We need to talk about taxes
Benjamin Franklin famously said that death and taxes are life's only certainties. Yet, in Bangladesh, the process of taxation remains shrouded in complexity and subterfuge. Taxes are the government's primary tool for revenue generation, economic influence, and behavioural moulding, yet public understanding and discourse about taxation are minimal. This article aims to illuminate Bangladesh's taxation challenges and propose reforms for a fairer, more productive system.
Taxes allow governments to legally appropriate resources and redistribute them to achieve their goals. In democracies, governments derive power from the citizenry; hence, democracies aim to improve aggregate welfare to retain public support. Autocracies, however, rely on their cronies to continue in power. So, autocracies prioritise enriching their cronies and use taxes as a tool to extract resources from the broader populace.
For all latest news, follow The Daily Star's Google News channel. In Bangladesh, successive governments' reliance on coercion and tyranny has undermined the country's democratic credentials. Taxes in Bangladesh should fund public infrastructure and services that increase the aggregate welfare of the populace, but in practice, they often benefit a privileged few.
Tax revenue is a product of tax rate and tax base, whereas tax base is the economic activities that are subject to taxation (income, goods, property, etc), and tax rate is the percentage of the tax base appropriated by governments.
Complexity arises when tax base exemptions and differential rates are applied. Tax base exemption involves the interpretation of abstruse rules, conferring wide discretionary powers to tax authorities. Since Bangladesh tax authorities have the mandate to draft and enforce tax laws, the mandate can be used to exploit people by capriciously changing or interpreting the law. Governmental pressure to meet revenue targets exacerbates the situation because it incentivises tax authorities to weaponise the tax system against the people.
Discourse in Bangladesh often focuses on tax rates, ignoring issues about tax base.
SRO 225-Law/Income Tax–7/2023 ("SRO 225/2023") stipulates that all government employee benefits, except basic salary, festival allowance, and bonus, are exempt from income tax. Conversely, private-sector workers are required to pay taxes on their entire income. Since government employee benefits are tax-exempt, the treasury loses out considerable sum annually, with losses compounding when pensions, gratuities and other allowances are included.
This violates the principle of progressive income taxation: people who earn more ought to bear a higher "average" tax burden. Although government employees have very lucrative earnings and benefits packages, their average income tax burden is lower than private-sector employees.
To cover revenue shortfalls, the government seems to prefer raising indirect taxes, such as Value Added Tax (VAT), Supplementary Duty (SD), etc, probably because the effect of these taxes is not apparent. Although businesses pay indirect taxes, their economic impact is shifted to consumers through higher prices, which disproportionately affect low-income earners.
Unless the impact of the indirect taxes is mitigated at each step, these taxes cascade along the supply chain. Thus, by the time goods and services reach consumers, indirect taxes become a major part of the price.
If a producer can "mitigate" indirect taxes, that would significantly reduce his production cost and increase his profits. When businesses can make more money by gaming the tax system than by improving productivity, they have zero incentive to look for productivity gains.
When taxes drive resource allocation decisions, less capital is allocated towards productive activities. Thus, inefficiency grows, and national wealth stagnates.
Bangladesh's economic challenges—rising debt, inflation, and financial instability—demand bold fiscal reforms. The interim government has stabilised the economy, but long-term stability requires productivity-focused tax policies. Given that Bangladesh is set to graduate from least developed country status, this would be an opportune moment to initiate tax reform.
Trade taxes (SD, Customs Duty, etc.) and non-tariff barriers can be reduced to minimise economic distortion and incentivise businesses to improve productivity. At the same time, protectionist policies must be phased out and replaced with policies that help local industries to compete globally. If local industries cannot become competitive after fifty years of protectionism, they will never be competitive.
Also, VAT should be aligned with international norms. Administration of input VAT credits must be improved to prevent cascading and mitigate VAT evasion and fraud. The VAT base should be expanded while lowering rates to improve compliance.
In addition, tax treatment for public and private-sector employees should be equalised and the income tax base broadened, while simplifying the system by eliminating arbitrary exemptions.
The government may resist reducing the tax rates for fear of losing revenue. However, the loss of revenue from the reduction of rates can be offset by the gain from the expansion of the base. Broader base distributes the burden of taxation among more people; thus, the government would only collect a small amount of tax from each person, which is likely to improve compliance and reduce the incentives for gaming the tax system.
Bangladesh's history shows that public discontent can topple governments. To avoid unrest and ignominious egress from their seat of power, leaders must prioritise wealth creation for the populace over cronyism. Comprehensive tax reform—focusing on fairness, productivity, and simplicity—can stabilise the economy and foster public trust and support for the leadership.
The interim government's reforms are a start, but lasting change requires political will. Bangladesh can transform its fiscal system into an engine of prosperity by aligning taxation with public welfare.
Kazi Rahman is business and entrepreneurship expert at Catalyzing Sustainable Transformation (CaST) Network.
Views expressed in this article are the author's own.
Follow The Daily Star Opinion on Facebook for the latest opinions, commentaries and analyses by experts and professionals. To contribute your article or letter to The Daily Star Opinion, see our guideline for submission.
Comments