Bangladesh's national budget for FY2022-2023 is scheduled to be presented to the national legislature in early June and with this in mind, there is still ample time for policy makers to consider correcting certain irrationalities, inadequacies, pain points and missed opportunities within the existing tax and regulatory framework.
If sustainable economic growth and development is one of the country’s primary objectives, then the upcoming finance bill and subsequent act certainly need to address various concerns, otherwise the nation may not be able to reach its true potential for real progress.
Therefore, now is the time for decision makers to analyze and contemplate the most feasible ways in which the next national budget may be designed such that prevailing bottlenecks and obstacles can be addressed and mitigated.
Constant rationalization
In the case of the tax and revenue structure, rationalization is a process through which the system and processes are restructured with the purpose of increasing efficiency and it involves updating the tax policy so that it may have maximum effectiveness towards the desired overall national strategy.
In other words, to be effective and achieve Bangladesh’s desired economic objectives, its tax structure needs to be rational and feasible while supporting and synergizing with its overall macroeconomic targets.
Policy makers need to take on a more realistic and achievable objective rather than only focusing on revenue maximization necessary.
Rationalization is an ongoing process rather than a one time action due to the constant and ever-changing economic dynamics of an evolving nation like Bangladesh and that is why the budget is a repeating yearly process.
This gives the government the opportunity to readjust and adapt its policies to changing circumstances while also keeping in mind its strategic targets for the nation.
Such rationalization is very necessary to keep increasing revenues while also decreasing collection costs and improving the nation’s overall bottom line and this sounds very similar to how a business entity also would approach its own rationalization process.
Business principles and targets of rationalization could easily be applied to the tax and regulatory framework of Bangladesh by slightly adjusting the specifics.
For example, a business seeks to constantly reduce costs and conserve resources and in view of the taxation system, this would be reducing collection costs, possibly by automation and removing wasteful programs which add little or no value.
The business concept of profit maximization may be alternated with the efficient maximization of revenue collections.
Increasing shareholder value may be changed to increasing the beneficial impact of tax policy to the citizens and overall nation.
There would not be much difference in the principles of transparency and effective governance between a company and public governance since it is also expected that the government would not hide anything from its citizens and constantly seek to inform and educate them on its actions.
Finally, simplification of processes is a universal concept which is equally beneficial to both the private and public sectors.
The taxation system needs to be simple enough such that it is easily understood and so that everyone is motivated and encouraged to become taxpayers.
Right now, the way in which Bangladesh’s revenue collection framework stands, it is often not only irrational but also sometimes contradictory.
Such contradictions within the system tend to offset the beneficial impact of one sector by negatively impacting another one.
Hence, a key part of the rationalization process is the removal of contradictions.
Removal of contradictions
Onone hand the country desires FDI, business expansion, increased international trade and business friendliness but on the other hand its tax ordinance and regulatory framework has numerous areas which are acting against such objectives.
Additionally, there are powerful obstructionist officials within the bureaucratic structure who strongly resist any changes which would benefit the nation but rather, are more inclined towards sustaining their positions of power and influence.
There appears to be a battle between two opposing forces in the nation’s financial and economic environment.
On one side are the collection authorities who are tasked with achieving nearly impossible revenue targets by almost any means necessary and on the other side are national policy makers who want to boost business and investment.
It is obvious that both these parties can never achieve all their targets unless there is balance and compromise.
There cannot be a tax waiver on one activity which is immediately followed by an even greater tax hike on another.
Thus, in constructing the taxation structure for the next national budget the authorities need to first figure out the areas within the existing tax ordinance which are against national strategic policies but are also not really contributing the amount of tax revenue expected.
Impact and consequences of changing the tax ordinance must be very carefully weighed in.
While a certain increase of tax in a particular area may seem like it will increase collections, it might also have a much greater negative impact on business growth and sustainability which would eventually lead to the shrinking of the taxpaying base.
Increasing the taxpayer base
Considering the massive spending and investment needs of the public sector to develop and improve Bangladesh’s infrastructure, revenue collections via taxation is certainly a critical objective for the government.
