Tax Structure and Policy Suggestions: Bangladesh Case

Monday, November 21, 2011

Tax Structure & Policy Suggestions: Bangladesh Case

1 Introduction

The main tax grossing or revenue collecting institution is generally known as National Board of Revenue (NBR). And as the central authority of tax policy and administration in Bangladesh, it plays a critical part in the development of the country. During the current fiscal year (FY 2010-11), NBR is expected to collect Taka 75,600 crore, providing much needed support to the government’s development efforts. In recent years, Bangladesh’s tax collection has recorded an impressive growth averaging 20% per annum. Despite this good achievement, a lot remains to be done. Bangladesh’s tax-GDP ratio at 9.3% remains quite low when compared with other similarly placed countries in South Asia. Less than 1% of the population pays income tax and tax evasion is persistent even though a significant amount of tax revenue is given up in the form of tax incentives. Together, curbing tax evasion and dealing with tax incentives could add 5 percentage points to the tax-GDP ratio, potentially adding about 40,000 crore to the revenue collection. Most of NBR s processes are manual and there is little in the nature of taxpayer service and taxpayer education. The NBR also faces problems in its functioning due to its current administrative structure. Despite being under the same board, the different wings of the NBR (Income Tax, Value Added Tax (VAT) and Customs) operate almost independently providing little support to each other in combating tax evasion and providing a unified front to taxpayers. Moreover, the NBR faces the problems of acute shortage of trained manpower as well as physical infrastructure. These weaknesses of the NBR have not gone well with the business community and individual taxpayers. And on other hand, the tax system of Bangladesh includes several tax revenue measures under the two broad headings of direct taxes and indirect taxes. The major policy objectives behind the tax expenditure measures in Bangladesh are to accelerate the process of industrialization, to attract foreign currency through increasing export and foreign direct investment (FDI) and to ensure social security and welfare of low-income groups. Tax expenditure measures exist in sectors such as public services, agriculture, labor and employment affairs, transport and communication, social security and welfare etc.

2 Descriptions

In Bangladesh we have taxes divided on two broad aspects which are as following, I. Direct Tax II. Indirect Tax Before going to the discussion of tax structure of Bangladesh it is necessary to know about the taxes which follow these above written types mostly. 2.1 Direct Ta In the general sense, a direct tax is paid directly at one shot to the government by the persons (juristic or natural) on whom it is imposed. • Income taxes • Corporate taxes • Transfer taxes • Wealth taxes • Narcotics duties • Land revenue • Stamp duty-non-judicial • Registration 2. 11 Income Ta Among direct taxes, income tax is one of the main sources of revenue. In Bangladesh Income tax is imposed on the basis of ability to pay. The more a taxpayer earns the more he should pay - is the basic principle of charging income tax. It aims at ensuring equity and social justice. All individuals and companies in the country need to pay income tax if their annual income excess certain limit determined by the Government. There are some conditions for paying Income Tax which are controlled by Tax Laws and Amendments in Bangladesh. EXISTING TAX RATE(in taka) 2010-11 Income slabs(in taka) Up to 165000 165001 – 440000 440001 – 765000 765001 – 1140000 Above 1140000 Tax rate 0% 10% 15% 20% 25% PROPOSED TAX RATE(in taka) 2011-12 Income slabs (in taka) Up to 180000 180001 – 480000 480001 – 880000 880001 – 1180000 Above 1180000 Tax rate 0% 10% 15% 20% 25%

In fiscal year 2011-2012 tax free income level has been set to 180000 taka. Moreover this senior citizen (age above 65 years) and women enjoy additional 20000 taka as tax free income. And the people those who are physically disable will enjoy up to 250000 taka as tax free income level. 2.12 Income Ta at a Glance

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Among direct taxes, income tax is one of the main sources of revenue. It is a progressive tax system. Income tax is imposed on the basis of ability to pay. The more a taxpayer earns the more he should pay''- is the basic principle of charging income tax. It aims at ensuring equity and social justice. And Income Tax Authorities are as follows,
Ø National

Board of Revenue, of Inspection (Tax), of Taxes (Appeals), of Taxes, Large Taxpayers' Unit (LTU),

Ø Director-General Ø Commissioner Ø Commissioner Ø Director Ø Director

General (Training), General, Central Intelligence Cell (CIC), of Taxes, Commissioner of Taxes (Appeal/Inspecting),

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Ø Commissioner Ø Additional Ø Joint

Commissioner of Taxes(Appeal/Inspecting ), Commissioner of Taxes, Commissioner of Taxes, of Taxes.

