amount of allowable investment is either actual investment in a year or up to 25% of total income or Tk. 10,00,000/- whichever is less. Tax rebate amounts to 10% of allowable investment. To see the list of items for which rebate is allowable, refer to Appendix A. Exemption in Income: Tax payers are exempt from paying tax from the income from certain investments and sectors. The list of items and their exemption limits are shown in Appendix A.
3. 2 Overview of Indirect Taxes in Bangladesh 3. 2. 1 Value Added Tax (VAT) VAT is one of the most important sources of tax revenues in Bangladesh. Since its introduction in 1991, VAT has been one of the most effective and efficient tools in resource mobilization. The concept of VAT was introduced by replacing the outdated excise and sales tax regime and its collection and administration has proved to be more economic, efficient and expedient. 3.
2. 1. 1 General VAT Rates i) VAT is imposed on goods and services at import stage, manufacturing, wholesale and retail levels; (ii) A uniform VAT rate of 15 percent is applicable for both goods and services; (iii) 15 percent VAT is applicable for all business or industrial units with an annual turnover of Taka 2 million and above; (iv) Turnover tax at the rate of 4 percent is leviable where annual turnover is less than Taka 2. 4 million; (v) VAT is applicable to all domestic products and services with some exemptions; (vi) VAT is payable at the time of supply of goods and services; (vii) Tax paid on inputs is adjustable against output tax; (viii) Exports are zero rated; (ix) Cottage industries (defined as a unit with an annual turnover of less than Taka 2 million and with a capital machinery valued up to Taka 3,00,000) are exempt from VAT; (x) Tax returns are to be submitted on monthly or quarterly or half yearly basis as notified by the Government. (xi) Supplementary Duty (SD) is imposed at local and import stage under the VAT Act, 1991.Existing statutory SD rates are as follows: (a) On goods: 20%, 35%, 65%, 100%, 250% & 350% (b) On services: 10%, 15% & 35%. 3.
2. 1. 2 Tax Base for VAT Import Stage: Customs Assessable Value + Customs duty + Supplementary Duty Domestic/Local Stage: a) Goods (manufacturing): [Production cost + Profit and Commission (if any) + Supplementary duty (if any)] b) Services: [total receipts excluding VAT but including supplementary duty (if any)] Truncated Base / Fixed Value Addition: In some of the cases of goods and services producers and sellers face difficulties in availing VAT credit/adjustment facilities due to non-availability of invoices from the sellers of input.In order to remove this operational difficulty fixed bases such as 10%, 25%, 30%, and 60% value addition is taken into account for calculation of VAT for a number of goods and services. In such circumstances net VAT rate for different rates of value addition comes to 1. 5%, 2. 25%, 4.
5% and 9%. VAT at the wholesale and retail stage: In case of wholesalers and retailers, there is a special provision for a 1. 5% percent VAT known as Trade VAT on the total sale, provided that the wholesaler/retailer do not avail the facility of input credit/adjustment. Such tax is also collected at the import stage from importers of finished goods as an advance trade VAT. Tariff Value for imposition of VAT: Under the VAT Law, the government is empowered to fix Tariff Value for some items for the collection of VAT.Example: tariff value for mild-steel products produced from imported/locally procured re-roll able scraps is TK 4000. 00 per MT.
Normal VAT input credit is also not available under this system. Deduction of VAT at Source: As deduction at source is also practiced in case of VAT on certain services, Government, Semi-Government, Autonomous Bodies, NGOs, Banks, Insurance Companies and Limited Companies are authorized by the government to deduct applicable VAT on the services at source. Excise Duty: At present excise duty applies to only two items: bank deposits and domestic air ticket (Tk. 250 per journey). 3. 2. 2 Customs Duty Customs wing is primarily responsible for collection of all duties and taxes at the import stage.
