Tax System in Bangladesh: Efficiency and Fairness
By Mohammad Shahid Ullah, kn.shahid@gmail.com; +8801-731802395
1. TAX SYSTEM IN BANGLADESH
Bangladesh, as an emerging developing country, is committed to augmenting revenue and achieving fiscal discipline with a view to increasing self-reliance. The external environment influencing the tax performance of Bangladesh has changed remarkably as the country became increasingly integrated with the global economy during the 1990s (McCarten, 2005). In recent years, the Government of Bangladesh has initiated some administrative and policy reforms in the tax system. An improved tax administration in association with some pragmatic policy initiatives has resulted in a modest improvement in the tax-GDP ratio of late. However, the performance is still unsatisfactory as compared to other countries at a similar stage of economic development.
The narrow tax base, widespread exemptions, and administrative inefficiencies are the main factors behind low tax-to-GDP ratio in Bangladesh compared to the neighboring/comparator countries. This also implies that tax reforms over the last decades could not bring about significant changes in Bangladesh’s tax efficiency and productivity.
A modest uptick in revenue is apparent in recent years, NBR continues to be characterised by a weak policy framework, very limited administrative modernisation, a high degree of administrative fragmentation, significant human resource constraints and weak enforcement mechanisms. The most basic challenge has been the overall weakness of the policy framework, which is characterised by an enormous range of exemptions, incentives and special regimes. These range from the existence of simplified regimes associated with VAT, to significant scope within the law for tax officials and political elites to grant comparatively discretionary benefits. This directly undermines revenue collection, but equally complicates administration, undermines equity in the system and introduces significant scope for officials to exercise discretion in both policy and administration.
In Bangladesh tax revenue is the principal source of Government revenue. The rest of the revenue comes from non-tax sources like fees, charges, tolls etc. In the Financial Year (FY) 2014-15, total revenue was TK.182954 crore, of the total the share of tax revenue was TK.155292 crore (84.88%) and non-tax revenue was TK. 27662 (15.12%).
1.2 Share of tax revenue
The share of tax revenue is more than four-fifth of total revenue. In Bangladesh out of total revenue, tax revenue consisted of 80.63 to 84.88 percent between FY 2005-06 and FY 2014-15 and the remaining came from non-tax sources. It has been observed that from FY 2011-12 to FY 2014-15, the share of tax revenue increased 80.96 to 84.88 and non-tax revenue decreased accordingly. The share of non-tax revenue was above 19% between FY 2005-06 and to FY 2011- 12, which decreased as 15.12% in FY 2014-15 (Figure 1.1).
Figure 1.1: Share of tax and non-tax revenue in total revenue, FY2006 – 2015
Source: Bangladesh Economic Review 2014-15
1.2 Tax administration in Bangladesh
National Board of Revenue (NBR) is the central authority for tax administration in Bangladesh. Formulation of tax policy and its execution responsibilities are performed by the NBR under the Internal Resource Division of government of Bangladesh.
In FY 2012-13, NBR collected 81.07% of total revenue. Of the total tax revenue, NBR collected 96.36%.[1] NBR taxes mainly come from income and profit, value added tax (VAT), import duty, export duty, excise duty, supplementary duty and other taxes and duties. In contrast, non-NBR taxes consist of narcotics duty, motor vehicles tax, land tax and stamp (non-judicial).
Non-tax revenue is collected from dividend and profit, interest, administrative fees, penalty and forfeiture, services, rent and leasing, tolls and levies, non-commercial sale, defense, non-tax receipts, railway, post office department, T&T Board, and capital receipts.
1.3 Tax Structure in Bangladesh
Table 1.1 and the Figure 1.2 clearly show that VAT is the major portion (36.98%) of tax in Bangladesh followed by income tax (35.61%). In terms of external and domestic sources, the domestic sources dominate in tax structure of Bangladesh (Figure 1.3).
Table -1.1: Tax Structure in Bangladesh, FY 2013-14
| Import Duty |
VAT
at Import Level |
SD
Import
level |
Export
Duty |
Sub
total |
Excise
Duty |
VAT
Local |
SD
Local |
Turn Over
Tax
Local |
Sub
Total |
Total
Indirect
Tax |
Income
Tax |
Other
Taxes
Duties |
Total
Direct
Tax
|
Grand
Total |
| 1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
14 |
15 |
| 1354.82 |
15318.9 |
4344.43 |
26.46 |
33230.61 |
822.39 |
29252.11 |
13647.19 |
4.72 |
43726.41 |
76957.02 |
42915.5 |
640.31 |
43555.81 |
120512.83 |
| 11.24% |
12.71% |
3.60% |
0.02% |
27.57% |
0.68% |
24.27% |
11.32% |
0.004% |
36.28% |
63.86% |
35.61% |
0.53% |
36.14% |
100.0% |
Source: Bangladesh Economic Review 2014-15
Figure1. 2: Composition of tax in FY 2013-14
Source: Bangladesh Economic Review 2014-15
Figure 1.3: Composition of taxes in terms of external (export & import) and local sources, FY 2013-14
Source: Bangladesh Economic Review 2014-15
1.4 Low performance of tax system- tax to GDP ratio is low
The tax system of Bangladesh is characterized by low tax as a percentage of GDP. Though tax to GDP ratio has increased from 7.5% to 10.26% from FY 2006 to FY, in terms of revenue generation, the performance however has been rather disappointing with the tax/GDP ratio still standing just over 10% mark, one of the lowest in the world.
Table 1.2: Tax-to GDP Ratio, FY 2006 to 2015
| FY |
2005-06 |
2006-07 |
2007-08 |
2008-2009 |
2009-2010 |
2010-11 |
2011-12 |
2012-13 |
2013-14 |
2014-15 |
| Tax-to GDP Ratio |
7.50 |
7.14 |
7.64 |
7.88 |
8.02 |
8.63 |
9.12 |
9.74 |
9.69 |
10.26 |
Source: NBR Annual Report 2013 and Bangladesh Economic Review 2014-15
The tax resource collection in Bangladesh has been well below the level of most countries at a similar stage of economic and social development indicates the relative weakness of the tax system in Bangladesh relative to other countries in the region. This below-par resource mobilization impeded economic growth and social development. Until recently, the collection of tax revenue in Bangladesh has been low averaging at about 10.2 percent of GDP until FY14 (Table 1.2).
