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The Financial Express

Raising tax-GDP ratio to 9.5pc

Revenue needs to increase by Tk 2.34t in three FYs

PRI presents dos on loan package deal


| Updated: February 07, 2023 17:18:50


Policy Research Institute (PRI) Executive Director Dr Ahsan H Mansur addresses a press briefing organised by the PRI on 'Implications of IMF Loan Conditions on Domestic Revenue Mobilisation' at PRI office in Dhaka on Monday. Director of the PRI Study Centre on Domestic Resource Mobilisation Dr Mohammad A Razzaque also spoke at the event. — FE photo Policy Research Institute (PRI) Executive Director Dr Ahsan H Mansur addresses a press briefing organised by the PRI on 'Implications of IMF Loan Conditions on Domestic Revenue Mobilisation' at PRI office in Dhaka on Monday. Director of the PRI Study Centre on Domestic Resource Mobilisation Dr Mohammad A Razzaque also spoke at the event. — FE photo

Increasing revenue collection by Tk2.34 trillion in next three fiscals is necessary to raise Bangladesh's tax-GDP ratio to 9.5 per cent as prescribed in the International Monetary Fund (IMF) loan package.

And the National Board of Revenue (NBR) is required to earn an additional Tk 650 billion in fiscal year 2023-24 to comply with the IMF suggestions, said Policy Research Institute (PRI) on Monday.

The think-tank made the projection at a press briefing titled 'Implications of IMF Loan Conditions on Domestic Revenue Mobilization' at its office in Dhaka.

However, PRI said, the NBR would not be able to achieve IMF's key condition to increase in revenue mobilisation from current 7.8 per cent to 9.5 per cent by fiscal year 2026 if they do not carry out a drastic reform in the tax administration.

"If there is business-as-usual scenario, the target will never be achieved, rather tax-GDP ratio would decrease from existing rate," said Dr Ahsan H. Mansur, Executive Director of PRI.

He suggests a review of the existing tax exemptions and a proper study to be well aware of the decision.

He said tax exemption should be reduced significantly to achieve the target.

"We are not telling to lift all exemptions, but there must be well-studied decision rather than taking such decision on whim or on lobbying," he said.

Current exemptions are estimated to be 2.3 per cent of GDP.

Among other conditions, the IMF has recently set a condition for Bangladesh to increase additional 0.5 per cent of GDP annually in FY24 and FY25 and 0.7 per cent of GDP in FY26 for a $4.7 billion-loan package.

Speaking at the press briefing, PRI Research Director Dr M.A. Razzaque said the IMF loan condition on domestic revenue mobilisation should be considered as part of a homegrown agenda and the tax-GDP ratio needs to go much higher than what has been suggested.

The IMF also asks to put in place the NBR Compliance Risk Management Units in the customs and VAT wings by December this year for higher revenue mobilisation.

Dr Razzaque said it may be tempting to see this as an external demand from the IMF. "Rather, this should be considered as part of achieving our homegrown policy target, as set out in the 8th Five-Year Plan, of raising the tax-GDP ratio to 12.3 per cent in FY25."

He said it may be challenging for NBR to achieve the target but "not impossible".

"But for that, there need to be efforts in place and changing mindset of NBR and political leadership in the country," he told the press.

Mr Razzaque said Bangladesh's weak revenue-generation abilities have kept its poor and vulnerable population groups underserved, failing to address the growing inequality in society.

He thinks with existing capacity, the NBR will not be able to manage if all taxpayers pay taxes, let alone managing increasing the number of taxpayers.

Currently, 8.5 million people are registered to pay tax, but only 1/3 of these actually submit a tax return.

A PRI analysis shows that increasing the tax-GDP ratio by 5 percentage points (i.e., to fulfill the 8th FYP target) could increase economic growth by up to 3.3 percentage points and reduce the poverty headcount rate by up to 2.2 percentage points.

PRI sets out practical policy options how government can achieve this.

Its recommendations include reducing tax exemptions, increasing compliance with the personal income tax system, bringing in short-term VAT reforms, increasing compliance with corporate etc.

PRI said the first is to increase the payment rate of people already registered to pay tax.

It recommends adopting measures to improve repayment that include the government's requirement to show a tax return to access services - this is a welcome initiative and should be strengthened.

The second way is to increase the number of people who are registered, data on income levels show that a significant number of people earn enough to pay taxes but are not registered," it said.

VAT reforms could significantly increase the tax-GDP ratio.

"Modelling shows that replacing the tariff-value system with market prices could increase the tax-GDP ratio by 0.6 percentage points in the short term," it said.

The think-tank analysis said the corporate tax rates -- ranging from 12 per cent for RMG to 45 per cent for non-publicly traded mobile operator companies -- in Bangladesh are amongst the highest in the region, yet the tax-yield has been quite low.

In 2020-21, around 29,000 companies submitted corporate tax returns.

PRI's Study Centre on Domestic Resource Mobilisation is conducting further analysis and developing policy options that can support government to achieve the tax targets set out in the 8th FYP.

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