However, the question arises on whether the taxation system is truly being utilized to its highest possible capabilities.
The short and simple answer would be it is not and the first and foremost indication of this is the abysmally small income tax paying base.
Currently, only a very small percentage of the nation’s massive population is burdened with contribution towards its public revenues and the same people are being over-taxed and regularly facing undue harassment and pressure, while there are many collections worthy areas which continue to remain untapped.
If tax revenues are to be increased, then it is vital that the taxpaying base is also vastly increased and those who have been regularly paying their taxes, must also be duly rewarded, and further encouraged rather than facing more harassment.
Growing the revenue net should be one of the most critical objectives for the upcoming budget and the idea should be to bring in new taxpayers into the net rather than constantly increasing the burden on the same group of people, year after year.
Currently the way in which the system is designed, there is immense dependence on indirect taxes like VAT, duty, etc., which are already high.
This is a regressive system because it puts an unfair burden on everyone, even those who are poor and marginalized.
Furthermore, due to such high indirect tax rates, an existing taxpayer’s effective, i.e., true tax rate turns out to be much higher than the statutory tax rates.
For example, if an entity is already paying high income taxes, they are then again burdened with high indirect taxes such as VAT and various forms of duties.
The currently existing system creates a conflict between the two regimes of taxation, direct and indirect.
The immediate objective of policy makers should be to increase revenues from income tax by increasing the income tax paying base while also attempting to reduce the burden of those who are already paying high taxes within the two regimes.
The system should also be updated such that it is effectively able to catch tax dodgers and defaulters by the removal of loopholes and by increasing accountability and transparency.
More automation
One of the greatest and most successful examples of Bangladesh’s ability to automate and truly benefit from it is its Covid-19 vaccination drive through the Surokkha system.
Surokkha was created and executed very quickly and of course, very effectively. It is simple yet highly capable of achieving exactly what it is intended for.
So, the question arises that if such a magnificent automated and technology infused system could be developed and executed so well by the government, then why aren’t there many more similar initiatives in all sectors of the public domain?
The main point here is that by the success of Surokkha, the government has proven that it is extremely capable of efficiently bringing automation at a full national level within a short span of time.
Therefore, it is also incumbent on the public sector to provide such highly useful and motivational automation in many more areas where private citizens must interact with the public sector.
The taxation system would greatly benefit if such remarkable automation and technology is also introduced for it.
Due to lack of transparency, the current revenue collection system allows for too much dependence on the integrity and honesty of the individual tax collecting officials and this has opened the gateway for unscrupulous negotiations between taxpayers and revenue officials.
Such a system allows for personal gains and benefits to the ill motivated revenue officials as well as the tax dodging tactics of those who wish to escape from paying what is owed by them.
Keeping the success of Surokkha in mind, the introduction and execution of new and available technology, artificial intelligence and software within the tax collection infrastructure would make it much more transparent and effectively remove the heavy reliance on the judgment and integrity of individual revenue officials.
Automation would also make the system more user friendly and easily manageable at the taxpayer end.
Nationally integrated databases may be used to keep track of bank accounts, earnings, inflows, and outflows of taxpayers to come up with an advanced estimate of how much tax might be owed by specific taxpayers.
This would make the system more transparent and therefore allow much lower opportunities for escape or leakage.
Balance in the private sector
Like how Bangladesh needs more revenues for financing large public sector projects, it also needs a lot more investment and active participation in the private sector from both local and international investors.
After all, it is the private sector which is doing a lot of the actual work for the public sector’s large infrastructure projects.
On top of that, growth in the private sector is also critical if ambitious development targets are ever truly going to be realized because an economy cannot just keep on growing and increasing its GDP primarily based on public sector spending.
At some point soon, the private sector must take over and become the dominant source of spending and investment.
Consequently, the taxation system must also be able to motivate and encourage the private sector and there are certainly plenty of tax incentives and exemptions available for the private sector in the currently existing tax system.