Ø Deputy Ø Tax

Recovery Officers, Assistant Commissioner of Taxes,

Ø Assistant Ø Extra

Ø Inspectors

2.21 Corporate Ta There is no significant change in corporate tax rates. But considering the public health the tax rate for the companies, producing cigarettes, raised from 37.5% to 42.5 %. Along with this, these companies have to pay .5% tax on their total receives as the mandatory tax rates. Tax holiday facility is allowed to newly setup industrial undertakings, tourist industry and physical infrastructure facilities subject to certain specified conditions in order to promote industrialization, encourage tourism and for employment generation. Exemptions and deductions are applicable to incomes from firms in Export Processing Zone (EPZ), 50% of income for export earnings, power generation companies, computer software business, agriculture related industry, micro credit for Non-government organizations (NGOs), Local government, welfare activities, etc. Company Publicly Traded Companies (other than Banks, Insurance & Financial Institutions) Normal Tax Rate (paying Dividend 10% or more) Additional Tax if the declared dividend/bonus share is not declared or distributed at least 15% within 6 months of the following income year Tax rate 27.50% 37.50% 10.00%

Companies declaring dividendtax inthan 10% Rebate @ 10% on applicable less case where dividend is more than 20% Excess Profit Tax (additional)-for banks only Companies Not Publicly Traded

40.00% 10.00%

Banks, Insurances and Financial Institutions: 45.00% 20.00% 40.00%

2.3 Indirect Ta The term indirect tax has more than one meaning. An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax. • Value added taxes (VAT) • Customs duties • Excise duties • Supplementary duty • Taxes of vehicle • Electricity duty • Travel tax • Turn over tax etc. 2.31 Value Added Ta es (VAT): To facilitate some industries and services VAT has been exempted in some selected areas. Goods exempted from VAT include food and agricultural products, animal products poultry sector, agriculture imputes, cloths made of cotton and synthetics, malaria. TB/ cancer preventive medicine, homoeopathic medicine, family planning items, books and periodicals, etc. Services exempted from VAT include fundamental services for livelihood, social welfare services, services relating to culture, services relating to money and finance, transport services, personal services and other services other than the above. The general rate of Value Added Tax (VAT) in Bangladesh is 15%. Value Added Tax (VAT) is imposed on goods and services at import stage, manufacturing, wholesale and retails levels; A uniform VAT rate of 15% is applicable for both goods and services; 15% Value Added Tax (VAT) is applicable for all business or industrial units with an annual turnover of Taka 2 million and above; Turnover tax at the rate of 4% is livable where annual turnover is less than BDT 2 million; Value Added Tax is applicable to all domestic products and services with some exemptions; Value Added Tax (VAT) is payable at the time of supply of goods and services; Tax paid on inputs is creditable / adjustable against output tax; Export is VAT exempt; - Cottage industries (defined as a unit with an annual turnover of

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i. ii. iii. iv. v. vi. vii. viii. ix.

less than BDT 2 million and with a capital machinery valued up to BDT 300,000) are exempt from Value Added Tax;
x. Tax returns are to be submitted on monthly or quarterly or half yearly basis as notified by the Government.

2.32 Customs and Supplementar Dut Exemptions from customs duty are granted to capital machinery, raw materials of medicine, poultry medicine, feed & machinery, defense stores, chemicals of leather and leather goods, private power generation unit, textile raw materials and machinery, solar power equipment, relief goods, goods for blind and physically retarded people and import by embassy and UN. Concessionary rates are applicable to agro-processing, textile and leather industry, educational institutions, hospitals, privileged persons, etc. 15% supplementary duty is applicable to sugar and kerosene. Tariff rate on any mobile is Tk. 1,500. 7.5% import duty is applicable to chemical color for textile industries. Incentives are also given to these sectors, which are complying with the international and bilateral agreements and conventions.

In case of Bangladesh as it is export led country, so the tax on exported goods is zero and tax on imported goods in general is high. Till to the November of FY 2010- 2011, the total collected import tax had amounted to 10,326.59 Taka which was 17.41% higher than that of previous FY 2009- 2010.

3 Future Path of NBR
The National Board of revenue basing on these above written kinds of tax collection tools has already set up some goals regarding incurring the problems of paying taxes by tax payers in order to accelerate the overall revenue collection process, which are as followsReach a tax-GDP ratio of 13% by 2016; Provide exemplary customer service to all taxpayers through a web enabled tax administration from e-registration, e-filing of tax returns to e-payments/refunds by 2016; and Reduce the tax pendency in the courts by 80% by 2016. With these above customer care related goals NBR has also aimed at some major goals which are written as below, The goals of the Modernization Plan are: A sound tax policy in line with the international best practice while

I. II.

III.

