Last September, the chief of the country's revenue regulatory body, the National Board of Revenue (NBR), Abu Hena Md Rahmatul Muneem said that Bangladesh's tax-to-GDP ratio was now less than 9 percent, the lowest in South Asia.
Due to a negative revenue collection growth during the pandemic, the ratio came down to 7.9 per cent in the fiscal year 2020-2021. However, the 7th five-year plan had projected the tax-GDP ratio to be 13.7 percent in the 2020-2021 fiscal year. The ratio is way behind projections.
In the latest edition of the five-year development plan, the 8th five-year plan also projected that the tax-GDP ratio would be 12.25 percent for FY25. Will Bangladesh be able to meet the target? There is still doubt.
Dr Muhammad Abdul Mazid, former chairman of the NBR, in an interview with The Business Standard, shared his thoughts on the three areas the government can improve to raise revenue as well as improve taxation management.
TBS: Do you think there should be separate bodies for collecting direct tax (like income tax) and indirect tax (like VAT and customs duty)?
Dr Muhammad Abdul Mazid: If you compare Bangladesh's with many other countries including India, you will see that there are two different bodies for direct tax and indirect tax. This is because direct and indirect taxes are very different.
The whole population, irrespective of being poor or rich, pays indirect taxes. If you buy a product or service, you will have to pay tax. But only those who have regular income pay income tax. The earnings from direct tax tend to be higher. The more one earns, the more s/he will pay as tax.
Many countries like India empower their finance ministries to manage direct taxes because they are also responsible for creating the country's budget. The problem with indirect taxes is very much related to trade, i.e., the price of imports and exports.
Moreover, in many other countries, the commerce ministry usually has the responsibility to manage indirect tax. The commerce ministry is also responsible for setting certain prices as they actively gauge the markets.
In Bangladesh, there is a huge lack of coordination between the NBR and the tariff commission. As a result, the NBR fails to realise the taxes it sets.
Our commerce ministry has a tariff commission. The task of the tariff commission is to give the commerce ministry recommendations on what product it should impose duties on.
The commission usually arranges public hearings to do so. But, as the NBR is under the finance ministry, it pays no heed to the tariff commission's recommendations on price or customs duty.
When I was the chairman of the NBR, I met the chairman of Bangladesh Trade and Tariff Commission. I told him that we [NBR] want to fix the customs duty based on the recommendations of the tariff commission.
Yet the NBR still does not listen to tariff commission because if the NBR did so, it could lose the freedom to change customs duties at will. There is no legal framework for applying the tariff commission's recommendations yet. There is no such system in place.
There is no coordination between the tariff commission and NBR. This is a huge problem.
It should be the responsibility of the commerce ministry to increase and decrease the price and other things like customs duty because it also formulates the import and export policies.
In fact, the customs duty that the NBR imposes is completely based on the import and export policy. So we have one agency framing the policies while the other is collecting setting duties and collecting revenue. If the commerce ministry could set indirect taxes, the tax collection system would have been more fair.
Another thing we should note is that every year before the national budget, the NBR takes suggestions from different trade bodies. However, these trade bodies are actually under the commerce ministry, not the finance ministry.
These trade bodies are seen meeting with NBR to lobby the NBR into reducing duties. If the trade bodies lobbied the commerce ministry instead, there would be fair play. And it would, undoubtedly, increase the revenue.
The NBR never admits they sat with them [trade bodies] to discuss customs duties and other things. Instead, they label it as a 'pre-budget discussion' although it rarely serves its actual purpose.
I believe if the power over setting indirect taxes comes under the commerce ministry, our revenue will increase. Moreover, the system will be more business and economy-friendly.
TBS: Why has Universal Self-Assessment failed to take off in Bangladesh?
Dr Mazid: Universal Self Assessment has been introduced in many countries around the world. The system was introduced in Bangladesh so that the taxpayers could easily report their income figures on their own. We need to honour our taxpayers. We have to honour what the taxpayers give.
But it has been seen in the past that in the name of carrying out audits, the taxpayers are summoned. The revenue authority has the power to summon a certain percentage of taxpayers at will.
The problem occurs when many days later, the same taxpayers are called in multiple times. This means, you did not actually give them the freedom of self-assessment.
However, it is also true that some taxpayers misuse the self-assessment system while filing their taxes. And if for this reason, the NBR officials summon them, it is completely justified.
But these summonings should be done with moderation instead of quizzing the same taxpayers again and again. The NBR will have to develop a system where taxpayers have no choice but to file taxes honestly.
The NBR is also highly understaffed. It is too busy scrutinising regular taxpayers instead of seeking new taxpayers and new avenues of tax collection. In other words, the NBR is deploying its manpower on issues that can be dealt with later.
TBS: Some view allowing tax evaders to whiten black money as a problem. What do you think about it? What should we do?
Dr Mazid: The economy runs on the basis of ethics. If you let a man who earned money illegally to get away with paying a small amount of tax or penalty, you are ultimately indulging them.
New taxpayers will think that it is better not to give tax. They will think the government will give them a chance too and raise no questions. Then they will think it is okay not to pay tax at all!
The NBR's stand is hypocritical. On one hand, NBR is very sympathetic to those who are evading tax. On the other hand, they are saying people should pay their taxes.
This cannot be sustained. The government should undertake a carrot and stick policy. The government should let tax evaders know that if you deceive, you will get punished. You will be asked questions about your wealth. Yet, we continue to indulge them.
Now I am not saying that we should completely stop whitening black money. Rather, we should gradually phase it out over time. No country in the world has allowed the whitening of black money to go on for years; it is usually limited to a few months.
In other countries, governments collect the undisclosed money and warn the tax evaders that if they repeat such actions, they will face serious punishment. If you do not send them a strong message, they will take you lightly and you will not be able to collect taxes effectively.