Low tax-GDP ratio: A real quandary for the economy of Bangladesh
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Low tax-GDP ratio: A real quandary for the economy of Bangladesh

Thoughts

Muhammad Nafis Shahriar Farabi
01 November, 2020, 11:45 am
Last modified: 01 November, 2020, 12:29 pm

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Low tax-GDP ratio: A real quandary for the economy of Bangladesh

The tax-GDP ratio represents the size of tax revenue earned by the government which is expressed as a percentage of the GDP

Muhammad Nafis Shahriar Farabi
01 November, 2020, 11:45 am
Last modified: 01 November, 2020, 12:29 pm
Muhammad Nafis Shahriar Farabi.
Muhammad Nafis Shahriar Farabi.

The tax-GDP ratio is an important factor in the economy of a country. It measures the effectiveness of a country's tax policy and assesses its income inequality. Higher tax revenue indicates that available resources are being used properly to ensure sustainable economic growth.

Bangladesh's tax-GDP ratio has been significantly low over the years. The low ratio has increased income inequality and impeded the development and growth process.

The tax-GDP ratio represents the size of tax revenue earned by the government which is expressed as a percentage of the GDP. The tax includes income tax, payroll tax, value-added tax (VAT), product sales tax, and other GDP items.

A higher tax-GDP ratio is always preferable as it induces investment opportunities and helps the government finance its expenditures, develop infrastructure and meet the budget deficit. It also reflects the robust tax buoyancy and wider tax base of an economy.

On the other hand, lower tax revenue puts pressure on the government's plan in expanding investment on developmental work and meeting fiscal deficit targets. It also increases public debt.

Bangladesh's GDP growth has been impressive over the years. It was recorded 8.153 percent in 2019. But still the country has failed to boost up its tax revenue terribly.

According to the World Bank Open Data, the tax-GDP ratio of Bangladesh is the lowest among its South Asian counterparts while Nepal has the highest ratio. Generally, developed countries reflect a higher ratio. For instance, the 37 member states of the Organisation for Economic Co-operation and Development (OECD) have an average ratio of 34 percent. It is almost four times than that of Bangladesh's 8.8 percent.

During this pandemic, lower tax revenue is affecting the country to finance the economy's recovery process. National Board of Revenue (NBR) has set a target of earning Tk330,000 crore in 2020-21 fiscal year, which is 11.9 percent of the total GDP. Centre for Policy Dialogue projects that revenue generation must be accelerated by almost 50 percent to fulfill the target, which is a nearly impossible task to accomplish. 

Higher tax gap, narrow tax base, impaired tax structure and money laundering are the key reasons behind this low tax revenue generation. Tax gap defines the gap between the actual tax liability and the amount paid on time. According to a survey conducted by the Economic and Social Commission for Asia and the Pacific (ESCAP), Bangladesh has a tax gap of 7.5 percent, which happens to be the highest in the Asia Pacific.

In his FY 2019-20 budget speech, Finance Minister AHM Mustafa Kamal said that 40 million people were included in the middle-income group, eligible to pay tax. Still, only around 2.2 million people pay the tax. People like to avoid paying taxes and opt for alternative ways. 

Illicit financial flows (IFS), including money laundering, also lower the tax revenue. Shadow international financial systems, commonly known as 'tax havens' facilitate the outflow of capital. During 1990-2008, Bangladesh ranked first in terms of illicit money flows from the least developed countries. During this time, the amount of illicit money flow stood at $34.8 billion.

According to a report of the Global Financial Integrity, the average IFS were $1,406 million over 10 year period ranging from 2001 to 2010. Trade mis-invoicing had accounted for $7.3 billion annually between 2008 and 2017. On an average, 17.95 percent of the trade occurs through mis-invoicing.

Bangladesh is highly dependent on indirect taxation, which is regressive in nature. As of 2014, regressive tax accounted for about 64 percent of the total tax amount. This taxation system does not provide justice as it affects the poor most. VAT is the most regressive tax on the poor in Bangladesh. VAT remains the major tax earning source in the budget for 2020-21 fiscal year, which is projected to be 33 percent of the total tax earning.

A study regarding the UK tax system revealed significant insights on VAT. The study found that the poorest 20 percent of the households bear the highest tax and VAT burden. While the richest 20 percent of people have to spend 5.9 percent of their income on VAT payment, the figure is 12.1 percent for the poorest people. This thing widens the gap between the rich and the poor in the society and leads to higher inequality.

 Gini coefficient is an economic indicator that measures the income inequality of an economy. The value ranges from 0 to 1; the higher the value, the higher degree of income inequality prevails in the country. According to International Growth Centre, from 1970 to the late 1980s, the Gini coefficient was stable around the 0.37 mark, which shot up to 0.458 in 2010. In 2016, it further rose to 0.483 as per the latest Household Income and Expenditure Survey (HIES), depicting the increased income inequality in Bangladesh.

Lower tax revenue generation has disrupted the development in the health and education sector. The government's expenditure on education as a percentage of GDP has decreased over the years.

In 2012, it was 2.175 percent, which declined to 1.326 percent in 2019. In 2018-19 fiscal year, public health expenditure was only five percent of the GDP, which was also significantly low.

The NBR has adopted various reformative plans such as Reforms in the Revenue Administration (RIRA), Income Tax Management System, Tax Administration Capacity and Taxpayers Services (TACTS) to make the tax system more structured, transparent and simplified. But regrettably, the implementation of most of these plans either did not work out or it was interrupted.

Sustainable Development Goals (SDGs) were introduced at the UN General Assembly in 2015. There are 17 goals which have been set to achieve the goals by the year 2030. Without accelerating the current tax-GDP ratio, Bangladesh might not be able to achieve the SDGs. Widening the tax net, proper reformation of the tax structure, increasing human resources and detaining tax evaders are crying needs to strengthen the tax-GDP ratio.


Muhammad Nafis Shahriar Farabi is currently pursuing MSS in Economics at Bangladesh University of Professionals.


 

Bangladesh / Economy / Top News

tax-GDP ratio / tax-GDP / GDP / vat / Low tax / Economy / Bangladesh

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