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Bangladesh’s tax gap to GDP ratio highest in Asia-Pacific

  • Published at 01:47 am June 28th, 2018
  • Last updated at 01:49 am June 28th, 2018
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Experts blame the gap of 7.5% between GDP and tax ratio on a number of socio-political factors Mahmud Hossain Opu

Bhutan is in second position behind Bangladesh with a 6.7% gap, while the gaps in Afghanistan and Maldives are also over 6%. Malaysia is the lowest at 1.3%.

The gap between tax revenue and Gross Domestic Product (GDP) in Bangladesh is the highest in the Asia-Pacific region, a recent study has revealed.

Trade analysts blame the 7.5% gap recorded by the “Economic and Social Survey of Asia and the Pacific-2018” on weak administration and a narrow tax net, strong lobby by business groups in the setting of the tax rate, and the corruption of tax officials.

Conducted by the Economic and Social Commission for Asia and the Pacific (ESCAP), the survey found the actual levels of tax collection are below their potential in 17 Asia-Pacific countries.

Bhutan is in second position behind Bangladesh with a 6.7% gap, while the gaps in Afghanistan and Maldives are also over 6%. Malaysia is the lowest at 1.3%.

Centre for Policy Dialogue Research Director Khondaker Golam Moazzem told the Dhaka Tribune that Bangladesh’s tax collection mechanism is more concentrated on limited sectors and is highly reliant on Value Added Tax (VAT) and individual tax.

“A lack of administrative capacity and weakness to widen the tax net, and business people’s strong lobbying in setting tax rates are other reasons for the less revenue earnings,” he said.

“People’s attitude towards tax is negative. They are disappointed with the government services they are getting (and) as a result, they become less interested to pay taxes.”

A businessman, seeking anonymity, also blamed the difficulty and abuse of the system for the low levels of tax collection.

“Despite having taxable income, people are unwilling to pay tax due to hassles and corruption of tax officials,” he said. “The lengthy and awkward process of returns submission is another obstacle to realizing tax.”

Reforms and automation urged

Experts are urging reforms to the taxation system and laws, along with the automation of the collection system through the application of information technology.

“Bangladesh’s economy is moving forward rapidly but we did not see any reforms in tax laws or collection system except for VAT in last three decades,” Ahsan H Mansur, executive director of Policy Research Institute, said.

“Without modernization, the revenue collection will not increase; rather, it will decrease.”   

According to NBR data, as of June 2018, there are about 3.5 million tax identification number (TIN) holders, of which about 1.95 million submit tax returns.

To increase the tax to GDP ratio, CPD research director Moazzem suggests the government bring the target group under the tax net and make it mandatory to submit income tax returns, “whether or not it is taxable”.

Moazzem also suggests boosting administrative capacity with adequate logistic support to widen the tax net and enlarge collection.

“Strengthening the online payment system to prevent hassles and corruption will also encourage taxpayers,” he said.

“(And) if the government brings down the corporate tax rate to a reasonable level, definitely the revenue will go up and people will pay instead of evading.”

Exporters Association of Bangladesh President Abdus Salam Murshedy also urged the government to widen the tax net.

“Ensuring a level playing field for all business is a must,” he told the Dhaka Tribune. “A large gap in tax rate among sectors creates the tendency to dodge tax.”

Other stakeholders have also urged the NBR to take measures against corrupt officials, who are helping business people to find ways to evade tax in exchange for bribes.

Tax revenue target 'achievable'

In FY17, the ratio of tax to GDP in Bangladesh was 9.1%, which is 11.6% (provisional) in the outgoing budget.

For FY19, the government has set a tax revenue target at Tk305,928 crore, which is 12.2% of GDP. Of the total amount, the National Board of Revenue (NBR) has been asked to source Tk296,201 crore, which is 11.7% of GDP and 32% higher than the revised target of FY18.

Finance Minister AMA Muhith expressed confidence that tax collection can be increased, describing the revenue target as” realistic”.

“Huge reforms in terms of manpower restructuring and business process reengineering have already been implemented in the NBR,” Muhith said in his budget speech earlier this month.

“The trend in tax compliance is quite satisfactory and by ensuring the continuation of this trend, the revenue collection target appears to be achievable.”

In the FY19, the government targets an additional Tk79,826 crore revenue with 30.8% growth over FY18.

However, the Centre for Policy Dialogue thinks more than 40% growth will be required to meet the target.