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OP-ED: Revenue reforms: The upside is very high

  • Published at 03:20 am March 9th, 2021
tax
Paying taxes should be easy BIGSTOCK

Bangladesh must urgently rethink taxation at a policy level

When there is high economic growth and rapid increase in GDP, which has been the case for Bangladesh for several years, then it also implies that money is being made, fortunes are being created, and people are getting wealthier. Therefore, archaic revenue policies must be abandoned and newer and more effective reforms need to be implemented so that policies and regulations are up to the mark and can keep up with the dynamic rate of development. 

Firstly, in order to ensure further and continued growth, a significant portion of the newly created wealth must be immediately reinvested back into the domestic economy rather than being transferred and invested abroad. 

If large amounts of wealth are being accumulated in the private sector but little or none of that wealth is being pushed back into the economy, then the entire nation loses out and such a mechanism will only be of advantage to very few members of society, mainly the elite and ultra wealthy. Hence any planned future revenue reform must address this concern. 

Secondly, another vital target for revenue reform should be to increase the base of taxpayers because presently, the total number of officially enlisted taxpayers is nowhere near where it should be, considering the population size and economic output of a country such as Bangladesh. High economic growth and creation of wealth means that there should also be a much higher number of tax-paying citizens. 

Windfalls gained domestically need to be reinvested locally

The critical question is: What is the best and most efficient mechanism to ensure that a significant portion of the earnings and newly-created wealth are poured right back into Bangladesh’s own economy?  

One possible answer, particularly in the case of Bangladesh, would be through the effective and efficient collection of tax revenues and the subsequent prudent and well-intentioned reinvestment by the public sector directly into the economy and infrastructure. 

In more developed economies, wealthy individuals may be somewhat trusted and relied upon to reinvest at least a good portion of their windfalls back into the nation’s economy, however, in Bangladesh the objective appears to be different based on recent as well as past trends. 

Such trends indicate that the immediate goal of many of those fortunate individuals, upon acquiring vast amounts of wealth via entrepreneurial activities in Bangladesh, is to transfer funds out of the country to more developed nations, either legally or illegally. As a result, while the wealth is earned in Bangladesh, not all of it stays in Bangladesh. 

A significant portion of that valuable wealth which was essentially a “reward from Bangladesh” ends up being used in the purchase of luxuries or investment real estate in countries like Malaysia, Singapore, Thailand, Canada, the UK, Australia and the US. This is most certainly not the intention or goal of the policymakers in Bangladesh. 

The painful truth is that Bangladesh’s rapid economic rise has far outpaced its existing regulatory framework, policies, and capabilities. The future reformed regulatory and policy goal in this case should be to ensure that what’s earned in Bangladesh should also stay in Bangladesh, at least a large portion of it. 

The entire fault cannot only be directed towards the lack of regulatory capability to retain revenues in Bangladesh because on the other side of the coin is also the personal desire of individuals and business enterprises to keep and reinvest their wealth in Bangladesh as opposed to investing it abroad. 

However, the primary purpose of discussion over here will be on the kinds of revenue reforms and changes that are required in order to capture and retain a much larger portion of the vast amounts of wealth being created within Bangladesh so that they may continue to fuel the growth and progress of the country. 

The mighty IRS: An example of recent reform

Before delving into possible revenue reforms which could potentially help Bangladesh retain its domestically created wealth and capital, let’s take a brief look into one of the world’s most well-known revenue collectors -- the Internal Revenue Service (IRS) of the United States. 

Prior to the “IRS Restructuring and Reform Act of 1998” (the Act), the IRS was neither gentle nor friendly. In fact in the 90s, many taxpayers lost their homes and livelihoods to the IRS because of its aggressive collection efforts. This resulted in turning public sentiment against the legendary and very powerful agency. Prior to the Act, the level of service at the IRS fell to unacceptable levels. 

During President Bill Clinton’s administration, the outrage among US taxpayers against the IRS’ collection tactics convinced the United States Congress and the administration to reduce the agency’s budget and embark on an unprecedented path forward which would entail a friendlier collection cooperation with taxpayers, hence the well-known phrase, “a kinder, gentler IRS,” came into being. 

