Reducing tax expenditure will increase revenue by Tk30,000-Tk40,000 crore immediately, said The Policy Research Institute (PRI).
Raising the tax-GDP ratio by 2 percentage points from personal income tax (PIT) will yield an additional revenue of Tk65,000 crore, they added.
PRI, a private research organization, held a press briefing on Wednesday “Connecting Fiscal Policy Changes to Economic Outcome: Evidence from a Quantitative Exercise” where they presented a report “Economic Impacts of Fiscal Policy Change: Effects of increased tax revenues in Bangladesh on GDP Growth, Consumption, Household Income and Inequality.”
The report was prepared by the Centre on Domestic Resource Mobilization (CDRM) -- a specialist wing within the PRI.
Ahsan H Mansur, executive director of PRI, said: “If tax expenditure can be reduced, it is possible to increase revenue by Tk30,000-Tk40,000 crore immediately. This should be done in the next budget.”
Tax expenditures are provisions of the tax code that can reduce how much a taxpayer owes - and therefore federal revenue.
Examples include special tax credits, deductions, exclusions, exemptions, deferrals, and preferential tax rates.
Mansur also said that by increasing revenue from taxation, particularly direct taxation like PIT would have a measurable positive impact on growth.
It would also allow the government to spend more money on growth-enhancing infrastructure projects and public services like social protection and agriculture.
Zaidi Sattar, chairman, PRI; Mohammad A Razzaque, research director, PRI; and Ashikur Rahman, senior economist, PRI also spoke at the event.
Bazlul Haque Khondker, director, PRI, gave the keynote presentation titled “Economic Impacts of Fiscal Policy Change: Effects of increased tax revenues in Bangladesh on GDP Growth, Consumption, Household Income and Inequality.”
Bangladesh has one of the lowest levels of tax revenue in the world as a percentage of GDP. This poses a risk to the country, both in terms of stabilizing the economy in the short term and maintaining a positive track toward development in the medium term as Bangladesh seeks to become a developed nation by 2041, he said.
At 7.6% of GDP, Bangladesh’s tax revenues as a proportion of GDP are currently half that of similar countries like Vietnam.
Key findings from the report
The 2 percentage point rise in overall tax revenue would lead to a 0.2 percentage point increase in real GDP growth, assuming additional revenues were invested in public services.
An increase in overall tax revenues, to fund increased spending, would also contribute to reduced poverty and inequality. The poorest 40% of households would experience the highest gains.
If the increase in tax revenue is focused on PIT, this would have the greatest benefit on the overall economy with a 2 percentage point increase resulting in a 0.5 percentage point increase in real GDP growth above current levels.
This level of increase in personal income tax would also benefit all sectors, including industry, agriculture, and services.
Increases in corporate income tax would have a weaker impact on growth but would improve household income and consumption, particularly among poorer households.
Due to the inflationary effects, increases in VAT revenues would have a negative impact on economic growth, as well as household income and consumption. VAT reform is still required, but tax increases should focus more on personal income taxes.
The report also stated that an increased emphasis on direct tax -- such as PIT --would bring Bangladesh in line with other emerging economies.
As countries develop, they generally increase tax revenue as a proportion of GDP and use direct taxes as a sustainable means to fund state spending.
The government has acknowledged the pressing need to boost tax revenues, as mentioned in its 8th five-year plan, where the goal is to increase tax revenue to 12.3% of GDP by 2025.
It is also committed to meet the revenue targets for the IMF loan's second tranche.
Recently, the Finance Ministry highlighted that Bangladesh's access to concessional borrowing was narrowing, estimating a need for $4.5 billion in the next fiscal year to service debt.
Therefore, increasing the tax-to-GDP ratio urgently will be crucial to reducing reliance on high-cost borrowing in the future.
Recommendations
The PRI made several recommendations to the government in terms of policy.
Among them included pursuing significantly higher revenues from PIT by expanding the tax net through increasing TIN registrations with a national campaign to increase TIN registration, particularly outside cities.
They also called for improving compliance of existing TIN-holders through the implementation of mandatory submission of tax returns and other measures, while also establishing a central automated tax administration database to reduce corruption.
Reducing inefficiencies in corporate income tax was also imperative, by reducing the high number of tax exemptions and tax holidays, particularly in growing sectors.
The PRI also demanded increasing compliance through mandatory tax returns for all registered companies.
VAT reforms were also demanded to increase revenue without inflationary effects.
This can be done by removing current inefficiencies in the system by expanding the VAT net by resorting back to the VAT Act of 2012, and also by installing more EFDs to improve compliance and reduce evasion.
New economic modelling
PRI used a new economic modelling for their recent report. They said that this new economic modelling conducted by PRI uses data on Bangladesh’s economy to simulate the impacts of possible revenue and expenditure reforms, specifically, the Computable General Equilibrium (CGE) for Bangladesh, calibrated to the 2020 Social Accounting Matrix (SAM) to simulate revenue and expenditure reforms.
This modelling provides estimates for the resulting changes in economic variables, including tax revenue, GDP, household consumption, and income distribution.
Simulations were conducted to identify the impact of raising revenue from personal income tax, corporate income tax, and value-added tax by different margins, with analysis to understand the effects on the national economy.
The simulations assume that additional revenue raised is spent on infrastructure, social sector, social protection, agriculture, and other public spending areas.
The split of modelled public spending assumes the same proportional split between sectors as is currently the case.