Only splitting the NBR may not help

Bangladesh's government recently enacted a long-awaited reform measure: dissolving the National Board of Revenue (NBR) and splitting it into two new agencies. The goal is to separate the tax policymaking and implementation processes, in line with a key conditionality of the International Monetary Fund (IMF) for the next tranche of disbursements.

With a dismal revenue-GDP ratio, a narrow tax base, and bias towards indirect taxes, an overhaul of the revenue administration has been overdue for many years, and many of us have been talking about this. The government even formed a task force to look at the NBR and its activities more closely and recommend actions in order to bolster revenue growth.

I had the opportunity to work closely with NBR seniors since the early nineties and was associated with many impactful reform projects there.

Under the TACTS (tax administration capacity building and taxpayers' services) project, where we reviewed the revenue administration and structure in India and Thailand, we even talked about a possible split along the direct (corporate & income tax) and indirect taxes (customs & VAT) lines along with capacity building in those agencies to be able to handle leakages.

Right scoping, planning, reaching out to the right target market, right communication, handling corruption and timely implementation have been issues with many agencies in Bangladesh, not only NBR. Existing NBR strength was severely constrained with day-to-day operational work, not much time available to think beyond and creatively for a visible revenue increase.

My long interface with NBR as a large institutional and individual taxpayer, a faculty at the tax academy and other government set up as well as consultancy experience with World Bank and UKAID projects, I would also say that there had been serious jelling issues between NBR professionals and seniors coming from outside.

By dissolving the NBR along with the Internal Resources Division (IRD) through an ordinance, the government is trying to pave the way for the Revenue Policy Division and Revenue Management Division.  The first will be tasked with designing the tax policy framework, formulating tax laws, determining various rates, and overseeing the coordination of international tax treaties and trade-related tariffs.

The second, on the other hand, will be responsible for tax administration, compliance, audit, and enforcement of income tax, VAT, customs and other taxes and duties.

The split of duties is deemed to make the tax system more efficient and increase overall revenue earnings. Until now, the NBR has been responsible for all these tasks – both policymaking and policy enforcement – something that has been criticised for creating an overlap of functions leading to poor revenue earning performance and coordination.

As we know, Bangladesh has one of the lowest tax-GDP ratios in Asia (below 8 percent). The NBR has consistently failed to ensure effective resource mobilisation, increase revenue generation through direct taxes, and plug loopholes to prevent tax evasion, among other things. Moreover, in its objective to meet revenue collection targets, it has often ended up enforcing policies that created unjust and uneven pressure on taxpayers and businesses.

However, merely overhauling the structure may not bear the desired results if the problems beneath the carpet are not addressed. Much has been said time and again, the government should reduce its overreliance on indirect taxes and expand the tax base to improve our tax-GDP ratio by bringing surplus-generating sectors and individuals under the tax net. Tax exemptions must also be reconsidered and allowed more judiciously, and corrupt practices in tax collection must be stopped. The entire system must be designed in a way that encourages eligible taxpayers so they can pay taxes without hassle.

We saw NBR officials protesting against the move, arguing that the new ordinance sidelines experienced tax professionals and does not recognise their career progression issues. Many, however, feel this can be sorted out through dialogue and necessary readjustments.

However, the ongoing reform and reconstruction drive must be followed through since it is in line with international best practices and the desire of the major stakeholders- development partners, domestic & foreign investors along with poor people hard pressed by large indirect tax-biased architecture.

The writer is an economic analyst and chairman at Financial Excellence Ltd.