Apart from collection of government revenue it is also responsible for trade facilitation, enforcement of government regulations, protection of society and environmental protection, preparation of foreign trade statistics, trade compliance and protection of cultural heritage. Customs collects 42% of the NBR’s total revenue. The revenue target for the year 2007-08 was Tk. 17,812 Cr. and actual revenue collection so far (July’ 07 to May’08) is Tk. 16, 987. 06 Cr.
that is 19. 04% higher than the previous year. The target has been revised to Tk. 19385 Cr. for 2007-08 and with an increase of 16. 25%; it has been set to Tk. 22,536 Cr.
for the year 2008-09. In the present financial year (2007-08) there are 3 duty slabs of customs duties i. e. 10% for basic raw material, 15% for intermediate raw material or semi-finished products, and 25% for finished products.In the proposed 2008-09 budget, the duty structure has been restructured and a four tier duty structure has been proposed, i. e. 3% for capital machinery, 7% for basic raw material, 12% for intermediate raw-material or semi-finished products, and 25% for finished products.
Since Customs functions at the gateway for import and export of goods, it plays a critical role in the import-export trade chain. In order to make customs procedures more transparent and to achieve more trade facilitation, a number of measures have been taken in past few years. With the introduction of ASYCUDA++ and Direct Traders Input (DTI) automation in customs clearance has begun.Recently, a full automation scheme is on way of implementation in collaboration with the Chittagong Chamber and the Task Force. Once the full automation is completed the importers and exporters will be able to access customs server from their offices or homes and will be able to submit their customs declaration online. Exemptions from Customs Duty: * Capital machinery; * Raw materials of Medicine; * Poultry Medicine, Feed & machinery; * Defense stores; * Chemicals of leather and leather goods; * Private power generation unit; * Textile raw materials and machinery; * Solar power equipment; * Relief goods; * Goods for blind and physically retarded people; and * Import by Embassy and UN. 3.
3 Trend Analysis of Tax Revenue 3. 3. 1 Direct vs.Indirect Taxes The tax structure in Bangladesh consists of both direct (income tax, gift tax, land development tax, non-judicial stamp, registration, immovable property tax, etc) and indirect tax (customs duty, excise duty, motor vehicle tax, narcotics and liquor duty, VAT, SD, foreign travel tax, advertisement tax, etc). An analysis of revenue from the existing tax base over the last seven years shows that indirect taxes dominate the revenue yield of the country. More than 70% of total tax revenue is garnered from indirect taxes, as illustrated in the figure below: The low collections from direct taxes are a startling fact; up to the 1990s, the share of direct taxes, i. e.
income tax was below 15% of total tax revenues. It started to increase and crossed 20% mark during the 2006-2008 period.However, it remains amongst the lowest in the South Asian region. In many developed countries, the share between direct to indirect taxes is the reverse of what it is in Bangladesh. For generating the desired level of domestic revenue to support economic growth, the share of direct taxes needs to be increased. 3. 3.
2 Tax Revenue Yield Relative to GDP The ratio of tax revenue to GDP has remained inadequate and stagnant over the past seven years, very low compared to other developing countries. During the year 2003-04, the ratio was 8. 5 and continued to rise until a drastic fall in 2006-07 to 8. 3. The ratio rose again and has reached 9. 0 in the year 2008-09. The figure below illustrates the scenario:Figure— gives a more detailed look into the tax-GDP ratio, showing the individual ratios of land tax, sales tax, supplementary tax, income tax, VAT and customs duty.
We see that there has been a secular decline in customs duty, from 2. 6% in 1973-1980 to 1. 8% of GDP in 2006-08, which could be attributed to the recent openness of trade regime and the reduction in tariffs. In 1991, VAT largely replaced the sales tax. Sales tax was 2. 8% of GDP during 1981-90; since then VAT increased gradually and stood on an average at 3% of GDP in 2006-08. The supplementary duty-to-GDP has increased from 0.
9% from its introduction in 1991 to average around 1. 5%.It can be seen that average income tax-to-GDP ratio has increased from 0. 8% in 1973-1980 to 1. 9 % in 2006-2008. Increasing contribution of income tax and VAT would enable Bangladesh to meet the demand for increased domestic resources for larger investment to achieve higher growth. Average Tax-GDP Ratio 3.
3. 3 Item wise Collection An analysis of the collections derived from individual items within the tax revenue revealed few important findings, the first being the dominance of VAT and import duty over other sources. As seen from the figure below, collections from VAT has increased from 33% to 36% over the last five years, which could be due to the widening of the VAT network to augment revenue collections.The collections from import duty too has remained quite high throughout the years, although it can be seen declining over the years, from 25% in 2004 to only 17% in 2008. Collections from income tax, although increasing, remains much lower than collections from VAT, and the increases can be attributed to greater public sector investments in recent years. 3. 3.
