The National Board of Revenue (NBR) is reviewing the current tax exemption status and policies to streamline tax collection and increase revenue – a move which will see individuals and institutions losing some of their tax benefits, fully or partially.
The NBR's Tax Department formed a committee on 23 October to develop clear guidelines for granting tax breaks to only those who are eligible "keeping in mind that such exemptions are not unlimited".
The committee has also been tasked with submitting a report within 15 days, a senior NBR official engaged in the process told The Business Standard.
"We are working to develop specific policies to bring discipline [in the tax system]," he added.
The tax department's move to tighten the present tax exemption policies goes in parallel to a similar initiative of the revenue authority to streamline value-added tax and duty breaks in imports and check gross misuse of such offers intended to encourage local industries.
Md Iqbal Hossain, head of the committee, told TBS, "We will not be able to submit the report on deadline because it is a massive task. We are currently reviewing the entire system, and it will require more time to complete and submit."
Cost of tax exemptions
Tax exemptions come in various forms, as explained by the finance minister in his last budget speech. He mentioned "Direct Tax Expenditure" referring to rebates, discounts, exemptions, reduced rates of taxation, and the exclusion of income from computing total taxable income.
The government plans to reduce this expenditure with this step. The government also plans to review and potentially reduce duty benefits for the import of intermediate goods and industrial inputs that are available locally. This is part of an effort to stimulate domestic manufacturing and support backward linkage industries.
In his last budget speech, Finance Minister AHM Mustafa Kamal reported that tax expenditures in the fiscal 2020-21 totalled Tk1.26 lakh crore, or 3.56% of GDP. The amount exceeded Tk178,000 crore in the previous fiscal with more beneficiary sectors coming under the "Made in Bangladesh" initiative. Information technology, garments and textiles, economic zones and high-tech industries account for about Tk10,000 crore in combined tax exemptions, also known as 'tax expenditures' .
Another amount of over Tk10,000 crore goes to sectors like mobile handsets, electronics and textile makers as well as industries in special zones in terms of duty benefits.
Individual taxpayers received over Tk40,000 crore in tax exemptions, more than double the amount provided to companies.
The International Monetary Fund (IMF) also provides guidance on streamlining tax expenditure in Bangladesh, a requirement included in the $4.7 billion loan package. The multilateral lender also stipulates an annual increase of 0.5% in the tax-to-GDP ratio up to FY26.
Provisions of tax exemptions have been misused, the government recognises this loophole. When tax exemptions are granted for social welfare purposes under this provision, some black money holders also exploit these benefits to pay taxes at reduced rates in certain cases.
People are taking advantage of the benefit by declaring their income from fishery and paying taxes at a lower rate, but the true source of such income is always in question.
Tax exemptions are also provided to promote local industries, encourage investment in backward areas and high-tech industries, and attract businesses to economic zones. However, there are complaints that some industries have been exploiting tax exemptions for years by using their influence or by unethical means.
102 types of sectors get tax exemptions
The NBR's tax department released a report on tax expenditures last Wednesday, revealing that 102 types of sectors currently receive partial or full tax exemptions. Forty of these exemptions apply to individual taxpayers, while the remainder apply to companies, industries, or investments. NBR Chairman Abu Hena Md Rahmatul Muneem said at a function in the capital on Sunday that widespread tax exemptions are costing the revenue board a significant amount of revenue and that no study has been done to assess the impact of these exemptions.
"We don't want to eliminate all tax exemptions, but we need to review them to stop unreasonable ones," he said. "If we constantly face pressure to reduce taxes for various sectors, it will be difficult to reach our goal of increasing the tax-to-GDP ratio or the contribution of taxes to GDP."
Economists think it's about time for review
Economists are positive about the step to move out of wholesale tax exemptions.
"We have long called for a review of tax exemptions to rationalise them," said Ahsan H Mansur, executive director of the Policy Research Institute. "The benefit should be given based on how much a sector receives, how long it has received it, and its contribution."
The economist stressed the importance of conducting this review with integrity and efficiency.
The initiative to rationalise the exemption is also seen as positive by industrialists.
"We have no objection if the policy is formulated with provisions for granting exemptions based on contributions to the economy," Shahidullah Azim, vice president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), told TBS. "But there must be transparency. If someone receives exemptions due to their connections with someone, while others without such connections are excluded from the benefit, it will not be acceptable."
Factors that may come into consideration for exemptions
The committee that is working on the review process will consider the areas of non-operating income separately and to be careful not to over-tighten the exemptions while restricting any wholesale exemptions.
Additionally, it will analyse the operational scope and formation process of trusts when granting exemptions, ensuring that company taxpayers cannot misuse the benefits of corporate social responsibility. It's also necessary to assess the possibility of revoking orders, such as statutory regulatory orders, that have expired.
According to sources, the NBR will use this report to prepare an exemption policy on the basis of which steps can be taken in the next budget.
Identifying sectors failing to achieve exemption goals
A research report commissioned by the NBR's Tax Policy Department has put forward several recommendations. According to NBR sources, the committee will take the recommendations into account during the review.
The recommendations say, "It is important to identify the tax expenditures that are not achieving their intended policy goals and are no longer relevant. Elimination or a sunset provision of such expenditure measures can free up government revenue and simplify the tax code."
Additionally, the report suggests limiting expenditures to prevent abuse of excessive benefits, refining eligibility criteria for tax expenditures to better target them towards specific groups or activities, and enhancing reporting and transparency.