When our economy needed a prudent tax policy to increase return submission, NBR took a back-paddling step that will only discourage the new taxpayers to come under the tax net, let alone increase the overall tax return submission growth.
One such proposal was the end of zero tax. This created a negative buzz among all and thus overshadowed the other positive sides of the new tax policy in 2023.
It is important to analyze why the National Board of Revenues (NBR) has proposed to impose a minimum tax on every Tax Identification Number (TIN) holder. Simultaneously, what the other provisions were and how NBR could have been more prudent in proposing policies are also worth discussing. Thus, a thorough analysis of the new proposed tax policy is of utmost importance.
What does the end of zero tax mean?
The phrase “end of zero tax” means NBR is considering a minimum Tk2,000 tax on every individual (TIN holders) even if there is no taxable income. Currently, there are 8.6 million TIN holders of which only 3.2 million individuals submit returns. Around 25% of them show no taxable income.
What NBR is proposing is that if a minimum tax of Tk2,000 is imposed on all the TIN holders, an additional Tk12.4 billion in revenue can be generated. Even if only those who submit returns were to pay the minimum tax, an additional Tk1.6bn would have been added to the revenue collection.
It seems like NBR has done simple mathematics and made the formulation of tax policy; like performing a desk job, which shouldn't have been so.
New tax policy making the complex issue complicated
Tax policy is a complex issue. Even the slightest amendment can affect stakeholders amply. This is why policy formulation or inclusion of any provision takes time. Almost all the citizens now know the economic struggle that the country is facing. And undeniably, revenue collection needs to be increased. That said, Bangladesh's tax-to-GDP ratio is only 7.5%, whereas World Bank suggests the ideal ratio would be 15%. Thus, Bangladesh has a wide scope to raise VAT and tax revenue.
So, it's not wrong that NBR should try to look for ways to increase tax collection. Perhaps, with that in view, rather than looking deeply into the loopholes of the existing tax policy, NBR has chosen the shortcut way and generalized the system which could burden the low-income group.
A minimum tax of Tk2,000 has been proposed, but NBR has still not come forward to explain why and how this amount has been fixed. On top of that, for the TIN holders living in the city corporation area, the minimum tax amount is Tk5,000. Does the city corporation provide such services that justify the amount of 2.5 times higher than the usual tax? The question can take the discussion to another territory.
Even if one keeps the numbers aside, a deadly provision waits to take the stage. The provision is -- indemnity to tax officers. This means tax officials will be immune and can't be held liable for their actions. No suit can be filed in a civil court for rejection or revision of tax assessment. This gives the tax officials an exceptional upper hand, which in turn, reduces the citizen's rights. As per the constitution of Bangladesh, citizens have the right to seek justice in court, but this provision snatches it away. So, when they face injustice from the tax officials, they won't have any door to knock on. This provision is nothing but another hindrance to ensuring transparency and accountability.
Commendable steps taken
Nevertheless, NBR has been consistent in addressing inflation, and this year was no exception to that. The tax limit has been expanded from Tk3 lakh to Tk3.5 lakh. Other thresholds for tax-free limits have been adjusted likewise. This was a much-needed amendment that NBR should have made, and it finally has. Other than this, NBR has taken several steps which are expected to aid in minimizing the social disparity.
A study conducted by the Centre for Policy Dialogue (CPD) found Bangladesh losing Tk60bn in wealth tax annually. Indirect tax, particularly VAT, is imposed on every individual regardless of the income group, which is why this form of tax burdens the lower income group and fuels inequality. However, wealth tax is something that is imposed only on the wealthy group and thus can decrease social inequality.
By increasing inheritance tax, land-wealth tax, and other property tax, inequality can be brought down, and this will at the same time increase the revenue collection of the government. Even though it came late into consideration, but the authorities are finally addressing one of the major sources of undeclared income -- property transfer.
Another commendable step that has been jointly taken by the governmentvand the NBR is the introduction of the carbon tax. Owners of more than one car are likely to face an environmental protection surcharge from the upcoming fiscal year as the government plans to discourage the use of vehicles in a bid to contain carbon emissions and air pollution.
According to NBR, the carbon tax, first in Bangladesh, may range from Tk20,000 to Tk0.3 million. This decision will serve the economy from 3 fronts. Firstly, it will reduce inequality in society. Secondly, it will boost revenue collection, and finally, it aligns with Bangladesh's climate prosperity plan.