4 Tax Effort Index of Bangladesh Bangladesh is a lowest tax effort country among the developing countries. According to a study conducted by policy analysis unit of Bangladesh Bank found that Bangladesh as the lowest tax effort country in the sample, with an average tax effort index of 0. 493.This has important policy implications that Bangladesh and other countries having low tax effort (less than unity) are not utilizing their full capacity of tax revenue, and therefore, have the potential for financing budgetary imbalance through raising tax revenue. The tax effort index for both direct and indirect taxes is below 0. 6, implying that Bangladesh has the potential for raising revenue collection from both direct and indirect taxes. In terms of tax buoyancy, Bangladesh ranks the second highest among the sample countries, with a tax buoyancy ratio 1.
235, meaning that tax revenue is quite responsive to GDP and effort has been made to increase tax revenue over the period.Table 3: Index of direct and indirect tax effort of Bangladesh FY 2000-FY05 FY| Direct Tax Effort Index| Indirect Tax Effort Index| 2000| 0. 614| 0. 468| 2001| 0. 588| 0. 477| 2002| 0. 612| 0.
504| 2003| 0. 609| 0. 520| 2004| 0. 56| 0. 540| 2005| 0. 513| 0. 553| Source: A Panel Study on Tax Effort and Tax Buoyancy with Special Reference to Bangladesh, Lutfunnahar Begum, Policy Analysis Unit Bangladesh Bank, Working Paper Series: WP0715, June 2007 4.
Irregularities in the Current Tax Structure of Bangladesh As the five-year trend analysis suggests, the revenue/GDP ratio for Bangladesh has consistently remained low compared to its neighboring countries. Vietnam has a ratio of 26. 6, India has —-, Pakistan has—-.The ratio has consistently remained low despite a steady increase in real per capita income in the country, as the tax base did not sufficiently broaden in line with increases in income or economic activity. Tax evasion, poor tax administration, a gamut of tax exemptions and discretionary and adhoc tax policy changes have contributed to this. 1. Narrow Tax Base, Particularly for Income Tax Both direct and indirect taxes are quite narrowly based in Bangladesh.
For example, among direct taxes, agricultural land has not been a buoyant source of revenue as the rates have not been revised periodically (McCarten, 2005). A significant number of tax expenditure measures exist in both direct and indirect taxes which creates an adverse impact on the overall revenue effort.The present income-tax base of Bangladesh is one of the lowest even among the developing countries. Less than 1 percent of are within the tax net. In case of personal income taxes, the burden is unevenly distributed among the registered taxpayers. In reality a major portion of taxes is paid by a small group of people with higher marginal rates. A number of registered taxpayers always remain in lower income groups for either being subject to tax incentives or tax exemptions and share a little burden of taxes often at lower marginal rates.
In case of Bangladesh, such taxpayers are small and medium traders and manufacturers. A lot of investment remains untaxed due to tax amnesty is a problem too for Bangladesh.Substantial amount of taxpayers having business income remain in losses those are subject to set off for several years also remain outside actual tax net. In that sense, the wage earners seems rightly taxed as such taxes are withheld by employer and paid by them. 2. Low Revenue Productivity and High Administrative Costs Empirical studies have found that poor logistics, lengthy procedures, unofficial payments, etc. of Bangladesh tax system lead to high administrative costs and low revenue productivity (McCarten, 2005).
3. Contribution of Corporate Tax Payers Remains Meager Taxpayers can be categorized into three main groups; corporate tax payers, salaried tax payers and other tax payers.Corporate sector though has a handful of taxpayers paying a major portion of total income taxes and the majority comes from small number of foreign companies. These are the elite tax payers, and in terms of number their percentage is very low. In 2000 it was 3. 02 percent, the salaried taxpayers share was about 18. 81 percent and the largest group consisting of remaining all others and mainly those who have income from business and profession was about 78.
