Published in The Daily Star on Tuesday, 31 May 2016
Tax collection to miss target for fourth year
Analysts say targets should not be ambitious
The government is likely to miss its tax collection target for the fourth consecutive year, which analysts have already predicted amid slow economic activities and weaknesses in tax policy and administration.
Yet, Finance Minister AMA Muhith is expected to set a revenue collection target of nearly Tk 203,150 crore for the next fiscal year, which is 15 percent higher than the actual target of the outgoing year and 35 percent higher than the revised target.
A similar situation may be the case next year as well, and the government may have to trim the target halfway through the year by acknowledging that the goal was too high, analysts said.
The Centre for Policy Dialogue has already expressed its doubts over attaining the target.
This is yet another uphill task whose success is highly doubtful, said the CPD in its recent analysis on the state of the Bangladesh economy in fiscal 2015-16.
Taxmen expect to hit the revised revenue collection target of Tk 150,000 crore in the outgoing fiscal year, but they are unlikely to log the original target of Tk 176,370 crore by the end of June 30, though the pace in collection has increased in recent months.
In fiscal 2014-15, National Board of Revenue achieved 90 percent of the collection target; a year before that, collection was 89 percent of the target.
The last time NBR achieved the revenue collection target was fiscal 2011-12.
Political turmoil in 2012-13 and 2013-14 is mainly to blame for the failure to achieve the tax collection targets.
The unrest slowed the pace of the economy and thus revenue collection. And it did not fully pick up in the last two years due to subdued economic activities and a decline in import prices, said the World Bank, in its April issue of Bangladesh Development Update.
“But these are not the only factors as revenues have grown slower than nominal GDP,” it said. The tax-to-GDP ratio, which is one of the lowest in the world, fell to 8.5 percent in fiscal 2014-5 from 8.6 percent in the previous year, reflecting persistent weaknesses in the tax policy and administration, it added.
The multilateral lender said there are a number of reasons behind the shortfall in revenue collection. Firstly, the budget target was overambitious in the outgoing fiscal year, in view of lacklustre revenue collection performance in the previous year.
Also, a number of tax incentives, including a lower corporate income tax rate for publicly traded companies, reduction in custom and supplementary duties, and fixation of 0.6 percent tax at source for apparel instead of the proposed 1 percent, were some other factors.
Administrative capacity and revenue collection efforts also did not see any major improvement and the reform agenda failed to gain any visible momentum, it added.
“It is no surprise the tax revenue target will be missed this year as well,” said Zahid Hussain, lead economist at the World Bank’s Dhaka office.
The original and even the revised tax revenue target for fiscal 2015-16 was “fantastically high”, not supported by any significant revenue increasing reforms either in tax policy or in tax administration, he added.
UNTAPPED TAX POTENTIAL: FASTER REFORMS THE KEY
Analysts termed the revenue targets overambitious at a time when Muhith maintains that there is tax collection potential, given the size of the economy and its steady performance, and ongoing reforms measures — automation of tax and VAT system and expansion of human resources and field offices of the NBR. They agree with the finance minister that the tax potential remains and it is underexploited.
The CPD, in a recent study, said about half of the potential tax does not come to the state coffer due to a lack of compliance by taxpayers and poor efforts by taxmen.
To tap the potential, analysts have been suggesting reforms in tax policy and revenue administration, as well as modernisation, for the last several years. However, the reforms measures, taken by the government in recent years, are being implemented slowly.
By now, the tax system was supposed to be fully automated, enabling taxpayers to file returns and pay taxes online. The new VAT and Supplementary Duty law, passed in 2012, was scheduled to be effective from July 2015.
The timeframe for the implementation of the law was shifted to July this year, in the face of opposition from businessmen and a lack of preparation by NBR.
Now, the enforcement of the new law, which envisages automation of VAT administration and VAT system, is likely to be delayed further. The passage of a new income tax law is also going to take more time, said insiders.
CPD, in its recent analysis, said concerns relating to a small tax base, low tax compliance and widespread tax evasion, have continued to plague revenue mobilisation in Bangladesh.
In this backdrop, options other than a serious revamping of the revenue mobilisation efforts and making this a policy priority are rather limited, it added.
“Without reforms in tax policies, modernisation of tax administration and addressing the leakage in tax collection, performance will continue to languish well below the country’s taxable capacity,” said Hussain of the WB.
“The policies on indirect taxation are archaic and have failed to keep up with the development of the market economy in the country. The policies on direct taxation penalise the honest and reward the dishonest. Paying taxes is more cumbersome than evading taxes,” he said.
“Tax administration is inefficient; its reach is not wide and deep enough. It is taxpayer unfriendly. It continues to use vastly outdated systems and procedures. Efforts to digitise the tax administration have not gone deep enough to be a game changer.” In addition, corruption is rampant, he said.
“As a result, we, the citizens, end up paying a lot more than what gets deposited into the treasury’s account,” he said, adding that Bangladesh consistently ranks among the top ten in the corruption perception index.
CPD Research Fellow Towfiqul Islam Khan said the revenue authority registers 12-14 percent tax collection growth with its existing capacity.
Making a breakthrough — 30 percent growth in collection — will require tapping the untapped potential; for this, institutional and legal reforms and modernisation of NBR are necessary, he added.
“So far, we were happy with the low-hanging fruits. Now, a major thrust is needed to tap the untapped potential.”
Modernisation of VAT, income tax and customs administration would go a long way in enhancing tax revenue in Bangladesh. Tax administration should be geared toward providing taxpayers’ services, said a paper — An Evaluation of the Tax System in Bangladesh.
Ahsan H Mansur, executive director of Policy Research Institute, co-authored the paper posted by International Growth Centre, on its website.
“The revenue gains made in recent years will not be sustainable without fundamental reforms. A failure on the revenue mobilisation front will seriously undermine the government’s efforts on expanding public services and meeting the growing infrastructure needs of the economy,” it said.
AB Mirza Azizul Islam, a former finance adviser to the caretaker government, suggested quick settlement of tax related cases at the court.
There is a problem in the enforcement of tax laws. The territorial coverage of the tax authority also remains poor, he said, adding that many individuals who live in rural areas have taxable incomes.
Hussain of the WB said there is one lesson to be learnt from the experience of the last four years. “That it is good to be ambitious, but when ambitions are not backed up by solid measures that give it a chance to be achieved, it turns ambitions into fantasies, thus hurting the credibility of the budget targets.”
“We hope moving forward the revenue targets will be set in accordance with the underlying macroeconomic framework and the reform measures envisaged in the budget.”