Reforming revenue regulations to rid it of its colonial past

Incumbent (tax) Revenue regulations in Bangladesh, like income tax, VAT and customs laws, are usually viewed as British by birth, too intricate in design, and cumbersome for the authorities to enforce.

Though taxation, as an influential instrument for revenue income for the state, existed in ancient and mediaeval India in a different form and style, the modern tax systems as we know them today were first introduced by the British in India. 

After the Indian Mutiny of 1857-58, the British government took over ruling power of India from the East India Company. The country was in a bad state financially. James Wilson (1805-1860) was posted in Calcutta as a member (finance) in the Viceroy's council, a position equivalent to Finance Minister. Wilson then introduced a bill in the Indian Legislature to restructure tariff laws. 

He also introduced the budgetary system and paper currency; he voiced support for floating the Income Tax Act in India in his first-ever Budget Speech for FY 1860-61. Two months after the historic introduction of income tax in India, Wilson died in Calcutta from dysentery. 

Many had felt that the novelty of the tax and the inquisitorial methods required by the administration would mean a failure of the new tax system.

Wilson witnessed the revenue law laid down by Manu, a set of legal texts based on the ancient manuscript - Manusmriti and proposed, "now, Sir, I must say that there is latitude enough here for the most needy exchequer and for the most voracious minister :- a 20% income tax upon profits; a tax varying from 2 to 5%. Upon accumulated capital; a share of almost every article produced; an annual tax on the trades; half the produce of mines."

Though Wilson took the logic from the ancient Indian pundits as the basis, he imported the British regulatory framework for the revenue collection mechanism, and imposed it on the natives of India. The first general income tax was levied for a period of five years in order to meet the difficulties caused by the Mutiny. 

As per the English model, it was levied on all incomes above Rs 200 per annum, on properties, professions, trades and offices at the rate of 2%. Larger incomes were taxed at a rate of 3% with an additional 1% that was to be used for the purpose of local development. 

One may note with dismay that the basis for income tax calculation was made cumbersome from the start with an embedded scope for creating and applying discretionary power by tax officials, which led to harassment and revenue dwindling.

In fact, the income tax laws and methods of collection were framed and formulated by the British political bureaucrats, who themselves were exempted from tax payment and the responsibility of collecting taxes was assigned to another class of bureaucrats, who assumed they would not be held liable for paying taxes, rather they would share the responsibility of collecting more.

So the regulation and method of calculation and collection were all designed to be solely imposed on the natives. 

Unfortunately this subjugating philosophy and attitude as a legacy still reign in our now free and independent society and state. If the lawmaker is exempted from the enforcement of that particular law and if it is framed only for ruling, regulating, controlling and exacting revenue from others, then one can easily discern the true spirit and nature of such an action.

Though the modern income tax was introduced in 1860, it lasted about five years until it was scrapped after protests from citizens. It was reintroduced in the 1870s and 1880s for a short duration. The first formal tax law was promulgated in 1882, compiled in 1886 and then finally the Indian Income Tax Law 1922 came into being, which anthologised the entire annual amendments. 

The Income Tax Law of 1922 was adopted by India and Pakistan in 1947 and later by Bangladesh in 1972. India introduced its own income tax law in 1961 and Bangladesh introduced one in 1984 as an ordinance, as there was no parliament in session at that time. 

Once again, this time the law was written (rather copied from earlier laws) by local and foreign bureaucrats turned consultants, not by the lawmakers. After a long demand and decree, a new income tax law is now in the making and it is hoped that it will be enacted by the lawmakers in parliament.

The present customs law was also born in British India and carried over to Pakistan and present-day Bangladesh. Though the nature and scope of customs tariff have to be reformed, if not replaced, in line with the open market economy and global business environment, it is yet to be amended or reformed. 

The present VAT laws are the replacement of an age-old sales tax. Though new VAT laws were introduced in 1991, it still contains remnants of past laws which were framed during colonial rule and are subject to proper amendments and modifications to be at par with industrial and investment business policies.

Reforming tax revenue regulations requires a very close review of existing rules and regulations, one by one, to fit with present-day demands of social norms and business practices. If these regulations have to be effectively enforced, prudently practised and impartially implemented in a free and democratic environment unlike the past colonial regime, it has to be a public law framed by the lawmakers who would also be within its jurisdiction. 

Appropriate ownership has to be established for each item of law, equally on every footing. Rules should not be framed only for the rulers or to exploit the innocent, it should not be a tool for applying discretionary power by the enforcement officials, but be applicable to all indiscriminately. 

Canons of tax law should be digestible and implementable across the board and be applied without fear and favour. It has to be simple, comprehensible and equal in meaning and interpretation. It should be delegable and assertive, but with adequate relieving and remedial provisions. Stakeholders' views at large should be taken into consideration to make it more user-friendly.

To be sound, a tax system must be economically efficient, inflicting as little damage as possible on the economy. Every tax system distorts economic decisions and leads to less economic activity than what would otherwise occur, resulting in what economists call "deadweight loss." 

These are the costs caused by distortion to working, investment, entrepreneurship and other productive activities. It has been argued that typical estimates of the economic cost of a taka of tax revenue range from 20 paisa to 60 paisa, over and above the revenue raised. 

Harvard's Martin Feldstein has gone as far as to conclude that the deadweight burden caused by incremental taxation "may exceed one dollar per dollar of revenue raised, making the cost of incremental government spending more than two dollars for each dollar of government spending (National Tax Journal, June 1997)." 

Moreover, applying different tax rates to different activities or producers exacerbates the distortion of economic decisions and increases the deadweight losses due to the tax system. A sound tax system should be designed to minimise these losses, it should be logistically economical. It should impose the smallest possible compliance costs on taxpayers, otherwise people will not be encouraged to pay tax, rather they will be inclined to evade tax.

Dr Muhammad Abdul Mazid is a former Secretary to the GoB and Chairman of the NBR.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.