18 percent. 4. The Drawbacks of Tax Holidays (i) Tax holiday and revenue losses The existing tax law permits, extension unit of an industry to be entitled to tax holiday. Such facilities of granting tax holiday have been found ineffective.A mechanism of internal transfer pricing could be arisen as a vehicle for perpetual tax holiday. As observed, the present income tax act is full of rebates and exemptions (Hussain, 1999). It is now needed to minimize and to come straight to a threshold of income, which is taxable.
The present scheme of granting tax holiday has not been a very good experience. Under the tax holiday, revenue loss arises from two main sources. The first is direct loss due to exemption of company income during the holiday period. The second is the loss due to the transfer of profits from companies under standard tax rules to companies benefiting from tax holidays.The transfer of profits has been commonly observed in countries where tax holidays are granted. The NBR has attempted to estimate the size of revenue forgone under tax holidays. A major problem was encountered, however, as a large number of companies under tax holidays failed to file tax returns as required.
Based on the partial data available, the NBR placed the amount of tax revenue loss over a five-year period (from FY1980 to 1984) at TK 40 million per annum. In an alternative estimate by World Bank, the expected revenue loss is about TK 126 million per annum. (ii) Tax holiday creates distortion in taxation mechanism The benefits of the tax holiday are being enjoyed mainly by the garment industries.Their growth has enhanced due to external factors. Even if the incentive of tax holiday were not given, the garment industry would have grown up and the state would have earned quite a substantial amount of revenue from the industry. Thus the revenue foregone does not appear to be fiscally efficient (Waresi, 1998). However this has not been able to foster industrial growth in different regions of the country.
Such a perpetuating provision for tax holiday creates distortion in taxation mechanism and against the norms of equity and neutrality. It is thus important to restrict such unbound opportunities for the sake of better future of the country. iii) Black money is being laundered through the mechanism of tax holiday Under the present arrangement any income accruing from poultry, fishery, livestock etc. is exempted from income taxes until June 2011. This provision is being abused indiscriminately. A lot of black money is being laundered into the market through this mechanism. One potential remedy should be to allow an initial support to this sector then bringing back them under the purview of taxation.
5. Inefficiency of Tax Administration Inefficiency of tax administration is a leading cause for such a dismal situation. Lack of adequate manpower, logistics, training facilities and management support are some of the deficiencies of administration. There is practically no IT support.A proper data base and IT support could have helped tax administration in pursuing the delinquent TIN holders. In fact, tax administration is one of the most uncared for areas of administration. Successive governments practically invested nothing towards development of an effective tax administration.
To cite an example, the tax department has no office building of its own in Dhaka or elsewhere. Hundreds of tax offices are located in different lanes and by lanes in rented houses without minimum amenities. The entire environment in tax offices is depressing. 6. Inequality in taxing Wages between Private and Public Sector In Bangladesh, income tax for government employees is deemed paid by their employer that is government.However, if a private employer pays income tax for its employees, such payments are considered income, which creates additional tax burden for the employee of the private firm. This seems discriminatory, that encourages employees of private firms to avoid or evade taxes.
5. Recommendations for an Improved System Anomalies in the tax structure and deficiencies in tax administration have not only led to a steady decline in tax revenues, but also to a poor public perception of tax authorities. Compliance levels are unsatisfactory, as tax evaders assign a very low value to the cost of non-compliance. To improve the current scenario, a set of recommendations have been provided. 4. 1 Changes in Tax Structure i) Tax rates: Many say that high tax rates induce higher evasion.If mutual causality of tax payers was brought into proceedings, and if tax burden was equitably distributed then perhaps the rates would be lower.
A change in the structure of the tax rates could bring about positive returns on the revenue collection. The initial slab of tax-exempt income could be brought down to Tk. 35, 000; there onwards, from Tk. 35, 001 to Tk. 165, 000 a minuscule rate of 5% could be imposed. Such a change will broaden the tax base, thus ensure a more equitable payment of taxes; the sacrifice of tax payers will not be too high either, as 5% will not prove to be too burdensome on their incomes. ii) Public Employees as Tax Payers: Public sector employees constitute around 2 million salaried personnel in Bangladesh.