I.

also being consistent with the local conditions in Bangladesh as well as the higher economic and fiscal policy goals and imperatives of the GOB. II. ii. Significant growth in revenue performance through widening and deepening of the existing tax base across all the three taxes. III. Enriched and enhanced taxpayer experience through an array of easily accessible taxpayer services available at multiple remote/ customer facing touch points. IV. Reducing compliance cost for the taxpayer by reducing unnecessary paper works and contacts between tax administration and taxpayers

thereby establishing a regime that makes the relationship between the tax departments and the honest and diligent taxpayer incident free. Shifting tax compliance management from the traditional subjective audit selection approach to a computer assisted intelligent selection approach based on efficient data mining and revenue risk management tools. VI. Setting up an efficient, integrated national tax accounting network that will correctly account for, reconcile and record tax payment information at a transactional level for all the three taxes and make visible this information in real time basis to taxpayers and to all stakeholders including GOB, NBR, tax officers, Bangladesh Bank and taxpayers. VII. Reassignment of tax personnel from non priority routine work to priority compliance and tax collection work through separation and consolidation of non-priority non-taxpayer facing high volume low knowledge, tasks like return receipt and processing, tax accounts, taxpayer registration with TIN/BIN, record keeping etc. in a remote centralized mass processing center. VIII. Creating an administrative and legal framework that ensures the collection of sovereign taxes in a fair / accurate manner while also supporting the competitiveness of Bangladeshi businesses in a transnational global economy. IX. Strengthening of tax evasion detecting unit like Central Intelligence Cell (CIC) and other intelligence units. X. Increased cooperation and coordination with other government and non-government agencies. XI. Human resource development through effective training. V.

4 Ta

Rebate for investment

Types of investment qualified for the tax rebate are: i. Life insurance premium, ii. Contribution to deferred annuity, iii. Contribution to Provident Fund to which Provident Fund Act, 1925 applies, iv. Self contribution and employer's contribution to Recognized Provident Fund, v. Contribution to Super Annuation Fund, vi. Investment in approved debenture or debenture stock, Stocks or Shares, vii. Contribution to deposit pension scheme approved by the government, viii. Contribution to Benevolent Fund and Group Insurance

premium, ix. Contribution to Zakat Fund, x. Donation to charitable hospital approved by National Board of Revenue, xi. Donation to philanthropic or educational institution approved by the Government, xii. Donation to socio-economic or cultural development institution established in Bangladesh by Aga Khan Development Network, xiii. Donation to ICDDR, B, Dhaka Community Hospital, xiv. Donation to philanthropic institution- CRP, Savar, Dhaka, xv. Donation up to five lac to (1) Shishu Swasthya Foundation Hospital Mirpur, Shishu Hospital, Jessore and Hospital for Sick Children, Satkhira run by Shishu Swasthya Foundation, Dhaka, (2) Diganta Memorial Cancer Hospital, Dhaka, (3) The ENT and HeadNeck Cancer Foundation of Bangladesh, Dhaka; and (4) Jatiya Protibandhi Unnayan Foundation, Mirpur, Dhaka; xvi. Asiatic Society of Bangladesh; xvii. Muktijudha Jadughar;

5 Scenarios of Ta Bangladesh

E emptions and Ta

Holida s in

In the interest of industrialization and investment, tax holiday has been continuing in the tax regime of Bangladesh since her liberation in 1971. There are forceful arguments for and against continuing this facility. At present more than 2000 industries are enjoying tax holiday. The existing tax law permits, extension unit of an industry to be entitled to tax holiday. Such facilities of granting tax holiday have been found ineffective. A mechanism of internal transfer pricing could be arisen as a vehicle for perpetual tax holiday. As observed, the present income tax act is full of rebates and exemptions (Hussain, 1999). It is now needed to minimize and to come straight to a threshold of income, which is taxable. The present scheme of granting tax holiday has not been a very good experience. In FY 1999-2000, total number of tax holiday cases were 1531 and the estimated loss of revenue was about 250 crore taka (1 crore is 10 million) that was estimated as about 9.6 percent of total income-tax earnings of that year. The benefits of the tax holiday are being enjoyed mainly by the garment industries. Their growth has enhanced due to external factors. Even if the 10 incentive of tax holiday were not given, the garment industry would have grown up and the state would have earned quite a substantial amount of revenue from the industry. Thus the revenue foregone does not appear to be fiscally efficient (Waresi, 1998). However this has not been able to foster industrial growth in different regions of the country. Such a perpetuating provision for tax holiday creates distortion in taxation mechanism and against the

