Tax buoyancy doesn't keep pace with economic growth
Economists wonder how targets and achievements matched so closely over the past five years
In terms of the size of the economy and GDP growth, Nepal lags behind Bangladesh. The Himalayan nation's value added tax (VAT) and corporate tax rates are lower than those in Bangladesh, but its tax-GDP ratio is more than three times that of Bangladesh.
Though Nepal's GDP has tripled in the past decade, its tax revenue increased almost fivefold. In the same period, Bangladesh's GDP size and tax revenue rose almost three and a half times. Nepal's tax revenue increased by almost double the size of its GDP, but that of Bangladesh remained flat.
Nepal's tax-GDP ratio increased from 14.75% in the fiscal year 2009-10 to 25.29% in 2018-19. In this period, Bangladesh's tax-GDP ratio fell from 9% to 7.59%.
It was not only Nepal, but also Vietnam, Cambodia, Mongolia, Tajikistan and other countries which achieved high growth like Bangladesh saw their tax-GDP ratios stay between 18% and 24% in the past few years.
Economists say the revenue growth of the fast-growing economies in South and Southeast Asia, especially those transitioning from least developed countries (LDCs) to developing countries, is about 25%. In Bangladesh, revenue collection rose by 14% on average in the last decade.
They also say the tax rate usually grows by one and a half times compared to GDP growth at market price in developing countries, but Bangladesh's tax collection rate has declined compared to GDP growth in recent years.
The IMF in 2018 went for a comparative analysis of the tax-GDP ratios of Asian countries and found them to be between 15 and 20%. It advised these countries to keep the tax-GDP ratio threshold at around 15%. In 2019-20, Bangladesh's tax-GDP ratio was only 7.59, half of what the IMF had advised.
Economists say tax revenue is not growing at the same rate as the size of the economy in Bangladesh. Taxes are not being collected at the expected rate because of the tax administration's inefficiency, tax exemptions, the lack of automation and corruption.
On the other hand, the GDP size reported by the government in the past few years was higher than the real picture, causing the tax-GDP ratio to fall.
Analysing the reasons behind the high GDP growth and the downward trend of the tax-GDP ratio, economists say no indicators other than remittance has matched the government's GDP growth data since 2015. Five years ago, there was not such a significant mismatch between GDP growth and other indicators.
Tax information is more acceptable as accounting statistics, they say, while the acceptance of GDP data as estimating statistics is quite low. Since GDP is calculated on the basis of estimates, there could be many gaps in data.
The size of Bangladesh's GDP, which was Tk8 lakh crore in fiscal year 2009-10, increased to Tk27.4 lakh crore in FY20. In other words, the size of the economy increased three and a half times in 10 years, with a nominal GDP growing at an average rate of 13.4% per year.
On the other hand, a decade ago, Bangladesh's tax revenue was around Tk62,000 crore, which increased to Tk2.19 lakh crore in the 2019-20 fiscal year. This means tax revenue increased three and a half times in a decade.
Over the past decade, Bangladesh's average tax-GDP ratio was 9.4%. During this period, tax collection rose by 14%.
According to finance ministry data, Bangladesh achieved the highest tax-GDP ratio of 10.4% in the 2011-12 fiscal year. After three consecutive years of decline, it increased to 10.3% in the 2016-17 fiscal year.
It has been steadily declining again since. In the 2019-20 financial year, the tax-GDP ratio was 7.59% while over the past decade, Cambodia's tax-GDP ratio had doubled from 10%.
Bangladesh's tax-GDP ratio is the lowest in South Asia because the government allows tax exemptions in big development projects. The tax-revenue ratio would have been higher if these projects had not received tax exemptions, but project costs would have increased then, which would have eventually put additional pressure on the people
Finance Minister AHM Mustafa Kamal said Bangladesh's tax-GDP ratio is the lowest in South Asia because the government allows tax exemptions in big development projects.
He said the tax-revenue ratio would have been higher if these projects had not received tax exemptions, but project costs would have increased then, which would have eventually put additional pressure on the people.
The analysis of Bangladesh's GDP and tax growth reveals something surprising. In election years and those marked by political violence, GDP growth rate is higher than in previous years, but the tax revenue growth rate is lower than in past years.
Despite the year-long political violence over the trials of war criminals and the 2014 elections, GDP growth in the fiscal year 2013-14 was higher than in the previous year. But tax revenue growth that year was about 5 percentage points lower than in the previous year.
Similarly, though there was not much violence during the 2018 elections, revenue growth in the year decreased by about 9 percentage points compared to the previous financial year. But even in the 2018-19 financial year, Bangladesh recorded additional GDP growth compared to the previous year.
"Our tax growth is lower than the nominal GDP growth. The ratio of tax growth is around 80% of the nominal GDP growth in Bangladesh while it is 120% in economies of a similar nature. That is why economists are in doubt over the GDP data of the government," Ahsan H Mansur, executive director of the Policy Research Institute, told The Business Standard.
He detects problems in data regarding both tax collection and GDP growth."Our tax collection management is weak and there is some sort of manipulation in the calculation of GDP. Higher GDP growth mostly helps increase tax collection."
The economist said there is no chance to manipulate calculations of tax collection data, but manipulating GDP growth is a regular practice in many countries and Bangladesh is no exception. He recommended that the government initiate the formulation of realistic GDP calculations.
He said several initiatives are needed to reform the tax collection system in order to increase revenues, adding that the government has lots of projects and programmes to reform the tax system.
Problems, he said, were being identified but reforms were not coming into effect.
The economist identified the lack of political will as the reason why problems had not been fixed in the tax collection system.
The former lead economist at the World Bank's Dhaka office, Dr Zahid Hussain, told The Business Standard the tax-GDP ratio should not decrease even if the size of the economy increased, given the tax rate remained unchanged.
"But the ratio is falling in Bangladesh, though it doubled in the last decade in other countries of the same economic nature," he said.
Explaining further, he said, "When the size of the economy increases, new sectors are created. That is why even if the tax rate does not increase, tax buoyancy in economies like Bangladesh remains between 1.4-1.5 as additional taxes are collected from those new sectors.
"But in addition to an overrating of GDP, the institutional capacity of the government and the revenue board as well as human capital resources declined as a whole here."
He said the National Board of Revenue had not improved over time.
Tax and VAT registrations, filing, and auditing had not improved despite several projects being taken up, he said, adding though there had been some progress in the projects, that was not enough to yield positive results.
Our tax policy is very ad hoc and arbitrary. Many sectors, organisations, and even individuals are allowed tax exemptions based on negotiations, bypassing official policy. The possible impacts of tax exemptions on revenue collection or other sectors of the economy are not addressed
Centre for Policy Dialogue Senior Research Fellow Towfiqul Islam Khan said tax collection in the Southeast Asian countries that are at the same level as Bangladesh in terms of economy and the countries waiting to graduate from the list of LDCs was increasing by 24% every year.
"But this is notably low in Bangladesh. We can easily say there are major problems in tax collection here."
He said the tendency to evade taxes was increasing due to the tax administration's lack of efficiency, adding there had been lots of discussions on tax structure reforms, but the reforms suggested had not been implemented.
"Our tax policy is very ad hoc and arbitrary. Many sectors, organisations, and even individuals are allowed tax exemptions based on negotiations, bypassing official policy. The possible impacts of tax exemptions on revenue collection or other sectors of the economy are not addressed," the researcher explained.
He said these were the reasons why a large part of the economy was enjoying long-term tax exemptions or rebates.
"For example, the apparel sector has been paying nominal taxes for many years. Though agriculture and fish farming sectors have grown, they are outside the tax net."