Wishy-washy – best describes the government’s stance on increasing its narrow revenue base, which stands as the Achilles’ heel of Bangladesh’s growth aspirations.
Although she is acutely aware of the long-standing shortcoming, she has shown no willingness to take bold and decisive action to fix the problem, instead relying on putting big collection goals in front of taxpayers. and cross your fingers.
Take the case of the collection target for the coming financial year of Tk 370,000 crore for the National Board of Revenue, which unsurprisingly is the largest yet.
The highest the NBR has handled is Tk 263,872 crore which was in the 2020-21 financial year.
And in the first nine months of this financial year, the revenue authority received around Tk 204,008 crore, which means that the target of Tk 330,000 crore will be largely missed.
Given the high level of inflation and the recovery of the economy, the government will maintain the status quo, generally resisting tax hikes, a finance ministry official said on condition of anonymity as they are not allowed to speak to the media before the budget.
“I would have opted for higher taxes on tobacco, soft drinks, alcoholic beverages and luxury cars,” said Nasiruddin Ahmed, former chairman of the NBR.
Given the current economic conditions, it is not possible to raise tax rates elsewhere.
“The scope is very limited. Sri Lanka has reduced VAT rates from 15% to 7% – look, what’s happening there,” he added.
Thus, without any radical reform, getting closer to the target for the next financial year seems too optimistic.
This raises the question of what Finance Minister AHM Mustafa Kamal has up his sleeves.
“Strengthening VAT administration and broadening the VAT base hold substantial potential to close the tax gap,” Kamal said in his letter to the World Bank in March when requesting a grant. budget support of $250 million.
This action plan has been peddled for a long time – with little progress.
“We have been hearing for a long time about widening the tax net, automating and creating tax offices in rural areas,” said Zahid Hussain, former chief economist at the World Bank office in Dhaka.
The reforms are too hard on the administrative side.
“When it takes them a year just to recruit agents, how can the whole tax administration be reformed in that time?”
To expect collections to increase in a year due to administrative reforms is too optimistic.
“It’s an unrealistic goal,” he said, adding that goals for the coming year are definitely set without considering the current state of fundraising.
Instead, an overhaul of tax policy by simplifying rates would have brought immediate results.
There are many tax rates, which leads to manipulation, leaks and corruption, according to Hussain.
For example, there is a rate for importing capital goods and a higher rate for its spare parts.
“Both are capital mechanisms, so what’s the need for two different rates?”
This leaves the door open for businessmen to negotiate with customs officials to lump the two into the same category.
“If we don’t design the rate structure in a way that closes the loop of tax evasion, the problem of revenue collection will not be solved,” he said, adding that the VAT law, which was supposed to have a uniform rate, has too many slabs and exceptions.
The government could also remove tax exemptions and reliefs which, according to the BNR’s own calculations, lead to revenue losses equivalent to 7-8% of GDP.
“It also creates opportunities for leaks. All political decisions are made on a case-by-case basis,” he added.
Tax compliance is too low in Bangladesh due to political and administrative problems, according to Ahmed.
“The corporate tax rate is too high. The VAT rates are not correct – too many exemptions have been granted. The tax administration is not well equipped. It is not digitized, which gives give rise to conflicts of interest between tax officials”.
He then called for speeding up the automation of the tax system.
“Leaving aside other reforms, just full automation would lead to recoveries that would far exceed the target,” he added.
Whatever the government does, it must act now and decisively because the existing revenue base, which is just under 10% of GDP, is insufficient to meet the country’s development needs, according to the WB.
“Bangladesh’s aspiration to become an upper-middle-income country by 2031 crucially depends on improving its revenue mobilization.”
The issue of domestic revenue mobilization has been highlighted in several policy documents, including five-year plans and annual budgets.
“But revenue generation continues to disappoint,” he said.
Selim Raihan, a professor in the economics department at the University of Dhaka, explains that this is because of a lack of strong will on the part of the government.
“The government has failed to carry out long-standing reforms. Reforms cannot be done for pressure groups. Take the case of the VAT law, which was implemented taking into account the demands everyone – she failed to tell the difference,” he added.