Table 3: Tax Effort in South Asian Countries, Average 2010-2014 (As % of GDP)
| Country |
Average Tax Revenue as % of GDP |
| Bangladesh |
10.2 |
| India |
16.6 |
| Nepal |
14.4 |
| Pakistan |
10.6 |
| Sri-Lanka |
12.4 |
Source: Ministry of Finance of- Pakistan, Nepal, India. Central Bank of Sri Lanka, NBR Bangladesh, IMF World Economic Outlook
The narrow tax base, widespread exemptions, and administrative inefficiencies are the main factors behind low tax-to-GDP ratio in Bangladesh compared to the neighboring/comparator countries.[2]
1.5 Major Policy Reforms and Its impact
There is no major policy discussion about the tax law in Bangladesh. The income tax legislation still dates to the Income Tax Ordinance 1984, promulgated under military rule. According to the Ordinance, there are seven heads of income on which tax is levied, including salaries, interest on securities, income from house property, agricultural income, income from business or profession, capital gains and income from other sources (Income Tax Manual Part-1, 2009).[3]
Historically, a number of efforts were made to strengthen tax revenue mobilization and improve the tax structure. In 1991 Bangladesh embarked on a major tax reform through the introduction of the VAT system. Simultaneously, significant reduction of import tariffs happened. Prior to these reforms, trade-based taxes dominated the tax structure in Bangladesh with customs duty alone accounting for about a third of tax revenue during the first two decades. [4]
Following the introduction of VAT in 1991, the share of VAT revenue increased substantially growing to 29% in the decade of 2004-14, while the share of customs duties declined to 10.8%. Though the base of the VAT system has been expanded, due to political expediency, numerous distortions were also introduced over time. Because of these problems, the VAT system underperformed considerably in terms of revenue generation compared with its potential. It is evident that a narrow tax base, widespread exemptions, and administrative inefficiencies are the main factors behind low tax-to-GDP ratio in Bangladesh compared to the neighboring/comparator countries. This also implies that tax reforms over the last decades could not bring about significant changes in Bangladesh’s tax efficiency and productivity.[5]
In recent years much simplification and rationalisation has been brought about in the process of taxation system. Complication in tax calculation has been reduced and above all, an attempt of attracting more taxpayers to the tax net has been made. Automation in tax collection mechanism has set in. Compliance with the standards and systems introduced by WCO has increased. The practice of honouring the taxpayers and recognising their contributions has got institutional shape in NBR. In the case of legislative reforms, new Value Added Tax and Supplementary Duty Act, 2012 has been enacted which will be effective from July 2016. A draft Direct Tax Code has been posted on the website and steps will be taken to get it passed by the Parliament by next year. In principle, there are plans for a comprehensive/maximum reduction in the rate of Import and Supplementary Duty in the budget for 2016-17 financial year which will eventually shift the burden of revenue collection to Individual and Corporate Tax along with Value Added Tax (VAT).[6]
- DISTRIBUTION OF TAX BURDEN AND PROGRESSIVITY
Taxes for which the tax-burden cannot be shifted or passed on are called Direct Taxes. This means that any person who directly pays such taxes to the government bears the burden of that particular tax. Indirect Tax on any good or service affects the rich and the poor alike. Unlike Indirect Taxes, Direct Taxes are linked to the tax-payer’s ability to pay, and hence are considered to be progressive.[7]
Direct Taxes comprise taxes from income tax and other taxes, sources of income tax can be classified on 7 categories, which are as follows:[8]
- Salaries
- Interest on securities
- Income from house property
- Income from agriculture
- Income from business or profession
- Capital gains
- Income from other sources.
Tax structure in Bangladesh-ratio of direct and indirect tax
The tax structure of Bangladesh is perceived to be regressive as it is heavily dependent on indirect tax; it is about 64% in 2014. The gap between direct and indirect tax has been reducing from 2005 as share of direct tax has been increasing (Figure 2.1).
Figure 2.1: Ratio of direct and indirect taxes in Bangladesh
Source: NBR Annual Report 2012-13 and Bangladesh Economic Review 2015
2.1 DIRECT TAX
2.1.1 Individual and company tax rate
From FY 2015-16, or individuals other than female taxpayers, senior taxpayers of 65 years and above, retarded taxpayers and gazetted war-wounded freedom fighter, the individual tax rate shown in the following table 2.1.
Table 2.1: Individual Tax Rate
| Total Income |
Tax rate |
| On first, Tk. 2 lakh 50 thousand of total income |
Nil |
| On next, Tk. 4 lakh of total income |
10% |
| On next, Tk. 5 lakh of total income |
15% |
| On next, Tk. 6 lakh of total income |
20% |
| On next, Tk. 30 lakh of total income |
25% |
| On the balance of total income |
30% |
Source: Abul Maal Abdul Muhith, Minister, Ministry of Finance, Budget Speech 2015-16
The threshold of taxable income for women and senior citizen aging 65 years and above is 3 lakh, for physically challenged person 3lakh 75 thousand, for war-wounded gazette freedom fighters 4 lakh 25 thousand. The minimum tax is 4 thousand taka. The company tax rate for FY 2015-16 is mentioned below (table 2.2).
Table 2.2: Company tax rate
| Category |
Tax rate |
| Publicly Traded Company |
25% |
| Non-Publicly Traded Company |
35% |
| Publicly Traded-Bank, Insurance and Financial Institution(other than Merchant Bank) |
40% |
| Non-Publicly Traded.-Bank, Insurance and Financial Institution |
42.5% |
| Merchant Bank |
37.5% |
| Cigarette Manufacturer both publicly traded and non-publicly traded company |
45% |
| Mobile Phone: Publicly Traded Company |
40% |
| Mobile Phone: Non- publicly Traded Company |
45% |
| Dividend Income |
20% |
| Minimum Turn Over Tax |
0.30 percent (0.10 percent in first 3 assessment years of commencement of commercial production) |
| Income from poultry industry
|
· On first, Tk. 10 lakh – 3 percent.
· On next Tk. 20 lakh – 10 percent.
· On the balance – 15 percent. |
| Poultry feed, dairy, mulberry, apiculture, horticulture, pisciculture etc. |
· On first, Tk. 10 lakh – 3 percent.
· On next Tk. 20 lakh – 10 percent.
· On the balance – 15 percent. |
| Shrimp/poultry/fish hatchery
|
· On first, Tk. 10 lakh – 3 percent.
· On next Tk. 20 lakh – 10 percent.
· On the balance – 15 percent. |
Source: Abul Maal Abdul Muhith, Minister, Ministry of Finance, Budget Speech 2015-16
2.1.2 Composition of tax payee
In Bangladesh, not only the tax-GDP ratio is low comparing with neighboring countries, less than 1% of the population pays income tax.[9] Only around 1.2 million individual and companies/organizations currently pay Income Tax.[10] According to NBR, in FY 2012-13, the total no. of tax payee was 2150672; of the total, salaried was 441440 (20.53%) and company tax payee was 57656 (2.68%); the others was 1651576 (76.79%) (Table 2.3).
Table 2.3: No. and composition of Tax payee
| Category |
No. of tax payee |
% |
| Salaried |
441440 |
20.53% |
| Company |
57656 |
2.68% |
| Others |
1651576 |
76.79% |
| Total |
2150672 |
100.0% |
Source: Annual report of NBR 2012-13
2.1.3 Components of Income tax
In the income tax structure withholding at source is a major component (54%), the payments through submission of return is only 10% (Figure 2.2).
Figure 2.2: Components of income tax in %, 2013
Source: NBR Annual Report 2012-13
The structure of tax withholding in Bangladesh is very old-fashioned and does not indicate proactive management of tax withholding agents. The withholding at sources is being applied recently, in the absence of a central data base, there is no way for the tax administration to follow up on additional tax payments and also administer the withholding agencies.
However, in FY12 the withholding at source has been extended to twelve new sources, which does indicate that the list is being reviewed and the NBR is looking for potential sources from where additional revenue may be generated. Some of these new items are Royalty of Technical Know-how fee, Rental Power Company, Newspaper, Magazines, Privately-owned TV Channels, etc.
Secondly, In most cases the NBR has relied on captive sources—using public offices (for contracts and supplies), financial institutions (withholding of interest and dividend income) and customs points (advance income tax from importers)–have been relied upon for collection of withholding tax.[11] There is a plan to set up a separate Taxes Zone for monitoring collection of Tax Deduction at Source (TDS).[12]
2.1.4 Corporate and personal income tax
Collection of tax from company is a major source of government revenue from income tax; it was about 55% in 2012. It has been found that there was wide gap between corporate and personal income tax in 2007; which has been reducing from 2008 (Figure 2.3), the share of personal income tax has been increasing and reducing the corporate income tax.
