The reformation of taxation policy dictates a systematic approach by installing a progressive database, strengthening tax administration, assuring proficiency and equity appropriately.
Though the induction of Large Taxpayers Unit (LTU), Central Intelligence Cell (CIC), World Bank's initiative, digitalisation in taxation, etc has brought about noteworthy prevalence, there is still much work to be done, particularly in the area of audit enforcement and compliance.
Reformation is immediately needed for amplifying revenue productivity via increased taxpayer's compliance. The introduction of an automated system will help the taxpayers in attaining better services.
Reformation is necessary for developing investment and employment in a broader realm. And also, in order to simplify global and regional trade reformation of taxation is a must.
Apart from these, Bangladesh has been constantly failing to yield satisfactory revenue from taxes for habilitating public expenditure. The Tax-GDP ratio is enormously low (9.06% in the Fiscal Year 2016-17) which is also much deficient if compared with the other developing states. Reformation of taxation is required to bring it up to the expected level.
The common limitations are basically high reliance on import tax than income tax, confined tax base, low Tax-GDP and many more. Although Bangladesh Government is providing generous tax holidays and tax exemption in the arena of investment for speedy industrialisation, the efforts are impaired by influential political lobbies.
The regulatory enforcement, compliance audit, revenue administration and the efforts behind the collection are unfortunately not optimally dynamic enough which is reflected in the capacity constraints and resistance. Lots of court rulings on tax suits are weakening the effort of tax revenue collection.
Sadly, the improvement regarding the proficiency of tax administration is immobilised because the designing and execution of a favourable policy framework is a huge barrier. It bears great importance and significance if the tax base is broadened by minimising tax preferences and concessions in the case of corporate income tax.
But the harsh reality is that the tax incentives are being continuously enhanced which is making the taxation more complicated and producing a wide gap between the nominal and effective corporate tax rates.
Since the corporate bodies are not idly inactive in using the tax incentives extremely, for revenue resources, the Government has started ingathering the minimum tax under the provision of Section 82C of the Income Tax Ordinance, 1984. Additional problems have to be faced due to this charge. In this backdrop, tax reformation must be recast with a new plan.
Some of the exceptional initiatives are transfer pricing and the inclusion of anti-evasion rules in the law. It is suggested to discourage the thin capitalisation rules because there remains a possibility of claiming excessive interest expense by the corporate entities as a deduction.
So, designing a suitable tax incentive structure keeping in mind the regional disparity and national industrial policy is of utmost necessity. Audit activities must be enhanced by the tax authorities to detect revenue leakage and tax evasion. That will also be a helping factor in comparing the subscription of different sectors both in public and private.
We notice a massive gap between the registered companies and the companies that pay taxes. In order to improve this shortcoming, the coordination among NBR, RJSC, ICAB is highly recommended.
In accordance with an annual report conducted by RJSC (2016-17), only 144 companies paid taxes among 3462 public limited, 161894 private limited companies and 860 foreign companies, registered by the office of the registrar of joint stock till December 2018. Although the VAT Act has been making a mark, the direct tax code, 2012 is still in darkness.
The revenue ratio assured that it's no way near the potentials because it has shown an upward graph. If the tax net is somehow extended, it will improve the horizontal equity of the tax system.
It's literally not possible to bring all the registered companies into the uniform tax net which would be an opportunity to exert pressure. Tax incentives should be designed in such a way that will protect local import substitute industries as well as will help to attract FDI.
Bangladesh did not witness any comprehensive reform initiative in the last eight to ten years. So, to address the present lacking in the tax administration of Bangladesh, a tax reform commission should be immediately formed.
If we evaluate the taxpayer compliance, we will discover it to be very low. Less than 1% of the population actually pay income tax whereas VAT is 7%. Significant tax evasion does exist (About 34% of the tax collected and 3% GDP in FY 2009-10, TIB 2011). Tax expenditure in the form of tax exemptions and incentives formed 2.52% of GDP in FY 2005-06. The business process is basically operated with little automation.
We need to formulate such a tax policy wherein the taxpayers feel encouraged to pay their taxes. This reformation must have to be started from a political and bureaucratic level. For those who are key stakeholders, the "buy-in" method must be generalised and ensured to them.
Social dialogue and effective communication between the stakeholders will boost up and expedite this tax reformation to a great extent. Besides, simplifying tax returns, processes, the submission also carries utmost significance. The tax dodgers should be brought into the ambit of the law.
Tax exemption must be made available and strongly designed lest an opposite and unexpected effect flush out. The inflow of funds and incentivising higher deposition would be an excellent way of gaining thoughtful outcomes from the exemption. Because mere exemption won't work, strong supervision is necessary.
The interference from policymakers is a must in this regard. Reformation must be structured not only within policy and regulatory bodies but also in administrative and governmental stages as well. People who are entrusted with collecting revenue, need to be corruption-free. If they are not, they should be phased out.
Audit and assessment must not be used as a weapon, but rather as a tool to improve taxpayer compliance. The taxpayers must be highly valued. Particularly, the institutions which deal with a large number of clients on a regular basis, like banks must adopt personalised touch and Go-to policy.
They must assure the clients that they are always there to help them. In this regard, a relationship of trust and well-being can play a great factor. Inauguration to find out new wealth creation domains and bringing under the umbrella of tax net by Bangladesh Bank, NBR, etc. is recommended. In this regard, technological advancement may play a vital role.
Nadim Zawad Akil is a law student at North South University (NSU). He can be reached at [email protected]