Overhauling income tax regime

The national board of revenue (NBR) is slated to overhaul the individual income tax regime in the upcoming national budget. According to a report published in this newspaper, it is understood that the government is to introduce higher rate of taxation ---up to 30 per cent from the current rate of 25 per cent--- to be levied on individuals having income over Tk 1.6 million. Needless to say, this will more than ruffle the feathers of the richest in society, should the current plan holds.

One can understand why the NBR is going back to its earlier decision, given that revenue generation has fallen to a record low at a time of economic uncertainties. Economists however do not believe this measure will do much to significantly raise government earnings because in their opinion, NBR ought to be concentrating its efforts on widening the tax net (rather than raising the tax rate). To put it in layman's terms, it makes more sense to have more tax-payable individuals under the tax net with tax rates remaining at a more moderate level - instead of taxing higher the small percentage of high-income individuals.

While there is some justification that a higher tax rate can help reduce the income inequality in society, it still leaves the government in a fix. Because the number of rich people in the country is not infinite, whereas by government's own estimates, millions of citizens do not pay income tax. While progressive taxation does make sense and it has widely been adopted by scores of countries around the world, the situation in Bangladesh where vast numbers of people can and do get away without paying any individual income tax is mind-boggling. Direct income tax remains a primary source of revenue collection for any government in the world - this is a proven fact.

The "country's tax base is still poor as many people are still not paying taxes or submitting zero-tax returns," says Dr Razzaque, chairman of Research and Policy Integration for Development (RAPID) and Research Director of Policy Research Institute (PRI)." The problem of levying heavy tax on existing taxpayers is likely to have a boomerang effect whereby people will be less incentivised to pay taxes in the first place. Despite claims that with digitisation financial information is more readily available to financial authorities, there will always be loopholes that people will resort to, to avoid paying taxes.

One of the prime examples of this situation can be highlighted when land registration costs were increased by an unheard-of 100 per cent by the last minister of finance during his tenure. People were still buying / selling immovable property but registration of the same went down significantly. Deeds were signed, money exchanged between buyer and seller but the formal handover of property was delayed. Government revenue from this very lucrative sector fell drastically. Although the decision has been reversed somewhat, people are yet to return to the previous years when the land registration fee was around 2.0 per cent and this is something that government needs to consider very, very seriously. While it is easier for the NBR to track salaried-individuals, since their paycheck goes to the bank, what is there to stop companies from paying partial salaries in cash and rest in to the bank to avoid this increase in taxation? Efforts should be made to bring the untaxed under the tax net instead of raising taxes for existing tax payers. This policy would serve the state much better in revenue mobilisation from a sustainable point of view.

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