Plugging holes in internal revenue mobilisation

Ferdaus Ara Begum  | Sunday, 8 January 2017

Widening of tax net is one of the most discussed and debated issues in Bangladesh.  It is a fact that while Bangladesh is aspiring to graduate from the present level of the economy to the status of Middle-Income Country and even Upper Middle-Income Country, Tax-GDP (gross domestic production) ratio still remains at a very low level compared to similar other countries.
Tax collection comparison in several countries, including Bangladesh, has shown that in Vietnam with its population of 91 million, taxpayers number about  30 million(33 per cent), while in Malaysia out of 31 million population, taxpayers stand at 2.1 million(6.2 per cent). In the Philippines, of 102 million people, 18.9 million or 18 per cent pay taxes and in India 2.7 per cent are taxpayers. In Bangladesh, only 0.75 per cent people pay taxes. Why so small a number of people pay taxes and how its scope can be expanded so that burden of tax burden is dispersed among all is a big question when we talk about internal resource mobilisation to fund required development projects.
A recent study has given a breakdown of taxpayers. It is found that 62,000 people pay corporate tax while the total number of enterprises in Bangladesh as per the Census of 2013 is 7.88 million, of which 4.0 million are active. The study mentioned that other taxpayers are about 8,00,000 and minimum taxpayers are estimated at 4,00,000 while only tax file holders are about 8,50,000. In total, about 2.1 million people are within the tax net, but the number of people who pay tax is only 1.2 million. In a country with 160 million people, eligible taxpayers are about 7.0 million. There is a huge scope to increase tax net.
Through different initiatives, the situation has improved a bit as the government is now going to introduce some new policies for expanding the tax net. One of these is to include all government officials in the tax net. For the officials who are drawing more than Tk 16,000 as basic, their tax will be deducted at source. While withholding tax is one of the concerns, the government is going to introduce six new zones to collect withholding tax. Some sources informed that teachers would also come under the tax net. If so, about 6,00,000 teachers will be taxed. Recent statistics reveal that presently, the number of people in the tax net has increased to about 2.6 million from the earlier 2.1 million, but the question is whether with the widening  of tax, revenue is going to increased in a reasonable manner.
The government recently introduced Tax Fair, which it considers as one of its successes. It is going to be expanded to different districts also. The question is if people are spontaneous in paying tax in the Tax Fairs, why are they not interested to pay tax officially? The gaps between tax payers and tax collectors have to be reduced by any means. 
In several discussions, it came up that tax policy and tax collection can not be administered by a single body. Can there be any reform in this context so that the mindset of the people changes and they, on their own, will be willing to pay taxes? 
The general people suffer  from knowledge gaps about the complex tax policy; they depend on tax lawyers and a clear fear factor works in most of the taxpayers. Even those, who are below income tax payment limit, are not interested to submit tax returns as policies are not clear. If anyone stops paying tax, it becomes really difficult once he starts paying tax, for some reason, such as studying abroad to prove that he is not genuinely paying tax.
A study, done by the ActionAid, highlighted some important issues. These are on the growing informal sector, illegal capital flight which was US$1.78 billion in 2012, poorly designed tax incentives which are 2 per cent of the GDP or an average GDP loss could be some of the reasons. 
Willingness to pay tax suffers because of several reasons. Some of these are tax system and perception of fairness, low transparency level and accountability of public initiatives, lack of the rule of law and weak fiscal jurisdiction.  There is another common phenomenon that target of each fiscal is revised every year. 
Target achievement is calculated based on the revised target. In some cases, it is seen, even the revised target is not achieved. The 2016-17 budget has also similarly targeted a robust revenue earning with a significant increment in each category of income tax, VAT and import duty. Reasons for each category are different, but the cross-cutting issue is incremental income. Figure -I shows the differences of initial, revised and achieved tax revenue of each category. It is shown that the initial target of income tax was Tk 659.32 billion, revised Tk 534.36 billion, achieved revenue was Tk 331.78 billion, or 50 per cent of the initial target and 62 per cent of the revised target in the year 2015-16.  In the year 2016-17, incremental revenue target is about 37.17 per cent. The policies for achieving these incremental targets are not clear.
At-source Tax is deducted. This is one of common policies in almost all countries as this is the easiest way to get tax payers in the net, but refund after final calculation would also need to be automatic, which is really difficult. NBR collects tax but can not do anything for giving refund. Integration of services of Bangladesh Bank and NBR is important in this respect. Since 1990, a number of projects have been taken to automate tax services, but so far improvement is less visible. Now e-tin is coming up, which will support taxpayers not to face tax officials. Rather by themselves taxpayers would be able to pay taxes. Tax education standard would need to be increased so that people on their own can calculate their taxes and pay it without harassment. In the NBR (National Board of Revenue)  website, there are tax calculators, but very few people use these calculators. Literacy in this respect is important.
Another painful experience of the taxpayers is facing audit.  Statistics shows that about 3.5 per cent of the total tax files or about 32,000 tax payers face audit every year. The tax audit wing of NBR visits the field-level tax offices to monitor compliance with its instruction. The 2014-15 budget said taxpayers should not face audit more than once in every three years. Compliance of instructions was also not fully disclosed to the taxpayers. File submission through online, as announced in the 2016-17 budget, may simplify the process. What more can be done for improving  the audit? It is seen that the Commissioner's approval for any kind of assessment is required. It could be omitted where the case is below Tk one million. In case of sensitive issues and higher level cases, the Commissioner's approval may  be required.
Presently disposal of an audit case requires about two years' time which is lengthy. The NBR may request the Commissioners to dispose of the cases within 3-6 months and in that respect, the Board may issue an executive office order/circular. Risk-based audit is in practice in many countries. Even in India, it is being practised. Bangladesh has also a plan, but needs some preparation in that respect. The parameters would need to be selected carefully so that harassment is not increased.
People always refer to Alternative Dispute Resolution as one of the ways to resolve huge backlog of tax cases and thus increase tax revenue. An estimated 24,572 backlog cases are waiting to be resolved. From different sources, it is learnt that ADR was applied to 571 cases (Income Tax(478), VAT(5) and Customs(88) and the number of resolved cases is 518. Revenue earnings from these resolved cases stood at $1.53 million. These could be a good example to be followed by those who are willing to see their cases resolved within their life-time. Some small reforms have been initiated by NBR for which BUILD worked for long. Time requirement for solving cases has been reduced to 50 days from the earlier 60. While an applicant has to apply (clause 41(Uum)(3) against any judgment, show cause requirement, notice and price fixation(as per Clause- 5), the time was only 10 days which was increased to 20. BUILD proposed for 30 days. Some changes might bring some improvement of the case resolution situation in this respect. Institutionalisation of ADR and strengthening of ADR Cell in NBR with appropriate budget are also some other requirements.  
Strengthening of tax administration and improving compliance are another area that needs attention. Confidence among taxpayers and tax collectors should be strengthened. Careful structuring of tax Incentives is another area which needs some policy corrections.
It is true that internal resource mobilisation is of utmost importance in the present context of the country. The 7th Five Year Plan has given due  importance to it. The government too has to give more importance to income tax, and accordingly in the year 2016-17, the targets have been set. 
The writer is CEO, Business Initiative Leading 
Development (BUILD).
[email protected]