The need for increased fiscal space in the budget for fiscal year (FY) 2021, which is the Covid budget, had been pronounced loudly way before the budget was announced on June 11, 2020. Domestic resource mobilisation by the National Board of Revenue (NBR) is the major source of financing the budget. The other sources are borrowing from the banking system, sale of national savings certificates, foreign loans and assistance.
In the upcoming budget for FY 2021 revenue income is set to be Tk 378,000 crore which is 11.9 percent of GDP. This is an increase from Tk 348,069 crore which is the projected amount in the revised budget for FY20. However, the Centre for Policy Dialogue (CPD) projects that revenue collection by the NBR will be Tk 252,811 crore in the outgoing year. So, to achieve the targeted revenue in FY21, revenue mobilisation will have to increase by 49.5 percent. This is an unachievable target given that resource mobilisation effort has been so low in Bangladesh for decades. Therefore, with revenue mobilisation target in the current fiscal year remaining unfulfilled, the revenue-GDP ratio will be even lower than the projection. For an economy which has been growing fast defying all challenges, low revenue collection poses a real predicament for the fulfilment of the objectives set in Bangladesh's short, medium- and long-term plans and programmes.
In the proposed budget for FY21 a number of revisions have been made in the tax structure, some of which are in the right direction. For example, annual tax-free income threshold for personal income has been raised from Tk 2.5 lakh to Tk 3 lakh. In case of female and elderly taxpayers the increase has been from Tk 3 lakh to Tk 3.5 lakh. In its budget recommendations before the budget announcement, CPD had proposed to raise the threshold to Tk 3.5 lakh and reduce the first three slabs of tax rates by 5 percentage points. Increase in tax-free income threshold and reduction in the tax rate by 5 percent under each slab is a welcome move during Covid period. Due to this change, the lowest segment of income earners whose monthly income is between Tk 30,000 and Tk 60,000 will gain the most. It is hoped that this additional income will provide some room for people to spend which in turn will help the economy.
The proposed initiative to provide rebate of Tk 2,000 for the first online return submission is likely to encourage digital transformation in the tax department. In the same vein, the introduction of one-page tax return form for small taxpayers will simplify submission of tax return. There are several other proposals in the budget in relation to the tax regime. Some of those are welcome initiatives, others are not. While tax rationalisation for individuals and businesses are essential for both mobilisation of tax and providing incentives to them, the major issue related to the tax regime lies somewhere else. This is the issue of reform of the whole revenue mobilisation system.
There is a need for change in the tax structure. While it is a widely known fact that direct tax is a progressive measure which establishes tax justice, NBR has not been able to change the composition of tax in Bangladesh. Higher dependence on indirect tax is a burden on all citizens, especially the poor. The poor and the rich pay the same amount of tax for goods and services. There is no difference between a daily wage earner and a millionaire when it comes to buying a good. So, the main source of tax is collected at the point of sale. In the budget for FY21 the major source of tax will be value added tax (VAT) which is projected to be 33 percent of total collection whereas tax on income and profit is 28 percent. Among other sources, the amount of import duty is 10 percent, supplementary duty is 16 percent and of non-NBR tax is 4 percent.
The reasons for low share of direct tax have been widely discussed. Narrow tax base, high level of tax avoidance and high volume of illicit financial flow are the most important ones. Why is the tax base so narrow in a country where the middle class is flourishing fast? The number of people who earn Tk 3 lakh and above in a year is large but they all cannot be brought under the tax net. Moreover, in a country where the growth of super rich people is faster than even China, several of them evade tax. Even though many of them are well known, NBR is unable to bring them to pay their due taxes.
Another large source of tax evasion is performed through illicit financial flow from the country through trade. According to Global Integrity Report 2015 an amount of USD 5.9 billion has been taken out of Bangladesh illicitly through mainly trade mis-invoicing. In a welcome move, the budget for FY21 announces the introduction of a new section in the Income Tax Ordinance to prevent money-laundering. According to the ordinance 50 percent tax will be imposed on the proven amount of over-or under-invoicing, or on the proven amount of false declaration of investment. However, for this measure to be effective forensic capacity of the Transfer Pricing Cell is needed. Banks which deal with foreign trade will also have to cooperate in making this measure successful.
Taxation based on lifestyle is a common and successful practice in many countries. In Bangladesh there is a huge mismatch between declared income and visible expenditures among many people. While a large section of people hide their income, they spend on expensive houses, cars, valuables, etc. They also spend on expensive services, for example, healthcare in private hospitals and children's education at private institutions at home and abroad, and travel to exotic places for holiday. By making such expenditures they also show off and take pride. However, when it comes to paying taxes, many do not pay their due shares. This is no secret to the NBR.
The proposed budget has neither given any clear direction on how the projected revenue increase in FY21 can be materialised nor any guidance on the reform of the tax administration. In the past there have been a number of reform initiatives within NBR with the objective to have a simplified, transparent, efficient and effective tax administration. Some of these include, Reforms in the Revenue Administration (RIRA) in 2002, Income Tax Management System in 2004, Tax Administration Capacity and Taxpayers Services (TACTS) in 2010. Unfortunately, most of those reform initiatives have either been discontinued or remained dysfunctional for unknown reasons. Covid-19 situation calls for introduction and initiation of reforms in the tax regime. An overhauling of the tax system is a crying need at this point in time when the country desperately needs more resources.
Human resource for tax administration plays an important role in improving tax compliance. The shortage of human resources in the NBR may also have been a reason for tax compliance and tax collections. Broadening tax net is the key. Automation of the NBR will help identify the tax evaders and new areas of tax collection. The transfer pricing cell needs to be strengthened. The unfinished task of VAT online services ought to be completed. Streamlining various types of corporate tax is also an area to work on. On the whole, interim adjustments in tax proposals here and there without any structural change will not help in achieving the voluminous growth target in revenue collection.
Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.