One is hard-pressed to come up with a strong rationale as to why this entire group of income earners should be excluded from paying tax, when they utilize public services as much as private employees do. Thus, the strongest contention is on equity grounds. The principle of excluding state workers from tax may have been valid before, but with recent across-the-board pay revisions in the public sector, the pay gap (except at higher levels) between public and private sector employees has narrowed. The vast proportion of non-state sector tax payers resent the exemption of state sector wages from income tax. There cannot be any tax policy justification for it. It would also be morally difficult for the government to promote greater tax payer compliance, while maintaining tax exempt status for its own employees.If a suitable income threshold is set, then there should be no reason to exclude public employees from tax liabilities, but such a dramatic policy shift will have to be managed well owing to its political sensitivity.
iii) Tax on Agricultural produce: In Bangladesh the agricultural sector provides employment for around 60% of the population and contributes 25% to the GDP but virtually pays very little in the form of income tax. This could be because a number of agricultural incomes have been exempt from payment of tax such as poultry, cattle farming, dairy farming, horticulture etc. , Exemptions of such income require further consideration as there has been widespread misuse of this provision. v) Informal Sector: The role of the informal sector in Bangladesh is strong, and the number and value of unrecorded transactions taking place on a daily basis is significant. Such provisions need to be reconsidered in order to mobilize revenue and to bring transparency in the tax system. Measures need to be undertaken to bring more enterprises into the main tax fold, into the organized private sector, through more field inspections and surveys as well as nation-wide education and awareness campaigns. v) Lower Rate for SMEs: Currently there exists a lower rate (15%) of corporate tax for small corporations, so that they may retain more earnings for expansion.
However, this requires complex monitoring, as firms could resort to dividing their enterprise into smaller profit making units as a means of tax avoidance and encourage subsidiarisation. It may be more effective, both in revenue generation terms, as well as monitoring-cost terms, to instead include these firms under the basic rate, but to provide more targeted incentives to subsidize and incentivize small enterprises. vi) Salaries of Foreign Technicians: Exemptions on salaries of foreign technicians require a careful review and should be specifically defined since a large number of foreign technicians are now working in Bangladesh and many companies often fraudulently use this measure.Overall, the key philosophy of making the cost of non-compliance (i. e. the cost of tax evasion) higher than the cost of compliance must be strengthened. Taking legal action against defaulters must be stronger in order to send a clear message.
Also, amnesty’s like providing penalty waivers to defaulters must be removed. Currently penalty waivers are granted at the discretion of commissioners, which gives rise to rent seeking behavior. There must also be a strengthening of the rules and transparency governing the tax system, so that it leaves little room for discretion by tax officers, minimizes incentives for rent-seeking, and builds investor and tax payer confidence in the tax authorities.As a corollary, a more comprehensive ‘Performance Evaluation Criteria’ for tax administrators ought to be established, and the indicators should be expanded from the current ones which focus heavily on revenue-raising, to broader themes like minimum service standards and customer satisfaction. 4. 2 Increasing Efficiency of Tax Authority The National Board of Revenue, the tax administration authority has been lacking administrative efficiency which is hindering the body from receiving the maximum amount of tax revenue through proper and timely collection. This is due to several weaknesses within the structure and organization of the NBR.
The following subsections investigate these weaknesses and recommend the course the action the NBR should undertake 5. 1 Reforming the organizational structureThe organizational structure of the NBR is quite rigid and it still follows the tax type structure that most countries have moved away from. Such a structure faces serious weaknesses including duplication of functions, uncoordinated audit and collection actions, poor tax payer services and inconsistent priorities between taxes. After establishment in 1972, the organogram of the NBR has been reviewed only once (1991-92). The current organizational structure is very flat with only a few layers and a large span of control. In order to counter this problem, the structure of the NBR should be reorganized along functional lines to permit clear lines of accountability.A move to functional organization structure is key to transforming the NBR into a modern and efficient administration.
International evidence suggests that a functional organization provides a number of advantages. First it improves tax payer services by providing a single of access for tax payers. This enables tax payers to easily understand their rights and obligations, thus increasing compliance. Second, the functional model improves productivity through greater cohesiveness and synergies among the internal functions. For example, comprehensive multi tax audits can be carried out leading to cost reduction. Similarly, enforcement operations can be carried out for all taxes owed by the same tax payer.Third, A modern organizational structure will enable NBR management to allocate routing and standardize work to specialized units supported by appropriate information technology, while assigning highly trained talent to more complex tasks that require problem solving and evaluation skills, such as auditing and collection enforcement.