Figure 2.3: Share of personal and corporate income tax in %, 2005-2013
Source: NBR Annual Report 2012-13
2.1.5 Wealth Tax
In Bangladesh, there is lack of systematic wealth taxes; there are provisions of imposing 10% surcharge on net wealth, the threshold is TK. 2 crore and 25 Lakh of the price of net wealth in 2015-16. The rate of surcharge is mentioned in the following table.
Table 2.4: Rate of surcharge on net wealth
| Price of net wealth |
Rate of surcharge |
| Up to 2 crore 25 lakh |
NIL |
| 2 crore 25 lakh to 10 crore |
10% |
| 10 crore to 20 crore |
15% |
| 20 crore to 30 crore |
20% |
| Above 30 crore |
25% |
Source: NBR 2014
The current practice essentially increases the marginal tax rate by additional 10% and amounts to distorting the incentive to work or to increase tax avoidance. In FY 2012-13, only 5662 persons have shown their net wealth above 2 crore in their income tax return, which is very much unrealistic.[13] The wealthy household owners of Dhaka and Chittagong city are avoiding their taxes due to having surcharge system. There are provision of Property Tax in India and mostly all developed countries. In India, Property Tax to GDP ratio of 0.48 percent.[14] Imposing property tax, government of Bangladesh can collect additional 1000-2000 crore tax and it will have progressive effect on distribution of resources.[15]
The existing surcharge system also distorts investor incentives in favor of land holdings and stock market speculation when compared with real economic activities. Without taxation there will be an excess demand for land and real estate that can easily have a spiral effect on prices especially in a densely populated country like Bangladesh.[16]
NBR has a very narrow taxpayer base with only 1.3 million registered TIN holders and not all of them filing tax returns. The taxpayer base would need to expand rapidly with major registration drives. The Direct Tax Law/Codes are also outdated and would require fundamental changes based on the principle of universal taxation. The direct tax administration is also outdated, paper-based, and based on territorial/geographical administrative units. While withholding at sources has no central data base, there is no way for the tax administration to follow up on additional tax payments and also administer the withholding agencies. The combined effect of all these deficiencies is the very low tax efficiency and the very low direct/GDP ratio in Bangladesh.
- Broadening of the taxpayers’ base. This will require monitoring of the ownership of all sizable physical and financial assets of taxpayers and determining the income generation out of those assets.
- Broadening of the tax revenue sources from traditional dependence on taxing financial institutions and a few large non-financial corporations. Tax administration has the tendency to increase tax incidence on existing and complying taxpayers and not work hard on identifying the new taxpayers by gathering information from multiple sources. The so called “Black Money” is circulating in the domestic economy, it is the responsibility of the tax department to find their owners.
- Focusing on income from service providers and self-employed (who are difficult to tax).
- Treating all sources of income equally for the tax purpose without discrimination for the households. This would imply taxation of capital gains from land, real estate/housing, and stock market. Wealth accumulation in Bangladesh is primarily happening through accumulation of urban land and real estate, untaxed/low tax income of the rapidly growing RMG sector, and relatively low tax incidence on income through financial instruments. This must change. These anomalies are serious and must go.
- The simplistic manner of imposing Wealth Tax in the form of an Income Tax surcharge of 10% must be abandoned and the NBR should move to develop a proper “Wealth Tax” or “Property Tax”. The current practice essentially increases the marginal tax rate by additional 10% and amounts to distorting the incentive to work or to increase tax avoidance. NBR has to build up its capacity for proper administration of property/wealth tax with proper study and identifying the right way to collect the tax, not simply by taxing the income tax in the form of a surcharge.
2.2 INDIRECT TAX
2.2.1 Value Added Tax (VAT)
The share of VAT is a highest in tax structure of Bangladesh, about 37% in 2014; the share of VAT has been increased about 35% to 39.44% within 2005 to 2010 (Table 2.5). Despite remaining highest position, VAT failed to maintain momentum and has been declining; it became 36.98% of total tax in 2014 due to increase of share from all direct sources (Figure 2.4).
| Table 2.5: Share of VAT in Total Tax for the Period of 2005-2014 |
| |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
| Total Tax |
29904.46 |
34002.43 |
37219.32 |
47435.66 |
52527.25 |
62042.16 |
79403.11 |
95058.99 |
109151.73 |
120512.83 |
| VAT |
10458.47 |
12358.17 |
13782.3 |
17671.36 |
20146.85 |
24468.05 |
30190.68 |
35777.43 |
41182.42 |
44571.01 |
| VAT % of total tax |
34.97 |
36.34 |
37.03 |
37.25 |
38.36 |
39.44 |
38.02 |
37.64 |
37.73 |
36.98 |
Source: NBR Annual Report 2012-13 and Bangladesh Economic Review 2015
Figure 2.4: Share of VAT in total tax in %, FY2005-14
Source: NBR Annual Report 2012-13 and Bangladesh Economic Review 2015
After replacing the sales tax, VAT introduced in 1991 as Value Added Tax Act, 1991 (Act No. 22 of 1991) from July 1991. Since then VAT remains the single-largest source of revenue for the Bangladesh government.
Under VAT Act 1991, a number of items enjoy exemption. Cottage industries are kept outside the VAT net. In general VAT rate is 15%. Exported items and essential commodities are zero-rated to VAT. Some special sectors within the small industries category enjoy VAT exemptions and differential rates (truncated rates); these are 1.5%, 2%, 2.25%, 4%, 4.5%,, 5%, 5.5%, 6%, 7.5%, 9% and 10%.[17] Over the last two and half decades, the rules under the VAT Act 1991 has revised and amended from time to time through a number of Statutory Regulatory Orders (SROs).
A new Value Added Tax and Supplementary Duty Act, 2012 has been enacted which will be effective from July 2016.[18] The new Act proposes to bring significant changes in the earlier VAT rules and regulations. The new Act will cover three form of taxes – VAT, SD and TT. As previous one, the new VAT was also one of the conditionalities of IMF’s Extended Credit Facility (ECF) program which is currently being carried out. The major changes under the new act are mentioned below.[19]
- The new VAT and SD Act will have a broader coverage. VAT will now be applied to all sectors. Besides imports, production, trading and services, it will cover wider range of services including rendering of services and import of services, immovable property, lease, grant, license, permit, rights, facilities etc.
- However VAT is not applied for certain good and services including supply or import of basic food for end consumption, prescribed supply or import of life-saving medicine, import of goods those are exempted or zero-rated, supply of the transportation of passengers by taxi, bus, mini-bus, or ferry, not being either transportation provided in a vehicle that is air conditioned; or a supply of a chartered tour of a kind ordinarily provided to tourists or other visitors, a supply of the health care and medical services, education and training, child care activities and residential care facilities for aged, indigent, infirm, or disabled persons who need permanent care services relating to social welfare activities, if these services are provided by a government entity or an approved charitable institutions, an import of goods exempted from taxes, by the Government by notification, in favor of an approved charitable institution, or to the state, an import of goods shipped or conveyed to Bangladesh for trans-shipment or conveyance to any other country, an import of goods made available free of charge by a foreign government or an international institution with a view to assisting the economic development of Bangladesh, as approved by the Board etc.
- VAT registration thresholds have been changed, TK. 800,000. However, every person who carries on the economic activities of manufacturing any supplementary dutiable goods in Bangladesh; or provides supply of any supplementary dutiable service in Bangladesh shall be required to be registered.
- Under new act VAT rate is 15%; truncated value base will be discontinued being termed as a ‘distortion under the present VAT system’.
