A good tax system should meet five basic conditions: fairness, adequacy, simplicity, transparency, and administrative ease.
This is just a definition. Tax systems vary widely in countries, and results also vary depending on the efficiency of the system. In the 2021 International Tax Competitiveness Index Rankings, Estonia has the world's best tax system for the eighth year in a row. Its top score is driven by four positive features of its tax system – a 20% corporate income tax applied to distributed profits, a flat 20% tax on individual income that does not apply to personal dividend income and its property tax applies only to the value of land, not to the value of real property or capital and finally, it exempts 100% of foreign profits earned by domestic corporations from domestic taxation.
In the World Bank's ranking, New Zealand is ninth out of 178 nations in a new report on the easiest places for businesses to pay taxes.
Both Estonia and New Zealand are the members of the 38-nation Organisation for Economic Co-operation and Development (OECD), which have reformed their tax codes over the past few decades, significantly cutting marginal tax rates on corporate and individual income. Now, most OECD nations raise a significant amount of revenue from broad-based taxes such as payroll taxes and value-added taxes (VAT).
In Bangladesh, reforms in tax administration have been in talks for years. Economists are calling for reforms, which have also been endorsed by the government. Finance Minister AHM Mustafa Kamal has pledged revenue reforms in his budget speech this year, as he did in the last year. But reform pledges are mostly centred in automation and amending or enacting laws and rules related to taxes and duties. There is hardly anything about making tax administration efficient, progressive and business-friendly.
While automation is a must to make the system easy both for taxmen and taxpayers, approach matters no less. Our tax system believes that higher rates will bring in bigger yields. Our tax-people rely on a few people who are already in the tax dragnet, and find ways to collect more from them, instead of finding new people or sectors with taxable incomes. Our tax system believes the more powerful the tax officials are, the bigger will be the amount they collect. That is why the new budget further strengthened the authority of tax people.
Businesspeople think a wider range of power for customs officials and bigger fines for irregularities in paying income tax, value added tax and various customs duties incorporated in the next fiscal budget may lead to their harassment and increased abuse of power.
The finance bill 2022 empowers the tax officers to look into the documents and computerised accounts of the institutions and fine up to Tk50 lakh for any kind of obstruction or non-cooperation.
Tax officers will now also have the authority to disconnect gas, electricity and water connections from businesses to collect undisputed taxes. For this, the officers will get support from the relevant utility service provider.
Similar authority has been given to VAT officers who can now disconnect the services of the business establishment. Besides, certain powers, earlier given to commissioners, have now been extended to assistant commissioner level.
According to the National Board of Revenue (NBR), about 60% of the total tax is collected from businesses.
Will enhanced power of taxmen bring more revenue?
Business leaders warn it may rather lead to misuse of authority and lead to more harassment to the business community.
Mostafa Azad Chowdhury Babu, senior vice-president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), finds some measures "oppressive".
"When a deputy commissioner gets the authority to impose a massive fine, say Tk50 lakh. This simply cannot happen in a civilised society," he said, adding that giving so much power will lead to more corruption and incidents of harassment.
However, on the condition of anonymity, an NBR field deputy commissioner of taxation, said that they often get non-cooperation from source tax deduction authorities.
Md Alamgir Hossain, former NBR member, who also engaged with last fiscal year's finance bill preparation, told The Business Standard that he had bitter experiences with many source tax deducting companies.
Attempts to evade tax are also common in countries with the best tax administration. A billionaire can get more than 10 ways to evade tax in the USA. The US system taxes income. Selling stock generates income, so they avoid income as the system defines it. Meanwhile, billionaires can tap into their wealth by borrowing against it. And borrowing isn't taxable.
Even then, the top 1% of US earners pay over 40% of federal taxes; the bottom 90% pay about 29%.
This is because of the system's efficiency, which makes tax evasion difficult while making tax payment easy.
While our tax system empowers tax officers more, it is slow to make the system easier both for businesses and individuals. Tax return submission around November every year is so chaotic that taxpayers are frightened to approach tax offices. Yet submission of tax returns, no matter if someone's income is taxable or not, has been made mandatory for a whole range of government services like seeking an SME loan or buying a savings certificate.
Progressive system means making high-income affluent people pay more taxes to lessen the burden of the poor. This is the fairest system with tax justice. To ensure this, tax administration must be efficient and transparent.
OECD members did it over the years. According to research from the OECD, corporate taxes are most harmful for economic growth, with personal income taxes and consumption taxes being less harmful. Taxes on immovable property have the smallest impact on growth. Countries applied the research findings into practice and developed neutral tax codes—raising most revenue with the fewest economic distortions. A neutral tax system does not favour consumption over saving, it offers few or no targeted tax breaks, it plugs loopholes for large businesses or wealthy individuals to evade taxes.
One may argue OECD countries are affluent and what they can do may not be possible in Bangladesh.
Not a strong argument. Improving a system is more of a policy attitude than of a huge investment. Bangladesh needs to find its way to reform tax administration and make it neutral in its approach to raise sufficient revenue to finance the government's budgetary priorities. Otherwise, the revenue target will continue to miss its annual target, whatever big projection is made in the annual budget, and the budget deficit will widen, making the country rely more on external support.
Revenue collection in the 11 months of the just-ended fiscal year increased by about 15% compared to the July-May period of the year before. But this growth is far away from bridging the resource gap. Analysts say the growth was because of soaring global prices that generated higher import revenues. They do not give credit to NBR for the growth.
"What year-on-year revenue growth we achieved cannot be called much satisfactory as it was driven by surged import costs, not by the extra effort of the National Board of Revenue. Keeping pace with the soaring import costs, customs duties, value-added tax and other taxes at the import level have increased," writes Dr Muhammad Abdul Mazid, former chairman of NBR, in an opinion piece in TBS.
The NBR is yet to complete the much-sought-after automation of its customs, VAT and income tax departments. Although it worked for that, the pace was very slow. The automation could have increased the revenue with ease of the tax filing and payment processes, he believes.
To get investment at a desired level, Bangladesh needs to put in place a tax system which is competitive, keeping marginal tax low. In todays' world, capital is highly mobile—investors have options wide open for them to take their money elsewhere if you have a high rate and chaotic tax system. High tax rates do not generate high revenue, rather it promotes tax avoidance and breeds corruption.
The efficient tax system has facilitated rich nations, as those in OECD, to collect more taxes and spend more on people's welfare.
Around 25% of the salary of French people goes to social security, versus 12% in the UK. Unemployment benefit goes up to 65% and state pensions up to 50% of one's previous salary in France. This is what makes French tax higher than that in the UK.
Taxes in Germany are higher than those in the UK. An employee earning €70,000 annually before taxes owes €29,219 in Germany and €19,857 in the UK in taxes. But higher social contributions in Germany more than compensate for the differences.
Bangladesh also plans universal pension schemes, health insurance, crop insurance, bigger allowances for vulnerable groups of people.
All the initiatives mean higher social welfare investment, which needs more domestic earnings. The national tax agency has to make it happen.