A recent report published by the independent international organization Tax Justice Network revealed that Bangladesh is the third highest in terms of tax revenue loss in South Asia, only behind India and Pakistan. It has been estimated that Bangladesh is losing more than $700 million per year in tax revenues and a significant majority of this is due to corporate tax abuse, and the rest of it is due to private offshore tax evasion. Such large tax revenue losses clearly indicate that some strategic reforms and change is required.
Reform and continuous reforms are the key
The first step would be to establish and agree upon a political and bureaucratic/administrative commitment at the highest levels that a clear mandate for tax reform is necessary and is of the highest strategic importance.
Simply having a mandate is useless if it does not have any clear and implementable pathway with step by step processes which will eventually lead to real changes. It must be ensured that there is full acceptance and “buy-in” by the key stakeholders and the executors of the reforms. The public (ie the tax-payers) must also be made fully aware and encouraged to be involved in the development of these reforms.
All parties -- political, bureaucratic, and the public -- must come and work together to design and then implement such reforms. An integral part of this process will be social dialogue and effective communication between all the stakeholders whereby clear and precise emphasis is placed on the intended benefits of the reforms so that any likely resistance from vested interests may be overcome.
Such reforms will inevitably have those who are losers, and they also must be taken into account and compensated in some alternate ways, otherwise the buy-in will never be complete.
We must simplify the tax return and submission process
Next, the primary strategic target of the reforms aimed at increasing the tax revenue net should be simplification, as well as the limitation of exemptions to a certain degree. Loopholes and defectively designed exemptions within the taxation structure and framework often allow for unwanted leakage of tax revenues as well as providing scope and opportunities for potential tax-payers to escape the revenue collection net. A simpler tax framework with a reduced number of rates may be considered, as this may lead to added tax-payer compliance.
Simplifying taxes, procedures, and structures may also encourage and motivate additional tax-payers to join the revenue net. In an evolving and developing economy like Bangladesh where there aren’t highly sophisticated technologies to easily spot and catch violators and fraudulent tax dodgers, there may be merits to tackling the matter from the other angle where the goal is to increase the motivation and desire of the public to become complying tax-payers.
The goal should be motivation and encouragement as opposed to fear of retribution. Simplification may be used as a solution to mitigate the challenges of the tax administration which is currently lacking the required technology, infrastructure, and fast and efficient judicial systems to quickly subdue and discourage tax abuse.
Any exemptions must be the outcome of thoughtful processes
Furthermore, exemptions should be made available in ways which align with the goals of increasing the tax revenue bases and with the purpose of attracting more tax-payers to become fully compliant. If exemptions are not well considered and weakly designed, then they would have the opposite and undesired effect of flushing out revenues from those tax-payers who otherwise should have been paying much higher taxes.
Typically, the key desired outcome of exemptions is to incentivize higher investments and inflow of funds into the economy, but poorly designed tax holidays and incentives will not only fail but they would increase the capacity for abuse by ill-intentioned members of the business community. The mere existence of discretionary granting of exemptions would also open up the gates for corruption by those in charge deciding such matters.
Therefore, it is advised that policy-makers tighten up the scope of exemptions, tax holidays, and unnecessary incentives. Such exemptions may only be very cautiously utilized for the most critical sectors of the nation which are of the highest importance and not be simply available to those who meet certain easily provable conditions.
Reaching the right target market is key
Reforms should not only focus on the tax policy and regulatory areas, but must also be directed towards administrative, management, and governance concerns. If those people/personnel who are entrusted with the crucial job of revenue collections are also not reformed themselves, then no amount of policy and regulatory change will bring about any favourable outcome.
The entire mentality and toxic culture within the revenue collection system must also be rooted out and changed. Experiences from those economies which had successful tax reforms show that they considered such changes in the revenue administration reforms to be critical, and changes to legal, technical, and administrative methods and processes were a prominent aspect of their overall reform strategy.
Investment in automation can only bring in long-term results
The currently embedded culture of corruption in the revenue collection administration must be phased out, including those revenue officers who are directly responsible for promoting such a contaminated environment. Placing more leverage and reliance on automation and information management systems can highly aid in fighting corruption by limiting the possibility of human interference in the revenue collection process.
For example, e-filing combined with automated acceptance, assessment, payment due management, and clearance systems may be of great benefit in this regard by actively removing the scope for corruption by individual officials who have dishonest motivations. Such use of technological methods would be of huge benefit to not only income tax collection, but also to customs, duties, and VAT. Reforms will also require effective social guidance and educational campaigns as well as promotions aimed at increasing the trust in the minds of the public, such that they may be encouraged to come forward and become compliant without the fear of being harassed by corrupt officials with unethical objectives.
Audits and assessments should never be used as a weapon with the intention of harassment and possible crooked motivations. Tax-payers should not be made to fear an audit or view it as a way by which auditors may try to intentionally put tax-payers into a vulnerable position whereby the only way for them to overcome it would be to somehow come to an arbitrary agreement with the auditor.
Instead, audits should be utilized as a way of increasing tax-payer compliance as opposed to discouraging them from reporting their actual and honest earnings. A well-targeted and risk-based audit program may improve internal controls, encourage compliance, and truly fight against deceitful practices.
Tax-payers must be treated as valued clients
Everything the government does is supposed to be with the goal of serving its citizens -- revenue collections and audits should not be managed as any different. A nation’s citizens should be viewed as valued customers by the tax revenue collection authorities instead of possible targets or victims to be identified and then charged for more money. Hence, a customer service approach towards tax collection may also provide relief as well as reduce fears in the minds of the current and future potential tax-payers.
Institutions such as banks routinely assign competent and dedicated customer relations managers to large clients. This results in enhancing the bond between the bank and the client by adding a personalized touch and providing a go-to person who is always there to help the client. Tax revenue collection authorities may also view large and important tax-payers as valued customers and may also assign highly competent and capable revenue officials who could be dedicated to these large clients and the goal would be to build a relationship of trust and wellbeing rather than approaching tax collection as a burdensome process which may force tax-payers to escape rather than be compliant.
We must find out new areas of wealth creation
If rapidly developing and growing nations like Bangladesh cannot strengthen its tax administrations, then they will miss out on the possibility of having fiscal stability in the long run. Therefore, such large revenue losses simply cannot be allowed, especially when the source of such funds to fuel a fast growing economy is so scarce.
The government simply cannot afford to miss out on even a relatively small amount of tax revenue funds which may have been collected but wasn’t due to the lack of proper reforms in such a vital component of the public administration machine.
The National Board of Revenue, Bangladesh Bank, and National Identity (NID) card cell at the Election Commission must get their acts integrated to identify new wealth creation domains and bring those under the tax net. Technology can play a significant role here.
One should not be at all surprised to see a technology-enabled environment significantly reducing the tax evasion practice in Bangladesh. This will also ensure our direct tax collection to go up significantly and help Bangladesh reduce its serious dependency on indirect tax, and thereby better compete with other emerging countries with regard to the ease of doing business and attracting more investments.
Mamun Rashid is a partner at PwC, Bangladesh. Views expressed in this article have been extracted from a National Income Tax Day panel discussion organized by National Board of Revenue.