A functional approach will provide a cross-checking across units reducing opportunities for revenue leakages. South Korea has been largely benefited when they changed their organizational structure to a functional structure consisting of three main arms: collection support division, revenue control division and investigation division. 5. 2 Strengthen the audit systemNBR lacks a proper audit system to detect non compliance with tax and enforce penalty The self assessment system present should be supported by a strong risk based auditing system. An effective audit program would contribute to better tax compliance by making tax payers aware that not complying with tax laws will result in sanctions. Taxpayers’ perceptions regarding the probability of being audited strongly affect tax compliance. Since risk based auditing does not seek to audit all tax payers, scarce resources should be targeted to auditing those tax payers most likely to evade paying their tax liabilities.
5. 3 Strengthen Human Resources The administration lacks quality human resources who are motivated to perform well.The current organizational structure does not encourage career progression for the junior staff members and newcomers and hence discourages potential recruits. To build up the capacity of the NBR the most important consideration should be the quality of human resources in-take within the organization. To be more effective in identifying and pursuing new areas of increasing the tax net the NBR needs qualified human resources in the form of statisticians, information technology specialists, qualified accountants and economists, especially for its Central Intelligence Cell (CIC). The NBR, being a revenue-generating organization, should have a proper compensation structure in place to give adequate incentive to their staff in line with the private sector.The NBR should improve human resource management by implementing a strategy that will redefine functions and job responsibilities, establish new recruitment standards, delineate clear career development paths, establish an effective training program, improve internal communications, and adopt other modern practices including pay incentives to motivate staff.
The administration should advocate greater flexibility in the management of its human resources in order to motivate staff, improve productivity and strengthen professionalism and integrity. 5. 4 Increasing access to information Another area of challenge for the NBR is the lack of cooperation and coordination among the various regulatory wings of the government which prohibits the free flow of information. Different organs of the government hold information on economic activity in various sectors.For example, the Ministry of Land has information regarding sale of land and real estate; the Bangladesh Road Transport Authority (BRTA) has information on purchase and sale of vehicles; the Central Bank, through its command over banks, has access to bank deposit information and the SEC has access to capital market information. The NBR needs to have free access to all these information sources to carry out focused and fruitful research. In an ideal scenario, CIC should run a database of all valid TIN numbers which should be automatically and regularly fed with information on their respective tax returns, bank account balances, capital market transactions and real estate/vehicle transactions.
Setting up such a database is not impossible if quality human resources and cooperation amongst the mentioned wings of the government can be ensured A database of tax payers need to be built as well.In order to do it NBR needs to build up its computer infrastructure and build a statistical system. A sound and comprehensive statistical system with an adequate organizational structure and network is an essential function that can be used in the country’s tax administration planning and development process. Currently the institutional structure of the national statistical system of Bangladesh comprises the National Statistical Council as the apex body while the Bangladesh Bureau of Statistics (BBS) is tasked, mainly with the collection and dissemination of official statistics. Currently, a small sub-division of the BBS is working with NBR to research and develop tax related data.This must be strengthened to meet the various current and future needs, and such an organization should, ideally, be under the auspices of the Ministry of Finance. It must include the tax departments, banking and insurance sectors, SEC, etc.
At this moment, there is an urgent need to formulate a database of taxpayers with all their relevant tax information such as income, wealth, business and corporations and above all their standard of living. The various parties will also have to establish a good method of cooperation in order to ensure that the information is such a database is quickly and accurately updated. Such a database will play important role in countering tax evasion. The National Board of Revenue (NBR) and the government must take the ollowing steps to ensure that future needs are met: * Plan a well organized and structured method to formulate the reform profile of each of its components (Customs, VAT, Income Tax and NBR) • Develop a sound and transparent legal and regulatory system • Identify areas where revenue is at risk and to deal firmly and fairly with noncompliance • Facilitate trade flows leading to speedy clearance of import/export cargo • Develop and manage an effective revenue administration staffed with a well trained and motivated workforce • Design and deliver fair, responsible, and effective enforcement mechanisms in ways that directly respond to changes in the economic environment and technological opportunities • Develop a modern IT-based tax administration that is at once efficient, effective and transparent. 4. 3 Increasing Awareness and Motivation among Tax Payers Reforms measures should also include a stronger focus on making the tax service more ‘people friendly’. A good recent example comes from Uganda, where a recent overhaul of the Ugandan Revenue Authority (URA) saw the adoption of a ‘Tax payer Charter’; through which tax administrators treat tax payers as ‘clients’ instead of ‘targets’.