One of the clear mandates of the Act was to force the IRS to significantly and dramatically improve service to taxpayers. New technologies were introduced and adopted and this also played a major role in improving the public perception of the IRS. The IRS became much more accessible through its user-friendly website and toll-free call lines which allowed taxpayers the opportunity to interact with the agency directly and more frequently, and much more information was made available to the public instead of being hidden behind a veil of mystery like it used to be in the past. 

After going through some difficult adjustment phases initially, throughout the years following the Act, the IRS worked hard to ensure a reasonable balance between service, interaction, enforcement, and collection. 

The primary point to take into account is that even such an advanced and highly developed nation such as the United States had to instigate major reforms to its own primary revenue regulator within just the last 25 years. This is because those in charge of its domestic policy realized in the late 90s that what they had been doing simply wasn’t working, and that it could be improved. 

Time for Bangladesh to also consider revenue reform?

Now the question arises: Where is Bangladesh in terms its own revenue collection policies, methods, structure, and public perception? Witnessing the dramatic reforms which even the mighty IRS was forced to go through not so long ago, why shouldn’t Bangladesh also consider the same for its own primary revenue collector, the National Board of Revenue (the NBR)? 

The most plausible answer is that it is high time that Bangladesh also quickly proceeded with its own “revenue reforms” with the full backing and blessing of its Parliament as well as the executive administration in charge in order to readjust and realign with the current pace of rapid growth and development of the nation. 

It should also be considered that those specific reforms which had worked for the United States may not work for Bangladesh since the two nations are at very different levels in their economic status. 

Therefore, it would be important to carefully consider what the most immediate challenges are which need to be overcome as well as the most pressing goals which need to be achieved, whereby the target is to prioritize and then design and implement customized reforms in those areas. Taking on too much change at one go will most certainly result in a negative impact as it would shock the system and would force further non-compliance. 

Upon observing the challenges being faced in the revenue collection sector, one of the most important barriers to overcome in Bangladesh is to encourage more of its citizens to become official taxpayers. There is no doubt that currently only a fraction of those who should be official taxpayers are actually official taxpayers. 

In other words the tax net must be broadened in order to encourage more income earners to report and pay taxes. One of the single most important priorities of the Bangladesh revenue collectors should be to increase the taxpayer base instead of trying to forcefully collect more taxes from those who are already compliant and have been duly reporting and paying their taxes. That is, don’t punish those who are already doing the right thing but rather motivate others to also do the same. 

Taxpayers should not fear the tax regulator

There is already a negative perception among Bangladeshi income earners and they feel that if they start to officially report and pay taxes on their earnings, then it is very likely that they will become a target of the tax authorities and then their activities will face additional scrutiny and as a result, they will be harassed and chased. 

These are potential taxpayers who genuinely want to become official taxpayers but tend to believe that it is better to perhaps stay under the radar of the NBR in order to avoid such harassment and scrutiny. This is a result of the general public perception of the NBR being not at all “gentle or friendly.” 

So, it is very possible that the current public opinion of the NBR is a negative one based on fear and anxiety, which implies that people would rather take the risk of tax avoidance than becoming compliant because the latter might only invite additional and underserved persecution. Therefore, such reforms are urgently needed which would result in appeasing this kind of trepidation towards the tax regulators. 

More automation and less human interference

This is where further automation and technology can truly be beneficial in changing perceptions and even allow for more benevolent enforcement of tax collection policies. When the system is automated, it takes out the possibility of harassment because harassment or pressure occurs more on a human to human level. 

An artificial intelligence or software does not have any ulterior motives to cause undue pressure on taxpayers because it is completely neutral to such issues. For example, in most developed economies, the tax reporting and payment system is completely automated and done online via sophisticated software which are owned and operated mostly by private entities who charge a nominal fee. 

Therefore, filing taxes by using such an intermediary removes the possibility of direct human to human/tax regulator interaction unless there is an audit. In some countries, even audits are highly automated but achieving that level of technological reliance is not something which would be within the immediate realm of possibility for Bangladesh. For now the goal should be to make the reporting and paying process as simple as possible in order to encourage more people to become taxpayers. 

