Bangladesh: Govt’s failure to tax rich raises burden on poor

The government has failed to expand the taxpayers’ base and increase its income from direct taxes keeping pace with the country’s economic progress over the past decade.

Economists blamed the weak enforcement of policy for the unwanted situation that forced the government to rely on indirect taxes heavily and overburden the majority of people with Value Added Tax and supplementary duty.

They said that the failure to tax the wealthy section of the society had also forced the government to increase its dependency on borrowing and seek alternative sources of funds.

Former Bangladesh Bank governor Salehuddin Ahmed found no notable changes in tax measures to reverse the trend in the new financial year.

The government has reduced corporate tax by 2.5 percentage points for the third consecutive year among its major tax measures for the new financial year of 2022-23.

The introduction of money repatriation policy for the first time by finance minister AHM Mustafa Kamal amid criticisms also contradicted the government’s aim to give more focus on progressive tax policies ahead of its graduation from the bloc of least developed countries, Salehuddin noted.

Salehuddin said that instead of the overwhelmingly poor and middle-class the rich would continue to get more benefits from the current tax policy.

The country’s earnings from income and profit stood at 32.1 per cent of the total revenue in the financial year 2020–21, which was 26.59 per cent in 2010-11 and 12.46 per cent in 1979-80, according to data from the finance division.

The income tax growth is slower than the average six per cent growth of the country’s gross domestic product in the past decade, said former World Bank Dhaka office chief economist Zahid Hussain.

In India, direct taxes accounted for 51.3 per cent of its total revenue in 2016–17 and the figure rose to 56.4 per cent in 2020–21.

Only 22.99 lakh of the country’s 62.77 lakh income taxpayers’ identification number holders submitted their returns in FY22 while the figure was around 22 lakh in both FY21 and FY20.

National Board of Revenue officials said that the number of individual taxpayers did not grow remarkably in recent years despite significant growth in TIN number holders.

The number of TIN holders was 1.9 million in FY 11 and 2.5 million in 2017-18 and 62.22 lakh in 2021-22.

Policy Research Institute executive director Ahsan H Mansur said that poor enforcement of tax laws was the main reason for the lacklustre performance in collecting direct taxes.

He said that over 900 statutory regulatory orders had been issued by NBR between FY15 and FY18 for giving tax benefits to certain quarters.

The government failed to  achieve its 7th Five-Year Plan Target Tax-GDP ratio of 14.1 per cent by 2020, he noted.

The country’s Tax-GDP ratio was 9 per cent in FY22.

A comparative analysis of revenue collection in per cent of GDP in the past five years by the finance division in its ‘Medium Term Macroeconomic Policy Statement FY23-FY25’ showed a slower performance by Bangladesh.

The analysis showed that Nepal’s average revenue–GDP ratio of 22.36 per cent is more than twice that of 10.01 per cent in Bangladesh. Laos’ ratio is one-and-half times more at 14.84 per cent. Cambodia has a revenue–GDP ratio of 23.99 per cent in 2021.

Laos and Nepal will graduate from the LDC category along with Bangladesh.

The policy statement said that the absence of sufficient revenue collection would hinder the country’s desired public investment level ahead of its graduation from the least developed country in 2026.

Ahsan H Mansur noted that the government’s failure in taxing rich people was also growing inequality.

Inequality as per the Gini coefficient has reached 0.48 in 2016 from 0.46 in 2010 and 0.42 in 2005 with bigger values indicating higher income inequalities.

The National Human Development Report 2021 released In January 2022 said that all the regions of the country and groups of people did not equitably benefit from the county’s socio-economic progress over the past two decades.

The richest 5 per cent shared nearly 30 per cent of the national income in 2016, while the poorest 5 per cent shared less than 0.3 per cent of the national income, it said.

According to Bangladesh Bank data, the number of bank accounts with Tk 1 crore and above in deposit increased to 1,03,597 in March 2022 from 1,01,976 in December 2021.

Former NBR chairman Muhammad Abdul Mazid said that the government had already overburdened the majority of people with indirect taxes, also known as regressive taxes like Value Added Tax and supplementary duty against the backdrop of its failure to increase earnings from the income tax.

Since the introduction of the VAT that replaced the sales tax in 1991, the government dependency on the particular source has been increasing gradually, he said.

The combined collection of VAT and excise duty was Tk 3,140 crore in 1991-92, almost 23 per cent higher than tax from sales tax and excise duty in 1990-91.

The tax collection from VAT was an average of 28.5 per cent during 1991-92 to 1995-96 and 35.7 per cent during 2006-07 to 2009-10.

Of the country’s total revenue in 2020-21, the highest 39.2 per cent income has been generated from VAT with the poor having little idea that they are paying tax every day on the prices of mobile phone use, medicine, gas, electricity and other essential goods and services.

Besides, tax evasion is rampant, said Mazid.

He added that the political will and the automaton in tax collection were imperative to enhance income from the direct taxes.

Bangladesh loses more than $144 million in tax revenue each year mainly due to corporate tax abuse and offshore tax evasion, said a report released by London-based Tax Justice Network in November 2021.

Nowadays, the government has been looking for alternative income sources desperately for its growing expenditure to run the administration and funding mega projects, many of which have taken on political consideration, said the economists.

They said that the enactment of the ‘Deposit of Surplus Funds of Autonomous, Semi-Autonomous, State-Owned and Public Non-Financial Corporations into the Government Treasury Act 2020’ had resulted in large deposits of idle money from profit-making state-owned enterprises moving to the national exchequer.

The reform initiative to consolidate the Treasury Single Account by collecting idle money from state-owned companies has also resulted in a surge in non-tax revenue collection, according to the Medium-Term Macroeconomic Policy Statement FY23-FY25.

The share of non-tax revenue has climbed to 18 per cent of total revenue in the financial year 2020-21 from 10.3 per cent three financial years ago, said the policy statement.

The government has taken an initiative to introduce a universal pension scheme by collecting savings from interested and eligible citizens, which, according to economists, could be a borrowing source for the government in the coming years.

According to the draft bill approved by the cabinet on June 20, interested and eligible pensioners will get pension 10 years from the deposit of a certain amount of monthly savings to be fixed by a proposed authority.

The proposed authority will be empowered to invest in portfolios and saving instruments from deposits to generate income and pay pensions to the depositors with a certain amount of interest, said a finance ministry official.

Ahsan H Mansur said that portfolio investment by the proposed authority should be made very carefully.

Economists feared that the private sector would face a credit shortage as a result of the high bank borrowing proposed in the budget for the FY23 because of lower than expected income from revenue.

The finance minister proposed to borrow Tk 1,06,334 crore from the country’s banking system in FY23 to meet the budget deficit worth 5.5 per cent of the gross domestic product.

Shakhawat Hossain, New Age