- Besides TT, all the entrepreneurs will be treated equally. The current broad based ‘exemption list’ has also been narrowed down significantly in the new Act.
Currently, Bangladesh VAT system is one of the most inefficient in the world with the lowest VAT productivity. Only 60,000 firms pay VAT regularly out of nearly 700,000 companies; the number of firms that should pay value-added tax should be 3-6 lakh.[20]
NBR is preparing for a change under the modernization program with support from the World Bank, IMF and IFC. If successfully implemented, this reform strategy will pay dividend in terms of much higher revenue. The required increase in VAT revenue (including supplementary duty) in relation to GDP would still not be an easy task. In addition to complete reorganization and retraining of the VAT staff, and replacing most of the field level staff with new Revenue Officers, the transformation will require other major changes: (i) replacing tariff values on hundreds of products by their normal market prices; (ii) reducing the number of products subject to supplementary duty from 1,400 to something less than 200; (iii) eliminating the current practice of price approval on most items; and (iv) eliminating the excise type current account system for VAT payments and moving to proper return-based VAT administration.[21]
A study conducted by Nahida Faridy and Tapan K Sarker (2011 )using Household Income Expenditure Survey 2005 data found that Overall the VAT in Bangladesh is regressive. It also found that the VAT burden in the lowest income range is 6.92%, which is extremely high given the fact that the VAT burden of the highest-income group is only 4.56%. The average effective VAT rate is 6.01%, which is also higher than that of the highest fourth income groups’ people. This means higher-income groups are bearing less of the VAT burden than the lower-income groups. Based on the findings, the study provides the following policy recommendations that could help design a better VAT system in Bangladesh. These are:[22]
- VAT in Bangladesh could be made less regressive by making a distinction between luxury goods and necessity goods. The government could tax more heavily those goods that account for a greater share of expenditure of the better-off members of society.
- Extensive exemptions cause distortion and induce elements of tax evasion in the tax system. However, some exemptions are unavoidable. Hence, VAT exemptions in Bangladesh should be limited only to basic health services, public transport, agriculture and agro-based industries and government education.
- A reasonably high threshold can help reduce the regressivity of VAT. It can also reduce the burden borne by the lower-income groups and ensure the equity of VAT.
2.2.2 Excise duty
Table 2.6 shows that share of excise duty in total tax has been increasing; it was 0.48% in 2005 which increased 0.68% in 2014. It has been found that the share of excise duty consisted less than 0.5% within 2005 to 2009; the upward trend started from 2010 and reached above 0.7% in 2013 (Figure 2.5).
Table 2.6: Share of excise duty in total tax for the period of 2005-14
|
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
| Total Tax |
29904.46 |
34002.43 |
37219.32 |
47435.66 |
52527.25 |
62042.16 |
79403.11 |
95058.99 |
109151.73 |
120512.83 |
| Excise tax |
144.39 |
161.15 |
183.49 |
214.33 |
238.34 |
347.49 |
486.18 |
660.36 |
772.53 |
822.39 |
| % of total tax |
0.48 |
0.47 |
0.49 |
0.45 |
0.45 |
0.56 |
0.61 |
0.69 |
0.71 |
0.68 |
Source: NBR Annual Report 2012-13 and Bangladesh Economic Review 2015
Figure 2.5: Excise duty as % of total tax
Source: NBR Annual Report 2012-13 and Bangladesh Economic Review 2015
2.2.3 Trade Tax
The share of import and export based tax in total tax has been declining; it was 73.98% in 2005 and became 27.57% in 2014 (Table 2.7). The major declined happened from the FY 2009; in 2009 it was 68.84% which reduced to 36.83% (Figure).
Table 2.7: Share of import/export based tax in total tax, FY 2005-14
| |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
| Import duty |
7912.13
(35.75%) |
7825.43
(33.77%) |
8154.76
(30.18%) |
9601.42
(30.48%) |
9371.23
(25.92%) |
8997.12
(39.37%) |
11566.05
(41.35%) |
13268.07
(42.19%) |
13227.55
(40.94%) |
13540.82
(40.75%) |
| VAT at import level |
12358.17
(55.86%) |
13782.3
(59.48%) |
17671.36
(65.39%) |
20146.85
(63.95%) |
24468.05
(67.67%) |
10651.22
(46.61%) |
12375.81
(44.25%) |
13769.64
(43.79%) |
14846.48
(45.95%) |
15318.9
(46.10%) |
| Supplementary duty at import level |
1853.48
(8.38%) |
1563.42
(6.57%) |
1196.63
(4.43%) |
1753.85
(5.57%) |
2318.24
(6.41%) |
3203.13
(14.02%) |
3998.71
(14.30%) |
4368.9
(13.89%) |
4205.01
(13.01%) |
4344.43
(13.07%) |
| Export duty |
0 |
0 |
0 |
0 |
0 |
0 |
28.71
(0.10%) |
38.95
(0.12%) |
33.47
(0.10%) |
26.46
(0.08%) |
| Total import & export based taxes |
22123.78 |
23171.15 |
27022.75 |
31502.12 |
36157.52 |
22851.47 |
27969.28 |
31445.56 |
32312.51 |
33230.61 |
| Total T ax |
29904.46 |
34002.43 |
37219.32 |
47435.66 |
52527.25 |
62042.16 |
79403.11 |
95058.99 |
109151.73 |
120512.83 |
| % of total tax |
73.98 |
68.15 |
72.60 |
66.41 |
68.84 |
36.83 |
35.22 |
33.08 |
29.60 |
27.57 |
Source: NBR Annual Report 2012-13 and Bangladesh Economic Review 2015
Figure 2.6: Trade tax as% of total tax
Source: NBR Annual Report 2012-13 and Bangladesh Economic Review 2015
The contribution of VAT is highest in total trade tax followed by import duty and supplementary duty, 46.1%, 40.75% and 13.07% respectively in 2014. Secondly, It has been found from 2009 the contribution of VAT has been declining rapidly; from 67.67% to 46.61%; it consisted around 46% in 2013 and 2014 (Figure 2.7).
Figure 2.7: Share of different taxes/duties in trade tax
Source: NBR Annual Report 2012-13 and Bangladesh Economic Review 2015
Recent measures in import/export based tax
- Existing import duty rates of 0%, 5%, 12% and 25% have been rationalized to 0%, 5%, 10% and 25%. That means duty rate for the import of intermediate goods has been reduced from 12% to 10%. Keeping the highest duty rate of 25 % unchanged import tariff for the import of capital machinery and ICT related equipment have been reduced from 3% to 2%.
- Supplementary duty rates have been re-organised to10 different slabs. They are 10%. 20%, 30%, 45%, 60%, 100%, 150%, 250%, 350% and 500%. That means a new slab of 10% supplementary duty has been introduced. It is to be
mentioned here that the highest three slabs of supplementary duty structure (ie. 250%, 350% and 500%) are applicable for the import of luxurious and health hazard commodities like tobacco products, alcohol and luxurious cars.
- Existing specific duty at the rate of 1500 and 3000 taka per MT remain unchanged for the import of raw sugar and refined sugar.
- Specific duty of billet/ingot has been increased to Tk. 3500/MT from Tk. 2500/MT, whereas the that of metable scrap at the rate of Tk.1500/MT remains unchanged. On the other hand, the specific duty of gold bullion and silver bullion remain unchanged at Tk.150 and Tk.6 per 11.664gm.
- Regulatory duty at the rate of 5% on finished and luxurious items are decided to be continued for further one year.
- In order to promote the use of renewable energy customs duty on the import of equipment for biogas plant
and solar lamp has been reduced.