Demystification and easement of the process

Furthermore, answers to most questions and concerns should be readily available in the highly user-friendly website of the tax regulators as is already the case in all developed nations. All relevant information and tax regulations and policies should be readily and easily available to taxpayers such that the entire tax reporting and paying process is fully demystified and easily executed. 

If there are changes to tax rules and regulations, then such websites also need to be regularly updated to contain only the latest and most applicable information. Certainly, Bangladesh’s internet capability and speed have already reached that state to fully and successfully allow for this to happen seamlessly. 

So now, all that needs to happen is that the process and method needs to be implemented and put in place in a usable manner which can only happen through reforms. Financial intermediaries such as bKash and Nagad as well as advanced online banking platforms are perfectly suited to carry out payment and refund transactions between taxpayers and the national treasury in a highly effective manner. 

Most current and potential Bangladeshi taxpayers are already highly accustomed with these intermediaries and are comfortable utilizing them on a regular basis for various financial activities. So why not also utilize these trusted and effective resources in future positive revenue reforms? 

If people are going to be encouraged to start doing something then it would be better that they are allowed to do so with the technological tools which they are already comfortable with, whereby resulting in the positive psychological association of taxpaying and reporting with preexisting and successful mechanisms which the people already trust and are capable of easily using. 

A system that emphasizes rewards and not punishments

Revenue reforms should also include a shift in policies which so far may have been allowing and possibly even unknowingly motivating wealth accumulators to move their wealth out of Bangladesh. 

Perhaps a better way to achieve this would be to provide adequate incentives to reinvest in Bangladesh rather than forcefully trying to block outward transfers because such methods don’t seem to be working since people always tend to come up with new and creative ways -- which are often illegal -- to bypass those blockades. 

There is no doubt that fear is not at all an effective motivating method because it demoralizes people and tarnishes their natural entrepreneurial spirit. Therefore, the reward for good deeds must outweigh the risk and punishment for undesired deeds. 

Tax credits, tax reduction, tax rebates, and tax abatements are already highly effective and are routinely used by most countries to motivate domestic reinvestment but reforms do not have to be limited to just these incentives and actions. 

The focus of reforms should also be to find ways to reward those taxpayers who act in ways which are in line with national interest and to also motivate non taxpayers to become taxpayers so that they may also enjoy those rewards. Alternatively, motivating and rewarding mechanisms may also be implemented beyond the taxation field which would cause even more enthusiasm among taxpayers and wealth accumulators to prefer investing in Bangladesh over other foreign jurisdictions. 

One of the primary questions asked whenever policymakers consider revenue reform is whether or not such reform will actually result in increasing revenues because let’s be honest, unless more money is deposited into the national treasury, such reforms are basically useless. 

Reforms aimed at stopping the outflow of wealth accumulated through domestic economic enterprise would definitely mean more public revenue earned because if those funds do remain within Bangladesh, then it would inevitably mean that they would be reinvested into Bangladeshi projects. 

Reinvestment would result in further income and earnings which would then result in additional tax revenues. However, if the wealth earned leaves the nation’s borders, legally or illegally, then the benefit would be realized by other foreign nations and not Bangladesh. 

Therefore, curbing the outflow of wealth via effective revenue reform is a key strategy which could immediately result in more investment and therefore more revenues. It is critical that re-investors do not get the wrong message and they are not obstructed in any way when they attempt to reinvest. 

Reforms should pave the way for these investors such that it is seamless and without any kind of interruption because the goal is to push back the excess funds into the economy as quickly as possible. Additionally, if more citizens are encouraged to come forward to become official tax-filers and taxpayers, then the tax net and consequently, tax revenues, would immediately be increased. 

Taxpaying and reporting should be perceived as something to be proud of but at the same time, it should be easy enough without any scope of undue harassment. Reporting and paying taxes should not cause anxiety but rather, it should be viewed as a simple and easy process like any other economic activity which an ordinary citizen does on a routine basis.

Mamun Rashid is a partner and Yamen Jahangeer a Director with PwC Bangladesh. Views expressed are their own.

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