However, the question arises as to whether the existing tax incentives are being effective? Are they directly contributing in the intended way towards achieving the nation’s overall strategic objectives?
Currently, there is an imbalance whereby certain sectors are heavily incentivized while others are overburdened with high effective tax rates.
Various sectors such as RMG and power, which needed a boost several years ago may no longer need such lucrative incentives since they may already be at a stage where they can self-sustain and keep growing organically by becoming more and more competitive.
While other sectors have emerged such as, information technology, pharmaceuticals, FMCG, etc., and they may have even greater potential if appropriately incentivized.
Therefore, it is mandatory for policy makers to carefully reexamine the existing incentives and exemptions and redesign them such that the most deserving sectors may be motivated and boosted.
At the same time, policy makers should also ensure that no sector is suffering from an unusually high effective tax rate due to existing issues in the tax ordinance.
The currently ongoing budgetary process should aim at ensuring that the next finance bill removes undue pressure of over taxation and provides well deserved incentives to strategically important sectors.
Encourage inflow of foreign expertise
Despite having celebrated its 50th birthday last year, Bangladesh is still considered to be in its infancy stage from a developmental perspective and it has a long way to go and most importantly, a lot more to learn.
The nation basically does not have the adequate expertise and knowledge base needed at the local level to achieve its highly determined development and growth objectives.
Bangladesh needs plenty of support and help from various experts, specialists, and consultants and this is required in both, the private and public sectors.
International consultants and experts are a valuable source of skills which are required to implement and execute the technical aspects of almost all kinds of projects.
All the currently ongoing mega infrastructure projects are being implemented with the help of foreign consultants and the same is also happening in the private sector, especially in terms of upgrades to technology, connectivity, and efficiency.
While it is important for taxation policy to promote and encourage the growth and development of local talent, the existing policies cannot be detrimental to and discourage the use of foreign experts because the domestic availability of such desperately needed expertise is very scarce and often nonexistent.
The way in which the current tax ordinance is designed it may be considered restrictive and unwelcoming towards the deployment of foreign consultants for local engagements and for consulting firms, in general.
This negatively impacts the net margin of foreign consulting firms and results in blocking the inflow of skills and expertise.
In crafting the next finance bill, policy makers may consider changing provisions such that Bangladesh becomes a much more consultant friendly country.
Regulatory restrictions and high tax burdens on consultants and consulting firms should be eased such that Bangladesh may attract the best expertise and influx of knowledge.
It would be very beneficial to Bangladesh if more internationally reputed consulting firms enter Bangladesh and can grow their businesses without facing high tax burdens that diminishes their ability to earn a reasonable amount of profit.
This is because such global consulting firms provide the required assurance and confidence to their respective clients that Bangladesh is a safe and secure destination for their investment.
Most global companies strongly prefer to enter countries like Bangladesh with the assistance and constant support of their designated consulting firms such as PwC, McKinsey, Accenture, Bain, BCG, etc.
Update tax policy to match strategic goals
Now that the logistic and economic crisis caused by the Covid-19 pandemic has been neutralized for the most part, businesses are once again hungry for growth and expansion and they are actively searching for new and attractive investment destinations.
There is no shortage of such locations because, like Bangladesh, many other developing countries are also competing for foreign investment to finance their own highly ambitious growth targets.
Many of these countries already have comparatively sound and stable tax and regulatory frameworks in place which may be more viable, and expansion friendly compared to what Bangladesh has to offer.
Bangladesh cannot afford to lag anymore because it has already demonstrated that it can achieve automation and technological advancement in almost any area, it can incentivize specific sectors when required, it can manage crises effectively and solve its own problems, and it can adapt and change to keep up whenever the need arises.
Hence, there is no reason why our tax and regulatory framework cannot also be improved and become a stabilizing and effective force that compliments and encourages our progressive and developmental aspirations.
Mamun Rashid is a partner and Syed Yamen Jahangeer is a director with PwC Bangladesh. Views expressed in this article are their own.