- Import duty of more than 50 commodities that include raw materials of glass, ceramic, steel melting, printing, optical fibre has been reduced to lower duty rates.
Source: NBR, 2014
2.2.4 Turnover tax
The contribution of turnover tax in total tax is very few; consisted 6 to 4 crore Taka within the period of FY 2005 to 2014 (Table?). It has been found that the share of turn over tax has been declining over the period, 0.019% to 0.004% (Figure ? ). Turnover tax (TT) gives preferential provision to the small enterprises, which has annual turnover below Tk. 80 lakhs, to pay turnover tax at a lower rate of 3 per cent. Under ‘turnover tax’ provision, an entrepreneur has to keep minimum ledger accounting that could reduce his administrative cost.[23]
| Table 9: Turn over tax (in crore taka) and % of total tax, FY 2005-2014 |
| FY |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
| Total T ax |
29904.46 |
34002.43 |
37219.32 |
47435.66 |
52527.25 |
62042.16 |
79403.11 |
95058.99 |
109151.73 |
120512.83 |
| Turn Over Tax |
5.71 |
5.77 |
6 |
5.12 |
4.91 |
4.67 |
3.63 |
3.45 |
3.68 |
4.72 |
| % of total tax |
0.019 |
0.017 |
0.016 |
0.011 |
0.009 |
0.008 |
0.005 |
0.004 |
0.003 |
0.004 |
Source: NBR Annual Report 2012-13 and Bangladesh Economic Review 2015
Figure 2.8: Turn over tax as % of total tax, FY2005-14
Source: NBR Annual Report 2012-13 and Bangladesh Economic Review 2015
2.3 Gender Analysis of taxation
Gender implications of taxation policy are a critical concern in country like Bangladesh, where number of problems affects the women mostly. Unequal property ownership, wage discrimination, unequal distribution of power within the household- these need to be taken into account in designing taxation policies. These have been considered only in the tax-exemption threshold for individual taxpayers; in the other areas of taxation, there is no different rate for women and men. In the exemption threshold for individual tax payers, there is different rate for women and men. The proposed tax-exemption threshold for individual taxpayers has been declared from Tk. 2 lakh 20 thousand to Tk. 2 lakh 50 thousand; which is Tk. 2 lakh 75 thousand to Tk. 3 lakh respectively.
“Considering prevailing inflation, increased cost of living and to reduce tax burden for marginal taxpayers I propose to raise tax-exemption threshold for individual taxpayers from Tk. 2 lakh 20 thousand to Tk. 2 lakh 50 thousand. To empower women and integrate them more in the economic activities and to reduce tax burden for senior citizens, I would propose to increase tax exemption threshold for women and senior citizens, aging over 65 years from Tk. 2 lakh 75 thousand to Tk. 3 lakh”.
– Budget Speech 2015-16, Abul Maal Abdul Muhith, Minister, Ministry of Finance, Government of the People’s Republic of Bangladesh, 4 June 12015).
Assessment of gender implications of taxation policies is not easy as literature available on gender implications of taxation is limited. It is difficult to get sex-disaggregated data on tax incidence; and the study on this topic is very rare.
2.4 Public Perception
According to NBR survey (April 2013) through questionnaire with 1000 formal and 800 informal firms in a cross-sectional descriptive type study, where respondents were asked to give their opinion on 12 selected aspects of business operations and taxation matters on 5 point agreement – disagreement scale (1 being strongly disagree and 5 being strongly agree). Mean scores obtained against each of these attributes can be seen from the figure below. High scores were achieved for ‘every business should pay taxes irrespective of income or turnover’ (4.0), ‘tax rates for businesses such as yours are too high’ (3.9), ‘tax authorities are unfair’ (3.7) and ‘NBR officials are corrupt’ (3.7). Gender disaggregated data showed similar trend.[24]
- REVENUE SUFFICIENCY AND TAX LEAKAGES
3.1 Low tax effort
Bangladesh is a lowest tax effort country among the developing countries. According to a study[25] conducted by policy analysis unit of Bangladesh Bank found that Bangladesh as the lowest tax effort country in the sample[26], with an average tax effort index[27] of 0.493. This has important policy implications that Bangladesh and other countries having low tax effort (less than unity) are not utilizing their full capacity of tax revenue, and therefore, have the potential for financing budgetary imbalance through raising tax revenue. The tax effort index for both direct and indirect taxes is below 0.6, implying that Bangladesh has the potential for raising revenue collection from both direct and indirect taxes.
Table 3.1: Tax Effort in Bangladesh, 2000-2010
| FY |
Direct Tax Effort Index |
Indirect Tax Effort Index |
| 2000 |
0.614 |
0.468 |
| 2001 |
0.588 |
0.477 |
| 2002 |
0.612 |
0.504 |
| 2003 |
0.609 |
0.520 |
| 2004 |
0.560 |
0.540 |
| 2005 |
0.513 |
0.553 |
| 2008 |
0.573 |
0.589 |
| 2011 |
0.601 |
0.604 |
Source: Tariq Saiful Islam, 2014[28]
In terms of tax buoyancy[29], Bangladesh ranks the second highest among the sample countries, with a tax buoyancy ratio 1.235, meaning that tax revenue is quite responsive to GDP and effort has been made to increase tax revenue over the period.[30]
Bangladesh tax effort is also low comparing with five Asian countries, viz., Indonesia, Philippines, Singapore, South Korea, and Sri Lanka each have an estimated tax effort index above unity implying the full utilization of their revenue potential. Among others, Pakistan, and Thailand have an average index greater than or equal to 0.9. Average tax effort for Bangladesh is 0.657. It may be noted that Bangladesh is ranked the lowest in terms of tax effort among the selected countries. Additionally, the tax effort for VAT is slightly higher than only one other country in the list, and it is higher than only two countries in the list for income tax. The comparator table also indicates that efficiency in collection of VAT is somewhat better than that of income tax. Tax efforts remain higher even among the comparator African countries.