norms of equity and neutrality. It is thus important to restrict such unbound opportunities for the sake of better future of the country. Under the present arrangement any income accruing from poultry, fishery, livestock etc. is exempted from income taxes until June 30, 2005. This provision is being abused indiscriminately. A lot of black money is being laundered into the market through this mechanism. One potential remedy should be to allow an initial support to this sector then bringing back them under the purview of taxation.

6 Ta

Liabilit

in Bangladesh

Tax deducted at source for the following cases is treated as final discharge of tax liabilities. No additional tax is charged or refund is allowed in the following cases: i. Supply or contract work ii. Band rolls of handmade cigarettes iii. Import of goods iv. Transfer of properties v. Export of manpower vi. Real Estate Business vii. Export value of garments viii. Local shipping business ix. Royalty, technical know-how fee x. Insurance agent commission. xi. Auction purchase xii. Payment on account of survey by surveyor of a general insurance company xiii. Clearing & forwarding agency commission. xiv.Transaction by a member of a Stock Exchange. xv. Courier business xvi. Export cash subsidy

7 Polic Suggestions
Some new policies should be taken for meeting the recent changing socio economic condition of Bangladesh which are as below, 1. One of the most burning questions of Bangladesh now a day is to meet up the highly increasing demand of electricity. For having such solution present government is looking for setting up nuclear or coal based electricity production unit. In first case, government can impose a one shot fixed but small amount of per head tax to all earners of the country. Such that if 100 Taka per head of this kind of tax is imposed at once on 5 crore people then at once government can collect 500 crore Taka just at a time which will enable it not to sink in

debt further. And this one can be termed as ‘Nuclear Electricity Production Tax’. On the other hand, equal ‘Coal Tax’ can be introduced to the earners which will be imposed to them on monthly basis say 100 Taka per head i.e., there are 5 crore capable persons who can pay it monthly, then the monthly collection of ‘Coal Tax’ will amount to 500 crore Taka. Which means, in total 6,000 crore Taka can be collected throughout the year and can be used to buy coal from international market easily leaving internal coal reserve in rest as opened coal mining process hampers environment hugely which actually will cause more to lose than to gain and on other side closed coal mining process does not give the right & desired output of coal production. Collection process of these ‘Nuclear Electricity Production Tax’ & ‘Coal Tax’ should must be made via online. Cause, if it is not done through the online process then collection cost will amount to high which means actual revenue may decrease. Value added tax on Tobacco related products & Cigarettes should be much higher than that of now. If the subsidy on overall oil is not withdrawn in general, then a kind of new tax namely ‘Private Vehicle Holding Tax’ should be introduced to the private vehicle holders. It should be levied on per unit of all kind of petroleum products bought by private vehicle holders as to reduce the overall subsidy on petroleum products to zero Taka. ‘Pigou Tax’ should be imposed to the industries which are highly

2.

3. 4.

5.

polluting the environment. 6. ‘Transit Tax’, ‘Transshipment Tax’ & ‘Corridor Tax’ should be imposed on respective cases as natural environment, transport infrastructure & agro land of the country will go under an adverse situation. These kinds of taxes may help to cover that accumulated adverse situation.

8 Conclusions
This paper analyses the concept of overall taxation system of Bangladesh. Major portion of the tax revenues comes from indirect taxes, particularly VAT at domestic stage. For a developing country like Bangladesh, domestic resource mobilization in the face of targeted socio economic objectives is important in formulating an effective tax policy. It is also required to create an efficient tax system, which includes appropriate tax revenue measures that serve social objectives as well as being economically feasible. Therefore, a critical review of the existing tax revenue measures in Bangladesh is necessary in order to oversee a balance between these two goals, Our analysis has identified some avenues for possible expansion of tax base through restructuring the exhibiting tax revenue measures, especially in the categories of income tax and VAT. Along with restructuring the measures, the tax administration requires a comprehensive organizational re-invention that is capable of meeting the revenue needs of Bangladesh. It is also important to set a

definition and to develop a methodology for measuring the tax revenues in the context of Bangladesh.

© Enamul Hafiz Latifee
Department of Economics,
Shahjalal University of Science & Technology, Sylhet.

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