NBR presents 6 key challenges to increasing tax to IMF

The National Board of Revenue (NBR) has presented at least six key challenges to increasing tax revenue to an International Monetary Fund (IMF) staff mission.

These challenges are the tax gap (between actual collection and potential tax), revenue forecasting, narrow tax base and broad exemptions, lack of automation, capacity building, and evidence-based strategic action plan.

NBR's tax wing presented the challenges to the visiting IMF team in a meeting held at the revenue board's headquarters in the capital's Agargaon on Monday (4 March), according to a meeting source.

"We presented the current reform activities of the NBR to increase domestic resource mobilisation to the IMF mission and our short-, mid- and long-term strategies also," a senior NBR official told TBS on condition of anonymity.

The NBR also presented a way forward, especially how to come out from the tax gap, he said.

"Revenue board officials told the IMF team that the tax wing is currently conducting baseline studies on tax expenditure and tax gap as well as risk management," the official said.

The IMF mission, however, did not make observations in this regard, he said.

The NBR told the IMF team that it is working on strengthening digital transformation capabilities, action plans for all wings and implementation of plans and strategies, investing in capacity building of human resources and also administrative as well as organisational reforms.

As part of mid-term priorities of income tax, expanding tax base, improving taxpayers service, addressing tax leakage and modernising infrastructure and enhancing inter-agency cooperation is running, the NBR mentioned in its presentation to the IMF mission.

IMF's one of the over 30 key conditions was to rationalise tax expenditure while approving a $4.7-billion loan in January 2023. The IMF is reviewing the progress of the government's reform agenda.

The lending agency set a target to increase the country's tax-to-GDP ratio by 0.5 percentage point this fiscal year which is currently less than 8%.

The government is offering a huge amount of tax exemption over the years mostly to corporate sectors, export-oriented industries, remittance, power and energy sector, microfinance, economic zones and hi-tech industry, garments and textile, poultry and fisheries, investors of capital market and other sectors including salaried persons.

In the last budget speech, the then finance minister AHM Mustafa Kamal said, "Total estimated amount of the direct tax expenditure in fiscal year 2020-21 was approximately Tk1 lakh 26 thousand crore, which was 3.56% of the gross domestic product (GDP) of that year."

Mustafa Kamal projected that the amount will reach over Tk1 lakh 78 thousand at the end of FY24 and the estimated subsidy amount to this will reach over Tk2,89,228 crore, whereas NBR's total direct tax collection for FY24 has been set at Tk1,45,845 crore.

However, the NBR narrowed tax exemptions in the last couple of years and has a plan to lower it further, revenue board officials said.

Like the tax department, value-added tax (VAT) and customs wings are also working in the same way, they said.

Ahsan H Mansur, executive director of the Policy Research Institute, told TBS, "The government has to come out from this wholesale tax exemption. Rather, it should identify which sectors actually need it, its contribution to the economy and future prospects."

Ahsan H Mansur, also a former IMF senior official, added, "Not only that, the NBR needs an effective automation, inter and intra connection, and a simplification of the tax-paying system which will help get more revenue."