Table 3.1: Tax Efforts in Selected Countries (for the most recent years)
| Country |
Tax Efforts |
Income Tax Efforts |
VAT Efforts |
| Bangladesh |
0.657 |
0.531 |
0.567 |
| India |
0.850 |
1.491 |
0.765 |
| Pakistan |
0.920 |
1.279 |
1.007 |
| Sri Lanka |
0.983 |
0.640 |
1.722 |
| Nepal |
0.668 |
0.522 |
0.729 |
| Korea Republic |
1.004 |
2.953 |
2.953 |
| Philippines |
1.040 |
1.324 |
0.743 |
| Bhutan |
0.690 |
1.066 |
0.687 |
| China |
1.015 |
0.923 |
1.170 |
| Ghana |
1.613 |
0.692 |
1.082 |
| Kenya |
1.309 |
1.886 |
1.394 |
| Malaysia |
0.848 |
1.104 |
0.614 |
| Thailand |
0.891 |
0.495 |
0.992 |
| Vietnam |
1.556 |
1.902 |
1.080 |
Source: Policy Research Institute, 2014
3.3 Potential tax payers are out of tax net
In Bangladesh, the potential tax payers are out of tax net; among them, the businessmen are highest. According to NBR survey 2014, the 79% businessman is out of tax net.[31]
Besides, NBR identified potential 1 lakh 66 thousand 546 house owners and business house in urban areas are not paying taxes, NBR is taking initiative to file cases against these potential payee.[32]
3.4 Tax evasion and avoidance
Tax avoidance is the way to reduce tax through using the loopholes of law, while tax evasion does the same by violating the law. These have been taking place through understatement and concealment of taxable objects, property transfer, and so on. Tax evasion and tax incentive eliminate the 5 percentage points of tax GDP ratio which is about Tk. 400 billion (NBR2011).[33]
The absence of a participatory policy making process, lack of research into, and reform of, the tax system, short-term oriented and politically motivated tax policies, loopholes, anomalies and complexities of tax laws and policies are responsible for creating scope for tax evasion. Institutional weaknesses of the tax administration, lack of professional support for tax officials and inappropriate behavioural aspects of tax officials have undermined the efficiency of the tax policy implementation process, resulting in widespread tax evasion. During the compliance process, the absence of a tax culture among income earners, inadequate taxpayer service, complexities and unfairness in tax estimation, weak enforcement and the negative image of the tax department work as influential driving forces for tax non-compliance. The empirical findings also revealed that the corrupt nexus of self-interested policy makers, rent-seeking tax officials, self-utility maximiser taxpayers, including businesspeople, professionals, self-employed persons, and their intermediaries, tax agents, facilitates tax evasion.[34]
3.5 Illicit wealth or black-money is major portion of GDP; illicit wealth is out of tax net
The amount of unreported money is within 45 percent to 81 percent of gross domestic product in 2011 (MoF, 2011). Those who own the majority of the wealth and income of the country are still outside the network of taxation. According to both governmental surveys and the words of the Finance Minister, a large amount of the government’s money is unaccounted for. In economics or regular parlance, one would call this “black money.” A small part of this may be valid income, but because no tax has been paid on this for various reasons, it has now been listed as “undisclosed” income. One can be certain that the right epithet for this is “illicit” wealth, earned by theft, looting, corruption, fraud, aggression, and terror. This includes bribery, investment fraud, commissions, the expropriation of governmental or public property, extortion, the sharing of funds allocated for unfinished development projects, over- and under-voicing, and so forth. It is obvious that only the powerful can do this and that too with the support and encouragement of the administration. This is precisely why we keep hearing about the whitening of “black money” during the tenure of each government, but rarely see any effort to stop its source. It is because the administration and the owners of black money are the one and the same.[35]
3.6 Tax Exemption
Bangladesh, like other developing countries, provides various supports to major and emerging industries with a view to enhancing industrialization in the country. Tax exemption and concession related measures are provided under the directives of industrial policy, export/import policy, SME policy and fiscal policy of the country. Direct tax exemptions/incentive measures are: tax holiday, exemptions and deductions, tax rate reductions, deferrals, tax credits and others; on the other hand, indirect tax measures are: exemptions and deductions.[36]
According to Mortaza and Begum (2006), there were a total of 106 measures under direct (55 measures) and indirect taxes (51 measures) for providing various kinds of tax exemptions and cash incentives. Tax holiday facility is provided to newly set up firms, physical infrastructure, tourism etc.; whereas exemptions and deductions are applicable to enterprises located in EPZs, power generation companies, agriculture related industry etc.; on the other hand, concessionary rate is applicable to textile, jute industries and those who do not enjoy tax holiday facility.
SMEs in Bangladesh enjoy tax waiver in case of turnover for up to Tk.7 lakh and provide reduced taxes for turnover up to Tk.24 lakh at a rate of 2 per cent, up to Tk.60 lakh at a rate of 3 per cent and for above 70 lakh at a rate of 15 per cent. The amount of minimum package VAT applicable for small business has been increased from Tk 6,000 to Tk. 9,000 in the national budget FY13. Exemption of VAT includes products under the categories of food and agriculture, poultry, and agricultural inputs etc.[37]
In the national budget 2015-16, following exemptions have been provided.[38]
- Tax exemption
- A separate and reduced tax rate of 15% for co-operative society other than its income related to agriculture and cottage industry.
- Reduce rate of tax for shrimp, poultry and fish hatchery
- Special incentives packages are on the card to encourage investment in developing Bangladesh Economic Zone and Hi-Tech Park along with investment in these areas. In consideration of increasing demand for vehicles and to ensure supply using domestic workforce along with reducing foreign currency expenditure, tax holiday for automobile manufacturing sector as heavy industry.
- Tax holiday for tyre manufacturing industry.
- Exemption of taxes from the interest income on Wage Earners Development Bond, U.S Dollar Premium Bond, U.S Dollar Investment Bond, Euro Investment Bond, Euro Premium Bond, Pound Starling Investment Bond and Pound Starling Premium Bond.
- VAT exemption
- Withdrawal of existing VAT levied at the rate 15 percent on the domestic production of “Nutrition Premix in Animal Food”.
- Total exemption of existing VAT on the electricity bill against cold storage service.
- With the progress of civilization, outbreaks of new types of diseases are being observed. Fatal viral diseases like hepatitis C are quite common in these days. The treatments for these diseases are very expensive. In order to reduce the medical expenses of the people of our country, exemption of VAT both at the domestic production and trade level against the medicines for acute liver related diseases.
- Exemption of applicable VAT on the supply of broken iron pieces or iron scraps.
- Though the custom duty is levied at the rate of zero percent at the import stage of PET Chips, a raw material of polyester yarn, the Advance Trade VAT at the rate of 4 percent is still there in the same stage. For the protection of domestic industry, there will be exemption of existing ATV in this sector.
- Exclusion the „capitation grant‟ allocated for both public and private orphanages from the VAT net.
- Total withdrawal of VAT currently levied on photography industry.
- Withdrawal of existing 15% VAT on Iron Oxide at the local manufacturing stage.
- As a substitute to import, glass tube and energy saving bulb as well as the raw materials used to manufacture them has been exempted from the payment of VAT up to 30 June, 2015. This VAT exemption facility will be extended up to 2017 as an incentive for this industry.
- Full exemption of existing VAT on the electricity bill of the relevant developers of the High Tech Park and on the procurement provider service of the relevant developers and investors of the same.
- Withdrawal of existing 15 percent VAT on the manufacturing of plastic crystals through recycling of plastic waste.
- Exemption of VAT on producing and supplying batteries up to the capacity of 60 ampere to the IDCOL registered solar panel manufacturers by the battery manufacturing industries.
- Withdraw the existing trade VAT on local sales of jute products; withdraw the existing 15 percent VAT levied on the license issuance and license renewal fee of jute and jute products.
- VAT exemption threshold on the export of sample medicines from Tk. 30 thousand to Tk. 1 lakh.