Promoting sustainable development
NBR has interestingly promoted sustainable development (development that satisfies current requirements without jeopardizing the potential of future generations to satisfy their own needs) through its new tax policy. The introduction of the "carbon tax" was just the first step. Zero duty on solar-powered water desalination plant imports was another one. This effort aims to meet the water demands of coastal inhabitants without grid electricity, especially those residing in towns in the south of the country that are prone to salinity. Zero duty may reduce electricity dependency for water desalination and improve the climate.
An innovation has also been made in the waiver section of the policy. The government has planned a VAT waiver for the potential recycled clothing backward industry. Even though it seems like NBR is leaving no stone unturned to increase revenue, it has a high consideration for sustainability.
According to the BGMEA, "It is possible to manufacture $5bn worth of clothing from recycled fibers. As a result, a huge amount of foreign exchange spent on yarn and fabrics could be saved."
Undoubtedly, the withdrawal of the existing 7.5% VAT on the collection of textile waste by spinning mills has the potential to increase manufacturers' use of circular fashion (that relies on recycled fibers). This encouragement will not only reduce strains of the foreign reserve but will also reduce the amount of waste produced by the industries. According to Circular Fashion Partnership, in 2019, Bangladesh produced 2,50,000 tons of pure cotton waste. If recycled, this could decrease imports by around 15%.
There were scopes for making the law a more climate-friendly one. In 2020, an announcement from Dhaka North City Corporation (DNCC) was heard. DNCC had announced 10% holding tax rebates for rooftop gardening. DNCC had announced another 10% holding tax rebate for water harvesting. However, the announcements are yet to come as a provision or law. If these were included in the new law, this could have encouraged the tax-payers to re-building nature.
What could have been done?
There is a lot of room for improvement. However, for a better, transparent, accountable, and stronger system, cooperation is a must. Cooperation among all the stakeholders -- starting from the government to the individuals -- has no alternative for formulation and implementation. NBR accounts for the lion's share of revenue collection for the government. It must maintain a liaison with every stakeholder of the economy.
In the recent proposal, NBR has a provision for whitening black money. In the draft law, the use of black money to purchase land, plots, and flats is permitted after paying taxes in the same way as the previous time. This provision, to some extent, fails to discourage the accumulation of black money.
Bangladesh Bank and NBR should have worked together to shrink the use of black money rather than creating opportunities of making the black one white at regular intervals. Both the central bank and NBR should coordinate with all parties of the economy to bring out the best policy that could be followed for over a decade with consistency.
It's time for NBR to look deeply into the salary structure of private firms operating in the country. To assist employees in evading taxes, some corporations have formulated a creative salary structure. As basic salary is taxable, while other allowances or financial benefits are mostly not taxable, paying a hefty amount on other benefits, firms pay a small amount as basic salary. For instance, some firms pay a basic salary of Tk15,000/month but the gross monthly salary stands at Tk80,000.
This practice is more of an open secret. NBR should investigate this kind of salary structure and make a legally binding ratio of basic and gross salary. It should make the investigation a regular task rather than a periodic one.
In the new draft, the scope of penalties has been expanded. For chartered accountants' firms submitting fake audit reports, a fine of Tk50,000 to Tk2,00,000 is proposed. But considering the remunerations the firms receive, the fine is not enough.
Then again, the fine for the same misdeed has been set at Tk1,00,000 only for firms. This fine is of a mere amount considering the vastness of financial crimes the firms are committing.
NBR is, however, seen to be active throughout the years. NBR's coming up with the idea of the "tax fair" and speedy implementation of digitalization are praiseworthy. NBR has also responded quickly to come up with ways for TIN cancellation for those who have anticipated zero taxable income. It is undoubtedly a needed step.
Now that NBR has made a remedy to this, it should take preventive measures as well. Some corporations require job applicants to have a TIN as a prerequisite for applying for a suitable position in the firm. NBR may ask those firms the justification behind asking the job-seeking youth to have a TIN even though those youth have no source of income.
NBR, for the last decade, has successfully implemented several policies that increased the tax net. Though it was successful in raising the number of taxpayers, the return submission number remained low. Thus, NBR should focus more on increasing that number now. Policies would need to include changes that encourage taxpayers to submit their returns.
The law is expected to remove complexities. However, tax, by nature is a quite complex issue. Taking every stakeholder into account, the policies should be implemented. The authorities must ensure that public sentiment doesn't go against the law, otherwise, the law will not be implemented successfully. NBR needs to ensure that the procedure -- from formulation to implementation to the tax collection -- could be counted as an integral approach.
Dr Ashraful Alam Chowdhury is an independent researcher and columnist.
