FY 2021-22: Budget thoughts

High ambition, low capacity responsible for widening revenue shortfall

Doulat Akter Mala | Friday, 23 April 2021

The tax revenue target and the capacity of the National Board of Revenue (NBR) are ill-matched. That is one of the major reasons for the widening shortfall in revenue collection, Mr Farid Uddin, a former member of the National Board of Revenue (NBR) has told the FE recently.

The situation, he said, was better even a decade back when collection used to be almost near to the targets. " Targets used to be compatible with the historical growth trend of the gross domestic product (GDP) and revenue and contemporary tax policies, institutional capacity, revenue management quality of the NBR and the level of tax-compliance culture", he said, elaborating.

Moreover, Mr Farid said, the government did not undertake any time-bound fundamental and time-befitting integrated reforms, backed by strong political commitment, over the last 12 years or so to modernize the NBR. The development partners have been advising the government to initiate such reforms since 2005, but to no avail, he added.

To overcome the problem of mismatch between revenue targets and collections, particularly during the ongoing unpredictable pandemic, Mr Farid suggested the following measures:

(i) The factors such as revenue potentials, tax gap, reasons of tax gap, challenges thereof, capacity development stage of NBR need to be kept in mind while setting the revenue target every year. A fast-growing economy like that of Bangladesh has significant revenue/tax-GDP ratio potentials, but the question is: to what extent that potential is achievable at a maximum 80 per cent efficiency rate. The collection of tax revenue during the last fiscal was about Tk 2.10 trillion (tax-GDP) ratio around 10 per cent). If the mismatch between NBR and Finance Division figures, the advance tax (AT), advance income tax (AIT) are reconciled and adjusted the collection figure would be less than what is reported. Experts feel that Bangladesh's optimum tax-GDP ratio should be around 15 per cent (about Tk 3.0 trillion).

It is not possible to reach that level overnight. Time-bound fundamental and integrated reforms were necessary for meeting that.

(ii) In terms of capacity, compliance and enforcement management, the NBR is a weak organisation. It needs to be strengthened as early as possible. There is a need for strong political commitment along with necessary investment and effective leadership to modernise the board based on international best practices. Initiatives were taken in the past or the ongoing ones were/are sporadic, not holistic/integrated, time-bound.

Moreover, the reform initiatives were mainly proposed and supported by the development partners rather than by the government. The initiative and support on the part of the government, in terms of commitment, planning, design, investment and leadership, were/are still inadequate. As a result, NBR is moving slowly towards updating its policies, laws, rules, procedures, operational system, digitalization, intra and inter-tax and regulatory information sharing, voluntary compliance and effective enforcement.

(iii) (a) The new Customs Act needs to be passed in Parliament without delay. Once passed, it must be implemented within one year to streamline the declaration, examination, valuation and management systems. Side by side, customs automated system ASYCUDA should be developed into a full-fledged system with modern risk management, valuation and auction module, connected effectively with the bond system, port and other agencies. Imports tariffs, duties, taxes are to be rationalized on international lines, abolishing unjust SD, RD, advance tax and advance income tax.

(b) The present VAT Act 2012 does not present an ideal VAT system. It is like the excise or sales tax system with multiple rates and cascades. It's neither compliance nor revenue friendly. Hence VAT Act 2012 needs to be amended, simplified in line with the international best practices with a minimum number of rates. The 15% standard rate is to be reduced to 7-8 per cent. The loss of revenue due to VAT rate reduction needs to be compensated through the rational imposition of supplementary duty on appropriate sectors and the expansion of VAT coverage along with fewer exemptions. VAT Online project is to be redesigned in line with amendments suggested above.

(c) Income Tax law should be updated and published in Bengali. Source or advance income taxes should be made compatible with business accounting and profit system and principles of taxation rather than as indirect taxes. Corporate tax rates, particularly on non-listed companies should be reduced.

(iv) Bangladesh is still dependent more on indirect taxes rather than direct taxes. About 65-67 per cent of tax revenue comes from indirect taxes. Only 35-37 per cent of revenue comes from direct taxes. The fast growth of the economy proves the high potential of direct taxes. Even from equity, economic and social points of view, the dependence on indirect taxes should be reduced and the volume of direct taxes increased. Hence the indirect and direct tax revenue target and collection ratio should be changed from presently 65:35 to 45:55 in the next five years. The NBR machinery must be designed and strengthened that way to achieve the said target. For this, VAT and income tax departments are to be merged into one department enabling NBR to implement and enforce the two systems in an integrated manner. Imposition of the direct tax such as advance income tax (AIT) and Domestic VAT such as advance tax (AT) on imports must be withdrawn to make imports trade and investment-friendly and to reduce misdeclarations in Customs.

(v) Once digitally made into an integrated organization of Customs, VAT and direct tax systems connected with other regulatory or facilitating entities, the quality of taxpayer services will improve resulting in increasing voluntary compliance and effective enforcement in case of default.

Asked about the main sources of domestic tax revenues, Mr Farid said tobacco, construction firms, advance tax (AT), telecom, procurement provider, pharmaceutical sector are leading providers of domestic revenues. Cement is a contributing sector, but real estate could not make much, although it is a potential sector.

He said among all these sectors, tobacco in particular has been doing well. This year is also no exception. Others are not doing that well. To get more revenues from other sectors, digitally integrated tax management of customs, VAT and direct tax systems connected with other regulatory or supporting agencies and the potential taxpayers is a must. There is no alternative to it. Strong commitment with necessary supports and leadership is necessary for this purpose. Tax policies pursued in the case of the telecom sector need to be rationalised.

Mr Farid said it needs to be kept in mind that the sectors mentioned above despite having potentials would not be enough to meet the gap between the budget targets and revenue income.

Turning to the difficulties that the pandemic has been causing to the country's economy, Mr Farid said the whole world has been passing through a troubled time because of the pandemic. Following steps might be included in the next year's budget to overcome the deal with the problems the pandemic has given rise to:

a) Reduced import duties and taxes, particularly supplementary duties (SD), regulatory duties (RD), advance tax (AT), advance income tax (AIT), on essential imports like industrial raw materials, capital goods, industrial consumables: This is to be done for the protection of industries and promotion of investment. Moreover, essential goods needed for public health security are to be favourably treated in the budget;

b) Multiple domestic VAT and supplementary duty rates should be reduced. That is, the present complex, and excise like VAT rates imposed on different sectors should be rationalized in terms of reduction, uniformity, and simplification to make those friendly to business particularly small and medium ones and the consumers;

c) Source VAT imposed on VATable businesses at different levels should be abolished to reduce compliance formalities;

d) Advance Tax (AT) from VATable manufacturing and service sectors should be abolished;

e) Corporate tax rates both for Public Limited and non-public Ltd Companies should be reasonably reduced to encourage them for more production and service;

f) Source and advance taxes imposed on imports, domestic businesses and services should be rationalized in line with proposals coming from the business community.

Mr Farid said people in NBR involved in the preparation of the upcoming budget need to keep in mind the ongoing impact of the pandemic on the national economy and should reduce or rationalize the tax rates so that economic activities in the country go up and help create jobs.

He said tax rates are not a fixed thing. Taxation is a changing phenomenon as it remains depends on the conditions and expectations of the economy and the desires and want of the government and the people.

As Bangladesh economy is now passing through a critical time because of the unpredictable pandemic, the corporate tax rates in all categories should be reasonably reduced to encourage entrepreneurs to invest more and engage in economic activities to the maximum possible extent. Personal income tax should also be revised downward to support the people who have suffered erosion in their income due to pandemic.

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