To increase voluntary compliance, the URA carried out a nation-wide campaign tagged ‘Developing Uganda Together’ aimed at increasing voluntary compliance. It was also accompanied by vast public awareness programs to make tax concepts and rules better known, and educate the public on how and where to pay taxes. The following measures could also be adopted: 1) Regular Surveys to Identify New Tax Payers Regular out-door and in-door surveys are required to be strengthened for identifying new tax payers. In view of shortage of manpower and to reduce corruption, surveys may be conducted through outsourcing. In the past, number of door to door surveys was conducted. But these were not very successful. Reasons of such failure should be analyzed to develop future strategy.
City corporations and municipalities are not particularly efficient organizations. But they are generally successful in bringing most of the houses under the municipal tax net. Why is the Taxes department failing to bring house property income under their tax net? It should be easier for them to do it because records are available with city corporations and municipalities. 2) Issuance of Privilege Cards to Compliant Taxpayers Introduction of privilege cards can help the government increase tax collection through building tax compliance and encouraging people by offering some social privilege as taxpayer. Holders of such privilege cards will enjoy monetary and non-monetary benefits as well as social status.Tax-card holders will be able to enjoy benefits in medical services, ports, banks, hotels, schools, colleges, universities, capital market and government services. 3) Discounts for Speedy Compliance Genuine tax-payers often lose interest to pay tax, as they feel deprived of various benefits and services which normally should be available to them.
The process of allowing discounts to such tax payers will recognize their contribution to government revenue and entitle them to certain monetary exemption for paying their taxes on time. This measure could be undertaken to reward voluntary compliance on the taxpayers’ part. 4) Strong Political CommitmentThere is a general perception — rightly or wrongly — that many of our political and business leaders are evading payment of due taxes. If members of the public feel assured that their leaders are paying taxes properly, then compliance is sure to improve. Compliance has to start from the top. The rest will follow. Administrative inefficiency, corruption and complicated tax law may be factors for non-compliance.
But, perhaps the most important reason is lack of commitment. This commitment has to come from political leadership. 4) Introducing the Concept of “Green Taxing” Bangladesh may initiate a package of tax reform, to internalize green taxing. The slogan of greening the tax framework should be: “tax bads, not goods. The idea is to shift the tax burden from value added by labor and capital (something we want more of, i. e. , income/profit) to “that to which value is added” — namely the input/raw materials and its associated depletion and pollution (something we want less of).
So, imposing on businesses, what is sometimes called ‘sin’ tax, on environment-harming activities, and promoting environment-friendly behavior through subsidy or tax write-offs may be more effective ways to ensure environmental sustainability and equity. Similar approach may be taken towards consumers/citizens as well. However, this approach should be revenue-neutral, in the sense that those who already pay tax based on slabs set by the government should not be further burdened.This will allow government’s revenue generation, without added cost to citizens and businesses, and this approach will promote environmental sustainability as well, direly needed in Bangladesh. The creation of a new green tax framework is challenging. Realistic environmental objectives in Bangladesh context must be weighed against economic and social considerations. Also, a differential approach of taxing to types of pollutants and production may be taken.
For biodegradable pollutants, less tax, but for persistent, non-degradable pollutants, tax rate should be higher. For export-oriented production, too much taxing may lower competitiveness. So, this needs to be taken into consideration.Several organizations including the CPD have already put forward concrete, itemized proposal for tax or incentives for pollution management. It is argued that looking through the lens of this suggested framework will make it easy for application of fiscal and financial instruments to specific activities, inputs and products. 5. Evaluation of the Proposed System This section evaluates the pros and cons of the proposed system and suggests how to overcome any limitations that may arise Changes in Tax Structure: The new system proposed suggests increasing the income tax net by lowering the annual income bar eligible for tax by introducing another segment earning income between Tk 35000 to Tk 165,000.
