The Income Tax Act, 1922 and its Bangladeshi successor The Income Tax Ordinance, 1984 had quite a similar view of tax administration and tax compliance by taxpayers. And the conceptual scheme of income taxation laid out therein is quite simple too; every taxpayer having income beyond a threshold amount determined by the government each year shall submit return to the tax office.
The tax office will issue a notice to the taxpayer to explain on what basis returned income was determined. If not satisfied with the explanation, tax office will issue another notice to submit documents and books of accounts specified in the notice. After examination of the same and having further explanation of the taxpayer and making further enquiries as the office may think fit, tax office will make an official assessment of income and tax payable by the taxpayer.
If not satisfied with the quantum of liability determined by the tax office, the taxpayer will file appeal before the successive authorities up to the Appellate Division of the Supreme Court. Then the tax to be paid by the taxpayer becomes final. In both versions of the law, as far as tax compliance was concerned, it was the tax officer who ruled the roost; the taxpayer was only at the receiving end and she/he was never taken into confidence.
These compliance norms changed in 2007 with the introduction of Universal Self-Assessment System of taxation. Under the new procedure, taxpayers will determine their income and tax liability on the basis of the existing rules and will pay the tax and submit the return to the tax office which will be accepted right away. The acknowledgement receipt given to the return filer will be treated as an assessment order.
Afterwards, National Board of Revenue (NBR) may select a portion of the returns for audit by the tax office in which the veracity of the tax payer's claims about the quantum of income and tax liability will be audited. After examination, it will either be accepted as per the taxpayer's filing or be reassessed with or without penalty depending on whether findings point to unearthing of concealment of income by the taxpayer.
There is no rule regarding the specific number of returns to be selected for audit but in each of the 13 years of its existence less than 3% of the returns filed under the system got selected.
The name is, of course, a misnomer since instead of the filing-and-tax-determination procedure being made truly universal the old "normal" type continued to exist. Taxpayers often failed to understand the difference between the two as far as filing requirement is concerned because both the procedures require filing of all necessary documents and evidences and tax payment records along with the return, be it normal or self-assessed.
The difference, however, exists in how the return is treated by the tax office after its filing is over – in the universal case, the self-assessment of the tax payer is accepted as final unless it is selected for audit and in the normal case, the tax office itself proceeds to make an official assessment the olden way as explained in the beginning. Experiences tend to show that this procedural duality of assessment propriety is often exploited by a section of taxpayers and/or their representatives for three unholy purposes.
One, for underreporting of income and tax liability knowing fully well the inadequacy of the information and logistics at the disposal of tax offices to enable them to make a reasonable assessment of income and tax liability. Two, for deferring payment of tax liability since official assessment takes more than a year to complete and thereafter an indefinite time period they can linger the cases in appeal stages up to the highest courts. Three, to squarely put the burden of tax evasion, if any detected in future, on the tax office.
In view of the fact that there is no pecuniary gain to be reaped from the difference in filing procedure in case any evasion is detected, this last reasoning should not be dismissed off as trivial because filings in Bangladesh are mostly done not by the taxpayers themselves but by taxpayers' representatives who might have a substantial interest in how tax filing is made and what follows thereafter.
This reengineering of the business process has ushered in a great potential for far-reaching salutary changes in the tax-system with the introduction of a fair degree of inclusiveness in tax compliance matters. Thus far he was in the receiving end, now he is in the driver's seat initiating the taxing process. It is he who decides what to declare and how much to declare. And given that the probability of being audited is very low his declarations in effect stand final.
On the other side, in order to protect tax-revenue and its base, the tax department remains on vigil lest tax evasion eats into the exchequer. One deterrent policy tool they have for this purpose is the threat of audit. In audit, tax department can chase taxpayer's underreported income and/or unreported sources of income or investment or expenses. These may lead to serious consequences including penalty and imprisonment.
The changes, however, can be meaningful only in a situation where policy tools like audit are credible to thwart evasive taxpayer behavior. Inclusivism in taxing exercise has been necessitated by increasing workload on the tax department on the one hand, and on the other, has been facilitated by the information revolution effected by the development in communication technology.
If its burdensome working with taxpayer-base of a meagre 2.2 million return-filing taxpayers at the present time, it's understandable the predicament of the tax department when this year's enactment of mandatory return filing by all e-TIN holders raises compliance level to full potential of 4.5 million. What if e-TIN registration rises to 10 million or more? It's therefore advisable to have a robust audit mechanism to enforce compliance on the part of the taxpayers.
Otherwise, "animal spirits" that are now assumed to guide economic decision-making by the people may continue to lead to widespread tax evasion in the same way as they are believed to lead to bank-loan default as recently suggested by noted Bangladeshi economist Professor Wahiduddin Mahmud following the findings of Harvard Medical School on how human brain works.
ICT technology enables networking between people and organisations making availability and use of taxpayer information handy and easy. This is exactly where effectiveness of an automated taxation platform comes in. Meaningful auditing requires collection, collation and processing of millions of taxpayer information from diverse sources in limited time schedule which only automation can deliver.
In the 13 years that the system has been in place, its absence has been undeniably and intensely felt. The fact that our tax-GDP ratio failed to register respectable growth in these 13 years and still remains low even by developing country standards is an evidence to the fact that audit tool without any technology-driven intelligence mechanism has failed to act as any credible threat to tax evasion.
A second building block of this robust compliance enforcement mechanism is a tax compliance and policy research unit at the disposal of the tax authority. We see tax policies changing every year through finance acts. But nobody knows on what findings (except suggestions of different lobby groups) these changes rest or what impact they have on tax administration, revenue, investment, tax compliance, taxpayer and third-party behavior and reporting costs, tax authority's business process etc.
As the economy progresses, financial transactions become more complex and newer general and special anti-avoidance tax rules need to be in place. Also increasing cross-border and e-commerce transactions present new challenges before the tax authorities. All these aspects need to be continuously researched, discussed and implemented. In the 2000-01 budget a proposal was made to establish a fiscal policy research cell in NBR but that has not materialised in the last twenty years.
The third component of the compliance enforcement network is a modern tax academy to conduct year-round training programmes for the tax officials as well as other stakeholders of the tax ecosystem to build up an informed class of highly trained tax officials and third-party information reporters. The research unit and tax academy can collaborate on joint projects to generate empirical data and dissemination of the findings.
Ramendra Basak is a retired commissioner of taxes. Email: [email protected]