3.7 Illicit Financial Flows (IFS)
Illicit financial flows are cross-border transfer of funds that are illegally earned, transferred or utilized. It can be generated in a many different ways that are not revealed in national accounts or balance of payments figures. And it includes trade mispricing, bribery, money laundering, crimes, corruption, smuggling etc. Both companies and individuals can lead these illicit financial flows from one country to another. The outflow of capital is facilitated by a shadow international financial system, especially offshore financial centres, tax secrecy jurisdictions that is famously known as ‘tax havens’. [39]
The incidences of capital flight as well as the practice of disguising the origins of illegally-achieved money are high in Bangladesh. According to Global Finance Integrity (2001-2010), average illicit financial flow from Bangladesh was USD 1406 million and the cumulative amount is USD 14059 million for the period from 2001 to 2010. Bangladesh was top illicit capital out flower in the period of 1990-2008 with the amount of USD 34.8 billion. The position of Bangladesh is second among the South Asian countries and 44th among the 143 developing countries. Nepal, Pakistan and Sri Lanka are ranked with 58, 94, and 105 positions consequently which states that the highest amount of money has been laundered from Bangladesh.[40]
The central bank of Switzerland, Swiss National Bank, disclosed recently in its annual report that ‘secret’ money from Bangladesh deposited in different Swiss banks rose by 62 percent year-on-year in 2013. The deposits, which stood at BDT 32.36 billion (US$415 million) at the end of 2013, were BDT 19.91 billion (US$255 million) in 2012, showed in the latest data of the Swiss National Bank. It means when the illicit financial flows from developed countries to Switzerland is declining at a record low rate, it is skyrocketing from Bangladesh. There are information of illicit financial flow from Bangladesh to Canada and Malaysia too. To settle in Malaysia under its ‘My Second Home (MM2H)’ programme, one needs to show liquid assets worth at least about BDT 122 million (US$ 0.16 million) and offshore income of about BDT 0.25 million (US$ 3,141) per month. Since the programme was launched (in 2002) till April 2014, some 25,500 people from across the world migrated to the country. Of them, 2,874 (11%) are from Bangladesh, according to the Malaysian government website This means, Bangladeshis laundered about BDT 35 billion (US$ 448 million) at least to have their second home in Malaysia and none was required to take approval from the authority in Bangladesh, as Malaysia does not inquire about the source of the money. Similarly, a citizen of Bangladesh can get residence permit in the US or Canada by showing liquid assets worth $500,000 (BDT 38.7million). Statistics are hard to come by, but reportedly hundreds of wealthy Bangladeshis have made these two countries their second home. Again, the US and Canada will not inquire where the money has come from, experts say.[41]
- EFFETIVENESS OF THE TAX ADMINISTRATION
4.1 Tax gap analysis
The achieving targeted amount of taxes by NBR is satisfactory for the period of 2005-2013; in 2008, 2010, 2011 and 2012 collection of taxes exceeded the target. The rest of years, the achievement rate was mostly above 90% (Figure 4.1).
Figure 4.1: Tax collection rate in terms of actual target (in %)
Source: NBR Annual Report 2012-13
4.2 Cost of tax collection
According to NBR report 2012-13, the cost of tax collection has been reducing; the cost of collection for 100 Taka is 1.35 Taka. The cost of collecting direct tax is higher than indirect tax (Table 4.1)
Table 4.1: Cost of tax collection in 2012-13
| |
Cost of collection of TK.100 |
| Cost of tax collection |
1.35 |
| Cost direct tax collection |
0.58 |
| Cost of indirect tax collection |
1.09 |
Source: NBR Annual Report 2012-13
4.3 Inefficiency of NBR
Another important feature of Bangladesh’s tax systems is higher inefficiency, especially in tax administration. Among the South Asian countries, Bangladesh and Pakistan has one of the lowest efficiency score (Figure 4.3). Furthermore, no improvement was reported between 2009 and 2013.
Figure 4.3: CPIA efficiency of revenue mobilization rating (1=low to 6=high)
Source: WDI, World Bank Databank, http://data.worldbank.org/indicator/IQ.CPA.REVN.XQ
NBR has maintained an outdated ‘control’ based system, which relies on the physical monitoring of taxpayers in order to enforce compliance. This is reflected, among other things, in extremely low levels of automation, and has allowed NBR officials to retain enormous discretion and, in turn, opportunities for collusion with, or extraction from, taxpayers. The discretion enjoyed by tax officials, as well as the overall inefficiency of data management within the NBR, has been exacerbated by a high degree of administrative fragmentation. Whereas there has been a trend across low-income countries towards greater integration across administrative units, the NBR remains divided into three highly autonomous divisions: direct tax, VAT and customs. The relative absence of data sharing across departments severely undermines administration, and opens space for collusion, arbitrariness and abuse, while fragmentation also creates additional costs for taxpayers. These challenges have been consistently underpinned by significant human resource constraints within the NBR.[42]
5. GOVERNMENT SPENDING
5.1 Sources of government income
Government income mostly (90%) depends on domestic sources; only 10% comes from foreign loan and grants. Tax and non-tax revenue is the main sources of government income; it is about 73% income source in the national budget 2015-16 (Figure 5.1), followed by domestic financing (19%) and foreign grant and loan. Borrowing from banking sources is the major source in domestic financing, which creates fiscal burden to pay interest on it.
Figure 5.1: Gov. Sources of Income, Budget 2015-16
Source: Budget in Brief 2015-16, Ministry of Finance, Gov. of Bangladesh, www.mofgov.bd
5.2 Government expenditure-sectoral allocation of budget 20015-16
Public administration receives highest allocation (19.2%) in the national budget 2015-16, followed by interest payment (11.9%) and education (11.6%).
The allocation for interest payment is more than double than health sector allocation (4.3%) (Figure5.2).The allocation for health is less than defence budget (6.2%).
Figure 5.2: Components of gov. spending in %, Budget 2015-16
Source: Budget in Brief 2015-16, Ministry of Finance, Gov. of Bangladesh, www.mofgov.bd
Expenditure on education and healthcare
The allocation on social sector like education and health has been poor. Expenditures on education and health has remained either stable or declined in relation to GDP and certainly declined in relation to total budgetary expenditure. The allocation for education and health has been declined from 12.51% to 10.72% and 5.13% to 4.13% from 2012 to 2016 respectively.
Figure5.3: Spending for education and healthcare in % of total budget, FY11-2012 to 2015-2016
Source: Child Budget 2015-16, http://www.mof.gov.bd/en/index.php?option=com_content&view=article&id=322&Itemid=1
Figure 5.4: Expenditure for education and healthcare as % of GDP, FY11-2012 to 2015-2016
Source: Child Budget 2015-16, http://www.mof.gov.bd/en/index.php?option=com_content&view=article&id=322&Itemid=1
Government spending perpetuates inequality
It has been found that government spending on social sector programs has been declining in terms of total budget. In all major categories of social spending like education, health and social protection, there is steady decline in the level of spending relative to the total size of the budget. With spending on education and public health at about 2% of GDP and 0.7% of GDP, respectively, Bangladesh cannot expect to provide the quality of education and health care services that the citizen’s of a middle income country would need. It will not be able to develop the skill level of its rapidly growing labor force and transform the demographic dividend into real acceleration of GDP and income growth.
The current distribution of education spending is not progressive as its allocation is not pro-poor. Health facilities are not adequately funded, nor are the allocated funds effectively utilized. The allocation of resources is not pro-poor and this contributes, among other factors, to the wide disparities in health outcomes.[43]
The Budgetary allocations for the social protection programs are also low at 1.6% of GDP (excluding expenditure on pensions for government employees). Moreover, this modest sum is also being distributed through about 100 social protection programs managed by more than 20 ministries/agencies with virtually no coordination among the executing ministries/agencies.[44]
About one third of public expenditure is being used for public administration and interest payment; these are two major components of government expenditure in national budget 2015-16. Civil and military administrations are major beneficiary of public expenditure in Bangladesh. What are the outcomes of this expenditure on people’s life? If people do not get quality services from government; why people will pay taxes?
There are four roles of any taxation: (i) it is a source of government revenue which is required to run any government; (ii) it provides finance for public services and investment (public goods), particularly at a time when the availability of finance for development (including overseas development assistance) is lean; (iii) it is a strategic tool for government to promote certain sectors with a view to support investment, economic growth and employment; and (iv) it is an instrument to ensure social and economic equity and justice. It is felt that the ongoing taxation reform agenda in Bangladesh is more biased towards the first two roles.[45]
The allocation for education and health has been reducing, major allocations are being provided to feed the civil and military bureaucrats and for payment of interests on loans of the last few years and the motives behind the loans is not the wellbeing of the people.[46] Secondly, the wealthy people are exempted from paying taxes due to not having wealth tax and other tax exemptions create and perpetuate social inequality in Bangladesh.
