Published in The Daily Star on Sunday, 25 May 2014.
Eye on Budget
Time to go for wealth tax
Sajjadur Rahman
A government employee had bought a 2.5-katha plot at Tk 80,000 in Mirpur in 1989. Now the land values at around Tk 1 crore, or 125 times higher, in a span of 25 years.
Another man who is a banker had bought a 1,500-square-feet flat at Eskaton in the capital at Tk 25 lakh in 2000, the market price of which is around Tk 1 crore now.
In another case, a land investor had purchased several hundred decimals of lands beside the Dhaka-Maoa highway in 2000-2001. He had to spend Tk 5,000-Tk 10,000 per decimal depending on the locations. Now he has been selling out the lands at Tk 5 lakh to Tk 10 lakh per decimal. The hike in the prices is astronomical — 100 times higher than 14 years ago.
The returns are amazing compared to any other format of investments in any country. And the gain is tax-free as well, which is why people choose to invest heavily in properties in Bangladesh.
“This is a very land-scarce country. Investment in assets is very safe and the income is tax-free,” said Ahsan H Mansur, executive director of Policy Research Institute.
If the gains on properties were taxable, people would not go for investing heavily in lands and flats, he said.
Mansur, who is a former official of International Monetary Fund, said taxes on properties are prevalent in many countries. It is 15 percent in the United States where a house owner has to pay as low as $18,000 annually as holding tax, which he said is very minimal in Bangladesh.
“Wealth tax will facilitate income distribution and reduce asset inequality and its concentration,” he said.
Analysts said imposition of wealth tax could not only generate some income for the government but also reduce property prices and rising inequality.
The move will also discourage moneyed people to invest in unproductive areas such as lands and flats, they said.
Mustafa K Mujeri, director general of Bangladesh Institute of Development Studies (BIDS), said wealth tax should be introduced to rein in rising income and asset inequality, which has become a challenge for Bangladesh.
“Wealth tax targets unproductive, non-essential and idle assets,” Mujeri said, adding that the government could offer incentives to bring back the already invested money in such assets to the productive sectors.
Prof Mustafizur Rahman, executive director of Centre for Policy Dialogue, said though there is now 10 percent surcharge tax on asset worth more than Tk 2 crore, it is not enough given the context of income and asset inequality.
“Time has come to impose tax on wealth, at least for resource mobilisation and to reduce inequality,” Rahman said.
Many countries have introduced wealth tax for assets that do not generate any income. For instance, if one’s earnings are deposited in a savings account, it does not come under the purview of wealth tax as the balance generates interest, which is taxable. But jewellery generates wealth tax.
Bangladesh’s neighbour India has wealth tax, which is payable if the market value of certain assets exceeds Rs 30 lakh. The tax is 1 percent of the combined value of such assets.
In 2011, Bangladesh introduced 10 percent surcharge on income tax paid by individuals with recorded wealth exceeding Tk 2 crore, which Mujeri of BIDS said not an effective measure to tax idle assets. Taking the scope, well-off people and corporate houses heavily invested in properties and contributed a lot to the price bubble.
Bangladesh is one of the most densely populated countries, with 160 million people living in an area of 155,000 square miles. Often, demands for lands have exceeded supplies.
A significant increase in remittances and rising income from corruption have fuelled the asset prices. The consequence is startling — a 3,000-square-feet flat in posh areas like Baridhara in Dhaka costs Tk 5-Tk 6 crore, which is on a par with many big cities in the world such as London and New York.
“I know a man who has 64 flats in Dhaka,” said Binayak Sen, a research director at BIDS, who has been trying persistently to make the government understand why the country needs to impose tax on wealth.
“I am saying it at different programmes, including before the finance minister. But only one voice is not enough,” he said.