Since the last few years, the NBR's tax target has been increasing exponentially. The principles of fixing the targets on each category of taxes, i.e., income tax, import tax and VAT, are not sometimes well-discussed with the private sector before the announcement of the budget of the concerned year. But private sector always apprehends that tax burden will be increased with the announcement of the budget each year. How the private sector will sustain would also need to be made clear in the Revenue Generation Strategy of the government.
The target of VAT in the year 2015-16 was Tk 639.02 billion while the revised target was Tk 540.46 billion. But VAT collected was Tk 400 billion, meaning 72.8 per cent of the revised target was achieved while if compared with initial target, it was 62 per cent. It means that there was a big gap between targeted and achieved amounts. A recent study by ActionAid had shown that consumption tax or VAT is a serious burden for the people in poverty and regressive to the poor, as a significant portion of their income is taken away by VAT. The study, referring to the Institute of Fiscal Studies of the UK mentioned that VAT burden is 12.1 per cent of the income of the poor segment while the burden is 5.9 per cent of income for the top quintile. The study also showed that the incidence of indirect tax on the poorest in the urban income group is higher than that of what is on the middle income group. The effective tax rate on the urban sector was 2.21 times higher than that on the rural sector, the study said.
Taking a cue from these statistics, there could be a study on how the burden of VAT can be reduced for the marginal segment of the country, as we are in the age of Sustainable Development Goals (SDGs) where no one will be left out and there will be equal participation in the economy.
Some argue that VAT is a modern system and if implemented properly, all types of citizens will be benefited as it will reduce tax cascading and thus price of essentials will gradually come down. But in practice, after the introduction VAT in 1991, a series of experimentation were done. Now we are in a process of embracing a new VAT and SD Act for which the country has been struggling since 2012. Preparation in that respect needs to be completed to convince all quarters, specially business people, that the new VAT policy will not be a burden for the community. There is no doubt that the NBR is trying its best by organising a number of training and awareness programmes, but as VAT is a complicated process, it would require some more time to be true to the situation.
High rate of VAT is another well-discussed issue. From available statistics, it is seen that in most of the developing countries like Cambodia, Indonesia and Vietnam, the rate of VAT is 10 per cent. In some countries, VAT is much lower. These countries are Taiwan (5.0 per cent), Malaysia (6.0 per cent), Myanmar(5 per cent) and China (6.0 per cent) for financial services, insurance, telephony, Internet, IT, technology, consulting, broadcast etc. while it is 11 per cent for entertainment, transport and logistics etc. High rate of VAT could be one of the reasons for tax evasion. If these countries can sustain with a low VAT rate with a high Tax-GDP ratio, a question may arise that for maintaining higher Tax-GDP ratio why this high rate of VAT is still required in our country while the areas of VAT have been expanding gradually from wholesale to retail stage.
As the rate of VAT is much high in the country as a consumption tax, it imposes serious burden on the poor segment of the community. On the other hand, VAT at import stage, because of not going for full automation and credit-giving system is difficult, still exists. Especially, small entrepreneurs, who can not import directly but buy raw materials from commercial importers, are facing serious problems and becoming uncompetitive.
Simplification of tax incentive procedures for SMEs is important as more than 90 per cent of the enterprises of the country are from small and medium enterprises. Turnover tax is one of the systems for SMEs. Through this system, who has turnover up to Tk 8 million, can pay VAT at the rate of 3 per cent instead of 15 per cent, while they would go for producing and selling their products. But these SMEs can not get tax credit as they are not recognised as VAT registered. They are turnover tax payers, and do not have import license and cannot participate in the tender. These issues need to be resolved if turnover taxpayers are really required to get the benefits.
In the statistics of the NBR, VAT collection at the import stage and domestic level are shown differently. The target for VAT to be collected from domestic level is much higher, about double, than that of VAT collected at import stage. Collection of VAT at domestic level in July, 2016 compared to the same time of the previous year is 11.6 per cent higher while at the import stage, it is 6.1 per cent higher. Of course, it is true that gradually VAT at the import stage is be reduced while at domestic level it is increasing because of increased coverage of VAT. It is also true that after the introduction of VAT and SD Act 2012 from June 2017, there will be a significant change in the system. Some of the main features are transaction value will be the dominating factor rather than price, input-output co-efficient will be required, input tax credit areas will be widened, single VAT registration number, business establishments will take registration at every place and a significant number of products will be out of Supplementary Duty gradually. All these policies will mean that VAT at the domestic level will be more prominent in future. Still policies are not yet clear to all, especially small business entrepreneurs, who are raising their voices in favour of package VAT now, presence of which is totally absent in the new policy. How will these issues be addressed if the new Act is to be implemented after five months? A clear policy strategy needs to be prepared so that taxpayers are convinced with the new policy. Benefits of the new policy would need a clear understanding in the private sector.
The main source of internal resources is NBR revenue. The target for this year is 35 per cent higher than that of the previous year. Incremental revenue requirement for fiscal year 2016-17 of NBR would be Tk 927.52 billion. Large Taxpayers Units (LTU) is expected to account the highest incremental revenue (37.1per cent).Import duty collection growth is set at 31.1 per cent. All these targets are dependent on the increase of business. Both external and internal factors are responsible for increase of business and investment. Since several years, we can see a sluggish growth of private sector investment. It means that the private sector cannot utilise the policy benefits for increasing their business. The gaps between macro level policies when it is translated to the micro level needs to be bridged at any cost.
Improving tax morale among present and future taxpayers was one of the proposals of the study as to how these will be achieved. When people will see that after paying tax, they are getting a good return, they will be encouraged automatically to pay tax. Incentivisation of tax-paying process is another requirement. Good taxpayers should be rewarded so that others can follow the suit. Tax Card policy would also need revision. From BUILD some proposals have already been given.
Non-NBR tax or non-tax revenue is another area through which the government gets some income against some licensing and permit services. In FY '17 there is a target of increasing the sources at 44.5 per cent (Tk 0.39 trillion). This year, trade license has come under VAT and in some cases, license fees have also been increased significantly. The increase has been made after a long gap. There could be a policy of the government that this increase should have a policy and rather going for a leapfrog increase, there could be a slow increase so that people can accommodate these increases with their business benefits.
In order to reduce tax evasion, automation has been given importance but there has been no prominent breakthrough so far. The NBR is going through an extensive reform process like ASYCUDA World, implementation of trade facilitation agreement, new Customs Act, Income Tax Code, VAT & SD Act implementation etc.
Though the government aims at growth, development and equitable society, GINI Co-efficient shows that income inequality is getting higher over last 15 years.
Bangladesh is moving ahead and doing well in some cases better than even a number of developing countries, such as China and India. Internal resource mobilisation is one of the imperatives for achieving higher economic growth with appropriate resource allocation and utilisation. Bangladesh needs to accommodate changes and challenges as the country is integrated with the world. The New Year 2017 may face some new challenges as far as some big changes are concerned. Careful studies of policies and its implications along with consistencies are to be made for the country.
The writer is CEO, Business Initiative Leading Development (BUILD)