The rate would be a minimum 5 %.This new segment might not be well received by the new taxpayers especially those with very low income. In order to counter the negative sentiment, the tax administration needs to take some special steps. The current administration is limited to serving taxpayers only in the urban areas. Effort should be taken to reach potential taxpayers in the outskirts of the country and motivate and encourage them to pay taxes. This could be done through tax fairs and workshops where taxpayers can pay taxes with help from the officials. This step should also help the farmers who APPENDIX A 1.
Eligibility for Tax Holiday Industrial Undertaking Eligible for Tax holiday: i) An industry engaged in production of textile, textile machinery, jute goods, high value garments, pharmaceuticals, melamine, plastic products, ceramics, sanitary ware, steel from iron ore, MS Rod, CI Sheet, fertilizer, insecticide ;amp; pesticide, computer hardware, petro-chemicals, agriculture machinery, boilers, compressors, basic raw materials of drugs, chemicals and pharmaceuticals, energy savings bulb, solar energy panel, barrier contraceptive or rubber latex. (ii) An industry engaged in agro-processing, ship building, diamond cutting. Physical Infrastructure Eligible for Tax holiday: Sea or river port, container terminals, internal container depot, container freight station, LNG terminal and transmission line, CNG terminal and transmission line, gas pipe line, flyover, mono rail, underground rail, telecommunication other than mobile phone, large water treatment plant ;amp; supply through pipe line, waste treatment plant, solar energy plant, export processing zone.Tourism Industry Eligible for Tax Holiday : Residential hotel having facility of three star or more. 2. Tax Rebate Types of investment qualified for the tax rebate are: – Life insurance premium – Contribution to deferred annuity – Contribution to Provident Fund to which Provident Fund Act, 1925 applies – Self contribution and employer’s contribution to Recognized Provident Fund – Contribution to Super Annuation Fund – Investment in approved debenture or debenture stock, Stocks or Shares – Contribution to deposit pension scheme approved by the government – Contribution to Benevolent Fund and Group Insurance premium – Contribution to Zakat Fund Donation to charitable hospital approved by National Board of Revenue – Donation to philanthropic or educational institution approved by the Government – Donation to socio-economic or cultural development institution established in Bangladesh by Aga Khan Development Network – Donation to ICDDR,B, Dhaka Community Hospital – Donation to philanthropic institution- CRP, Savar, Dhaka – Donation up to five lakh to i. Shishu Swasthya Foundation Hospital Mirpur, Shishu Hospital, Jessore and Hospital for Sick Children, Satkhira run by Shishu Swasthya Foundation, Dhaka ii.
Diganta Memorial Cancer Hospital, Dhaka iii. The ENT and Head-Neck Cancer Foundation of Bangladesh, Dhaka iv. Jatiya Protibandhi Unnayan Foundation, Mirpur, Dhaka – Asiatic Society of Bangladesh – Muktijudha Jadughar 2. Exemptions from IncomeThe following income is exempt from taxable income. i. Income derived from any Small and Medium Enterprise (SME) engaged in production of any goods and having an annual turnover of not more than taka twenty four lakh is exempt from tax. ii.
Industry set up in EPZ is exempt from tax for a period of 10 years from the date of commencement of commercial production. iii. Income from fishery (excluding income of a company), poultry, cattle breeding, dairy farming, horticulture, floriculture, mushroom cultivation and sericulture are exempt from tax up to 30th June, 2011, subject to investing at least 10% of the exempted income that exceeds one lakh Taka, in government securities or bonds. iv.Income derived from export of handicrafts is exempted from tax up to 30th June, 2011. v. An amount equal to 50% of the income derived from export business is exempted from tax.
vi. Listed companies are entitled to 10% tax rebate if they declare dividend of 20% or more. vii. Income from Information Technology Enabled Services (ITES) business is exempted up to 30th June, 2011. viii. Income of a private power generation company subject to certain conditions included of private sector power generation policy of Bangladesh is exempted from tax for 15 years form the day of commencement of commercial production. ix.
Exemption of tax on interest of foreign loan.