Most subsidies in the last few years have gone into the electricity sector. In 2012 this amount was Tk. 32,000 crores. 28,000 cores out of that was spent on Quick Rental Power Plants. The large capital needed to buy electricity at a higher price from Quick Rental and the import of oil came from loans. The burden of these loans has fallen on the people. This is why paying interests comprises the largest expenditure right after administration in this year’s budget. However, a one-time expense of Tk. 1,000 crores could have given us the same amount of electricity if we had spent it on the renewal, repair, maintenance, and reform of the energy sector. We would not have to pay subsidies and increase the amount of loans every year. Neither would we be bound to import extra oil. The economy would not be under added pressure. The allocations make it seem like the government is privileging the energy sector, but in reality, the increased expenditure is to ensure good business for a few preferred groups. The result of this is the cycle of debt as well as the hike in costs of both electricity and oil.
[1] Annual Report 2012-13, National Board of Revenue, www.nbr-bd.org
[2] Fiscal Management and Revenue Mobilization by Dr. Ahsan H. Mansur, Policy Research Institute of Bangladesh, Prepared as a background paper for the Seventh Five Year Plan
[3] Nashid Rizwana Monir, 2012, Political Economy of Corruption: The Case of Tax Evasion in Bangladesh, Monash University
[4] Fiscal Management and Revenue Mobilization by Dr. Ahsan H. Mansur, Policy Research Institute of Bangladesh, Prepared as a background paper for the Seventh Five Year Plan
[5] Fiscal Management and Revenue Mobilization by Dr. Ahsan H. Mansur, Policy Research Institute of Bangladesh, Prepared as a background paper for the Seventh Five Year Plan
[6] Abul Maal Abdul Muhith, Minister, Ministry of Finance, Budget Speech 2015-16
[7] Prashant Prakash, Property Taxes Across G20 Countries: Can India Get it Right? 2013, CBGA and OXFAM India
[8] NBR, Income Tax at A Glance, http://www.nbr.gov.bd/Publications.php?lan=eng
[9] Nasir Uddin Ahmed, Chairman NBR, Government of Bangladesh, IGC Growth Week 2011, London School of Economics, Sept. 2011
[10] Abul Maal Abdul Muhith, Minister, Ministry of Finance, Budget Speech 2015-16
[11] Fiscal Management and Revenue Mobilization by Dr. Ahsan H. Mansur, Policy Research Institute of Bangladesh, Prepared as a background paper for the Seventh Five Year Plan
[12] Abul Maal Abdul Muhith, Minister, Ministry of Finance, Budget Speech 2015-16
[14] Prashant Prakash, Property Taxes Across G20 Countries: Can India Get it Right? 2013, CBGA and OXFAM India
[15] Binayak Sen, May 31, 2014, Wealth and Inequality,
[16] Ahsan H. Mansur and Mohammad Yunus, 2011, An Evaluation of the Tax System in Bangladesh, PRI, Dhaka
[17] Md. Zakir Hossain, 2015, Value Added Tax: Act, Rules and Usage, Dhupradi Publication, Dhaka
[18] Abul Maal Abdul Muhith, Minister, Ministry of Finance, Budget Speech 2015-16
[19] Towfiqul Islam Khan and Md. Zafar Sadique, 2014, VAT and SD Act 2012: Concerns and Implementation Challenges, CPD, Dhaka
[20] Abul Maal Abdul Muhith, Minister, Ministry of Finance, http://www.thedailystar.net/business/tax-evasion-irks-muhith-111646
[21] Dr. Ahsan H. Mansur, Fiscal Management and Revenue Mobilization, Policy Research Institute of Bangladesh, Prepared as a background paper for the Seventh Five Year Plan
[22] Nahida Faridy and Tapan K Sarker, Progressivity of VAT in developing country: empirical evidence from Bangladesh, Asia-Pacific Tax Bulletin, May/June 20111
[23] Towfiqul Islam Khan and Md. Zafar Sadique, 2014, Value Added Tax and Supplementary Duty Act 2012: Concerns and Implementation Challenges, CPD, Dhaka
[24] Survey Report on Tax Perception & Compliance of the Formal Sector and Perception of Taxation by the Informal Sector, April 2013, International Finance Corporation
[25] A Panel Study on Tax Effort and Tax Buoyancy with Special Reference to Bangladesh, Lutfunnahar Begum, Policy Analysis Unit Bangladesh Bank, Working Paper Series: WP0715, June 2007
[26] Bangladesh along with 10 other developing countries including 3 South Asian Countries, viz, Bangladesh, Bolivia, India, Indonesia, Jordan, Mongolia, Morocco, Nicaragua, Pakistan, Philipines and Sri Lanka
[27] Tax effort has been used as an indicator of how much a country is utilizing its taxable capacity; If the value of the index is less than one, it means that the country is not utilizing its full revenue potential. Conversely, if the value of the index is greater than one, it implies that the country is collecting more taxes than would be predicted.
[28] Tariq Saiful Islam, 2012, Taxation and Future Economic Development of Bangladesh at Development Constraints and Realization edited by Mustafa K. Mujeri, UPL Dhaka
[29] The tax buoyancy provides such a dynamic index of tax performance, which measures the sensitivity and response of the tax system with respect to income/GDP.
[30] Dr. Ahsan H. Mansur, Fiscal Management and Revenue Mobilization, Policy Research Institute of Bangladesh, Prepared as a background paper for the Seventh Five Year Plan
[31] http://www.bonikbarta.com/printpage/preview/9248.html
[32] http://www.bonikbarta.com/2014-09-30/news/details/215.html
[33] Revenue Mobilization and Economic Growth, Bangladesh Economic Update, November 2013, Unnayan Onneshan, Dhaka
[34] Nahida Faridy and Tapan K Sarker, Progressivity of VAT in developing country: empirical evidence from Bangladesh, Asia-Pacific Tax Bulletin, May/June 20111
[35] Anu Muhammad, Who’s prospering on whose labor? http://alalodulal.org/2013/06/20/anu-muhammad-budget/
[36] Tax Policy and Enterprise Development in Bangladesh, CPD, Dhaka
[37] Tax Policy and Enterprise Development in Bangladesh, CPD, Dhaka
[38] Abul Maal Abdul Muhith, Minister, Ministry of Finance, Budget Speech 2015-16
[39] Whose money and whose interest? Illicit money flys off Bangladesh, EquityBD Position Paper, February 2014
[40] Revenue Mobilization and Economic Growth, Bangladesh Economic Update, November 2013, Unnayan Onneshan, Dhaka
[41] Whose money and whose interest? Illicit money flys off Bangladesh, EquityBD Position Paper, February 2014
[42] Mirza Hassan and Wilson Prichard, November 2013, The Political Economy of Tax Reform in Bangladesh: Political Settlements, Informal Institutions and the Negotiation of Reform, ICTD Working Paper 14
[43] Bangladesh Public Expenditure and Institutional Review, June 2010, World Bank
[44] Dr. Ahsan H. Mansur, Fiscal Management and Revenue Mobilization, Policy Research Institute of Bangladesh, Prepared as a background paper for the Seventh Five Year Plan
[45] Towfiqul Islam Khan and Md. Zafar Sadique, 2014, Value Added Tax and Supplementary Duty Act 2012: Concerns and Implementation Challenges, CPD, Dhaka
[46]
Excluded Voices 