The government, has added a tax rate of 30% in taxation on personal income in the budget for FY2014-15 in addition to existing five tier progressive rates. It is designed with a tax-free income slab of Tk. 220,000, additional income of Tk. 300,000 as second slab to be charged at 10%, next Tk. 400,000 as third slab at 15%, next Tk. 500,000 as forth slab at 20%, next Tk. 3000,000 as fifth slab at 25% and lastly at 30% on the rest amount. However, the proposed highest rate is not debated at all because of its compliance with the ability-to-pay principle. Moreover, our finance minister has a plan to keep these slabs fixed over years. Apparently, it will be a burden to bottom layer taxpayers who don't have a rapid rise in incomes but have a natural rise in consumptions.
The rigidity and non-adjustment of income slabs may arise from a one-eyed inference. The government may account for a person with a monthly income of Tk. 28,000 to pay the least yearly tax of Tk. 3,000 after a few rebates on house-rent, medical expenses and conveniences. This least amount can also be paid by a person with a monthly income of Tk. 41,000 after an extra rebate on investment. Is it a fact that everybody pays a small amount of tax and saves a large amount of Tk. 11,000 a month? The answer lies with answer of another question on what portion of white money can the middle income people save after coping with high inflation. It is not that a person not paying income tax is not paying any taxes. The reality here is, either the producer or the importer shifts the indirect tax burden to consumers. Thus, an individual has no option but to fall in the tax-web of VAT, import duty and many other taxes. In this regard, the government as a welfare institution has no rationality to render more burdens on individuals.
Let's look at the burden dynamics of personal income tax in Bangladesh. The income slabs against tax rates are often changed but not every year. Whether these changes have raised or reduced burden on taxpayers could be calculated using the Consumer Price Index (CPI). The CPI increased from 193.5 to 307.2 between 2007-08 and 2013-14, which was used to calculate the compensatory slabs for budget 2008-09 and 2014-15. It is to be noted that the tax for this year is paid on the income of previous year. The adjustment suggests a rise in tax-free income slab to Tk. 262,000 in 2014-15 from Tk. 165,000 in 2008-09. Moreover, other slabs needs to rise like the second slab at 10% tax rate to Tk. 436,000 from Tk. 275,000, third slab at 15% to Tk. 515,000 from Tk. 325,000, forth slab at 20% to Tk. 595,000 from Tk. 375,000 and fifth slab at 25% on rest amount. However, it varies from proposed slabs, which contradicts the objective of efficient tax design supporting low burden to taxpayers.
Why doesn't our government look for reducing burden on existing taxpayers? The very easy answer is the larger amount to be collected from limited in-net taxpayers. Our strict tax policy was very effective for almost one million taxpayers, who supported gradual larger budget. On the other hand, a parallel policy for money whitening sheltered tax evaders in the name of political compromise. No matter what the ethics say about duality, the government became happy with gradual larger collection of income tax. Moreover, its target for FY2014-15 has been lifted to 37.5% of tax revenue, which was achieved at 31% of that in 2012-13 from 18% in 2001-02. Won't the government choose the easy and proven option of taxpayer in-net to meet its target? Though the taxpayers in the booby-trap are bound to pay whatever the government decides, it is just an oppression to obliged contributors. Rather, the option for the government will be the incorporation of disobedient evaders into tax-net.
Wide tax-net is worth a lot irrespective of whatever the taxpayers pay. There are two ways to bring tax evaders into the net. Out of the sanctions and incentive regulations, the latter is more effective in the progressive world. Lowering the tax rate or the transaction costs would be an incentive to new taxpayers. A few Asian countries like Thailand, Vietnam and Indonesia have an income slab at 5% tax rate. This soft tax tier can be adopted in between the zero and 10% tax tier in Bangladesh. If the government accepts the compensatory slabs up to 10% tax, the accumulated limit is Tk. 700,000 (Tk. 262,000 @ 0% + Tk. 436,000 @ 10%). These two slabs cann roughly be divided into a tax-free slab of Tk. 220,000, 5% tax on the next Tk. 200,000 and 10% tax on the rest Tk. 280,000. This will not only compensate existing payers but will also encourage people to enter into tax-net. It will also decorate our proposed six-tier system into lucky seven tiers with a tax rate gap of 5% in each tier.
Addition of a slab with 5% tax will have an easy policy. This public incentive will not offer any disincentive to the government as it will not lose the tax amount at the present rate of Tk. 3,000 times the number of taxpayers. On the other side, the government could hide its monopolist nature visible in rigidness with slabs. Easiness will complement for the fame of tax department and trim down anti-tax flue. Meanwhile, our country is ranked first among the South-Asian countries for taxation services according to a report of the Vriens & Partners PTE Limited. Moreover, the government has come out of compromise with black money, which will also create a positive attitude among taxpayers. The easy taxation with a soft rate of 5% would lead them to be tax-ambassadors. However, further reform and digitalisation are necessary to reduce the transaction costs. A digital record system is needed to identify the incomes of people in and out of tax-net. Then, an easy seven-tier personal tax system along with strictness against tax evaders would build an efficient and a sustainable tax system.
The writer is Associate Professor and Chairman, Department of Economics, Comilla University. Email: firstname.lastname@example.org