Investment in land property yields the highest returns to the owner in Bangladesh. From 1972 to 2010, inflation-adjusted average return of the sector was between 95% and 120%, as shown in an article titled “The Imperative for Property Taxation in Bangladesh” by Sadiq Ahmed. Where the return on bank fixed deposit was between 9% and 11%, commerce industry 15% - 23%, and share (stock) of listed companies was 38% (2006-11 average).
Bangladesh is a densely populated country with around 1,150 persons per square kilometre. The country has been experiencing a steady economic growth since its independence, which crossed the 6% mark 10 years ago.
Two major contributors of this economic growth are remittance from expatriate citizens, which is going to cross $15bn a year in the near future, and export earnings, which is nearing $30bn a year. Because of prevailing widespread corruption and tax evasion, largely by the wealthy, social wealth is being accumulated by a few unscrupulous professionals, bureaucrats, businessmen, people associated with politics, and the families receiving foreign remittances.
In absence of a reliable capital market and a lack of opportunities for investing in productive sectors, a large portion of accumulated wealth in the hands of few wealthy people is being siphoned off to the markets of developed countries.
Informatively, wealth transfer from developing countries to developed countries was about $6tn between 2001 and 2010. The remaining portions of the corruption-generated and foreign remittance monies are mostly being invested in land and buildings. Excessive investment in land and buildings cause high property price in both urban and rural areas.
High property price creates many social problems: Higher costs to businesses, corruption relating to frequent ownership transfers, land grabbing, extortion, rapes, and even killing.
Land owners with little to no social influence are the main victims, while land owners belonging to minority religious groups are the worst. In many cases, they were evicted from family-inherited properties.
Excessive returns from property investment discourages investment in productive sectors.
Efficient capital and financial markets, backed by a structured investment climate, could have absorbed this accumulated wealth. Investment in productive sectors is still a big job to accomplish to a new entrepreneur, as adequate policy and infrastructure supports from the state are either not available or are tangled in exhausting bureaucratic processes. Rampant corruption is another hindrance to investments in productive sectors.
Property tax could be one of the solutions to the real estate bubble and another answer to the growing inequality. According to World Bank data, Gini Coefficient (a widely used measure of income inequality) had risen from 0.26 in 1984 to 0.33 in 2005.
It had reduced slightly to 0.32 during 2005-10 periods. On the other hand, income of the top 20% of population has increased by 5.57%, while the income for 80% has decreased by the same amount during 1984 to 2010. Meaning, 20% wealthy and powerful people have taken away the income of the middle and lower class people, making them poorer. This social injustice happened because of inefficient national policies and their implementation. Inequality has a price. It hinders poverty reduction, thwarts economic growth, and indulges the economy into poverty spiral.
In many developed and developing countries (eg Australia, Canada, Denmark, Greece, Hong Kong, India, USA) property tax is being levied on the basis of the assessed value of the property.
It is directly charged to the owner. Countries like Bangladesh, where property prices are ever increasing at lightning speeds, property tax can control the speed as it increases the cost of acquisition and maintenance of the property. In this way it also reduces the cost of doing business.
As a result, investors would become interested in investing in other productive sectors as per their own convenience. Imposition of property tax will widen the tax net as untouched areas will be brought under the tax net in a country where tax-GDP ratio is around 10% in comparison to 40% in the United States.
Properties are tangible. Thus, it would be very difficult to evade the tax levied on it in a society where tax avoidance is largely unnoticed.
Property tax is not new to Bangladesh. In the 1980s the system was scrapped because administrative and operational costs to collecting the tax, surpassed revenue generation. The situation has changed a lot since then. With the advancement of information technology, more economic and business information is available to tax authorities.
A meticulously designed tax collection system can bring the benefits of property taxation.
Discussion on the possible imposition of property tax was initiated by the government in 2011. Prominent economists instantly welcomed the move while business communities created obstacles, saying that this tax will give impetus to the growth of an underground economy. Managing underground economy is a separate challenge being tackled by the government.
A taxation system alone cannot fight an underground economy. Instead of levying property tax the government through the Finance Act, 2011 introduces a surcharge on income tax for those who have declared property to be valued more than Tk2cr.
The surcharge discourages honest tax payers, who have built or acquired properties with her/his hard-earned, tax-paid money. Interestingly, the surcharge has been levied on income tax, not on property value. It cannot consider the value of the property, rather it considers only the income of the individual. Surcharge is not property tax and hence it cannot achieve the purposes of property tax
VAT is payable by the consumer when purchasing VAT-able goods or services. Generally, VAT-able goods and services are not vital for living. For example rice, potato, fish, meat are not VAT-able , while sweet, cosmetics, stationery are VAT-able . Living in an ordinary flat or building can be exempted from the tax net, but living in a posh flat or building on a high-value land cannot remain outside of it, as one of the main purposes of taxation is to ensure social justice through the redistribution of social resources. Property tax ensures social justice by collecting money from wealthy people, to be used for common social purposes.
Property tax is justified in the current discriminatory economic system where the gap between rich and poor is a challenge to address.
