The Financial Express

Tax and GDP ---   a mismatched growth

Tax and GDP ---   a mismatched growth

'Only 1.0 per cent of the population pay tax', screamed the headline of a news report published in a vernacular daily the other day.

This was no revelation. Reports having identical headlines were published in newspapers in the past also. But those had little effect on the situation on the ground.

Bangladesh has been stuck in the seventh position among eight South Asian nations, in terms of tax-GDP (gross domestic product) ratio for several years. An estimated 11 per cent of the population of each of the two Himalayan nations--- Bhutan and Nepal--- pay tax.

The volume of income tax has been rising in recent years, but the rate of increase is not compatible with the growth of the GDP.

Why are people unwilling to pay tax?  There are several explanations for this. The leading ones include (1) many people are uninterested in paying tax because of the fear of harassment and (2) submission of tax returns does involve all the complex accounting processes.

These explanations are not entirely acceptable. Of course, taxpayers are still facing problems while submitting tax returns and also afterwards. But the situation is a bit improved these days than before.

The unpalatable truth is the majority of the people having taxable income tend to avoid tax payment. They see the tax as coercion on the part of the government. Most of them do not pay tax with an open mind. This is true in the case of both individuals and corporate bodies.

Such a mindset does create an environment favourable for tax evasion. Millions of eligible taxpayers consciously stay away from tax net and many others pay tax, but not in the right amount. Thus, tax evasion and tax avoidance have remained two major sore points in the country's tax system.

The numbers would depict rather a clear picture about the state tax payment. Between 2.0 and 2.2 million people of a country of 170 million, according to an official estimate, submit tax returns annually. No tax is paid against 10 per cent of the returns submitted. Besides, 0.7 to 0.8 million returns are submitted by government servants. Thus, the number of private individuals submitting tax returns remains very low, given the size of the economy.

In such a situation, the obvious question that one might feel tempted to ask: what are the taxmen doing?

The question is a pertinent one when the government has been making claims about reforming the tax administration and beefing up the capacity of taxmen.

It will be unfair to say that the national Board of  Revenue (NBR) has not done anything to boost revenue earnings. It has done surveys in markets and residential areas to locate potential taxpayers in recent years. But the outcome has been far short of the expectation. The taxmen have been more interested in raising the number of TIN (tax identification number) holders. The number of TIN holders has gone up, but not the volume. The income tax receipt is still far below the expected level.

When people are unwilling to pay tax to the government, the motivational work on the part of the taxmen needs to be very strong. However, that is seen as a major area of weakness.

Besides, there exists a negative feeling about the payment of tax among the vast majority of the population. They do often express frustration over the gains made through tax payment. It is important to incentivise tax payment. Incentives could be given in the form of health insurance and old-age pension.   

Then again, the efforts of the taxmen to locate taxpayers and tax collection have remained mainly confined in two cities--- Dhaka and Chittagong. Most of the income tax revenue comes from these two urban centres. The taxmen are found to be less interested in emphasising other urban centres, including divisional and district headquarters. If explored properly, these cities and town could be good sources of revenue for the government.

The tax authorities might claim otherwise, but the fact remains that the taxmen are yet to develop the expected level of friendly attitude towards taxpayers.

The tax fairs organised ---this year, there will be no such fair because of the pandemic--- are the events where taxpayers feel comfortable for understandable reasons. But such events do cover a small fraction of taxpayers and others are required to visit tax offices. Some people also submit tax returns online. Overall, the environment in tax offices, reportedly, is not that conducive. 

Direct tax---income tax--- is considered the progressive way of taxation as indirect taxes tend to hurt the interests of the poor and low-income people who cannot afford to pay tax. The governments usually become more dependent on indirect taxes such as value-added tax and import duty when the income tax revenues are inadequate. Such increased reliance raises the cost of goods and services. The affluent section of society can bear with that, but not the poor.


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