Through digitalisation of the taxation system, Bangladesh could potentially achieve revenue mobilisation of up to USD 167 billion by 2030, marking a fourfold increase from the current fiscal year’s amount. The digitalisation of Bangladesh’s taxation system could be a transformative step for enhancing domestic revenue mobilisation (DRM). Policymakers should prioritise this initiative to significantly improve tax efforts, outcomes, and overall revenue collection. While digitalisation will not solve all DRM issues, it can substantially increase tax revenues. Greater DRM is crucial for Bangladesh to meet public sector expenditure demands, ensure equitable income distribution, and reduce dependence on domestic and external borrowings. Debt servicing already consumes a large portion of revenue, with about 20 per cent of revenue expenditure in FY2023-24 allocated to interest payments alone. Low revenue income has led to the entire development budget being financed by borrowed funds, either domestic or external. The low Revenue-Gross Domestic Product (GDP) ratio, coupled with the need to keep the budget deficit under 5 per cent of GDP, has resulted in a relatively low Public Expenditure-GDP ratio compared to other developing nations.
The above-mentioned observations emerged at the dialogue titled ‘Digitalisation of the Taxation System in Bangladesh: The Next Frontier’, organised by the Centre for Policy Dialogue (CPD), in partnership with the European Union (EU), on Sunday, 19 May 2024. The dialogue was based on a study from the research programme titled ‘Towards People-Centric Public Financial Management (PFM) in Bangladesh’. The Keynote Presentation was made by Professor Mustafizur Rahman, Distinguished Fellow, CPD.
Dr Fahmida Khatun, Executive Director, CPD, chaired the session and remarked, ‘After Bangladesh graduates from Least Developed Countries (LDCs) status, it will face higher interest rates on external borrowings. Enhancing DRM will be crucial to manage and repay these higher-cost loans, ensuring fiscal stability and sustainable development’.
In his introductory remarks, Mr Enrico Lorenzon, Team Leader – Inclusive Governance, Delegation of the European Union to Bangladesh highlighted ‘Digitalising the taxation system is a formidable task, but it will significantly enhance DRM in the medium to long term. Initially, digital files will replace paper ones, but the true benefits will emerge over time’.
In his Keynote Presentation, Professor Mustafizur Rahman, recommended ‘Comprehensive digitalisation of the entire taxation system is essential. This involves integrating digital, human, and institutional components to achieve better DRM’. He added that improving the effectiveness of the Integrated VAT Administration System (iVAS) by integrating transaction data and third-party information sources will enhance data analytics for identifying revenue risks.
‘It is crucial to train VAT ICT staff in SAP programming to localise and expand iVAS functionalities, thereby reducing reliance on external vendors’ underscored Professor Rahman. He also discussed the importance of ensuring database software consistency across various initiatives and developing a detailed integration plan to address issues related to varied programming languages and interfaces.
The Distinguished Fellow of CPD also suggested that building in-house cybersecurity capabilities or engaging skilled teams for thorough penetration testing is necessary to protect the NBR’s network from ransomware attacks. Additionally, broad-based automation of tax processes, linking activities to taxpayers’ National Identity Numbers (NID), will help prevent tax avoidance and corruption. This automation should cover filing, processing, assessing total income, computing taxes, and making payments.
Capacity building within tax administrations should be prioritised, with targeted training in tax technology and data management. Partnering with international organisations can provide additional expertise and resources. Fast-tracking the establishment of the National Single Window and the installation of Electronic Fiscal Devices (EFD) is needed to ensure uniform compliance across sectors.
‘With the impending phase-out of the World Trade Organization (WTO) e-commerce taxation moratorium, customs systems must be prepared to effectively capture and manage e-commerce transactions’ emphasised Professor Mustafizur Rahman. Updating the tax net to include sectors previously exempted under Information Technology Enabled Services (ITES) incentives will also be crucial.
The Chief Guest of the dialogue, Ms Waseqa Ayesha Khan, MP, Hon’ble State Minister, Ministry of Finance, Government of Bangladesh, suggested ‘To encourage taxpayers to pay taxes, they need to be rewarded with superior service quality’. She also added that attempts are being made to digitalise business transactions, but businesses have resisted, preferring cash over digital transfers. Such constraints make it challenging to transition to a fully digitalised system.
Mr Kazi Nabil Ahmed, MP, Chairman, Parliamentary Standing Committee on Ministry of Posts, Telecommunications & Information Technology, the Special Guest of the dialogue, highlighted ‘Transparency is crucial for effective DRM and taxation. This can be ensured not only through laws but also by digitalising the taxation system’. He added that digitalisation will also help to enhance citizen participation and will ensure greater government accountability.
Dr Debapriya Bhattacharya, Distinguished Fellow, CPD, emphasised ‘Merely digitalising tax collection without digitalising public expenditure will not achieve the desired results’. He added that it is crucial to conduct qualitative assessments of the Annual Development Plan (ADP) and Five-Year Plans, in addition to the current quantitative assessments. Currently, only financial evaluations are performed, neglecting qualitative and impact assessments.
‘While the revenue department and government officials have taken on the responsibility of improving DRM, taxpayers must also take the same responsibility’ suggested the Guest of Honour, Mr Abu Hena Md. Rahmatul Muneem, Chairman, NBR. He added that without taxpayers’ cooperation, no amount of automation will improve DRM.
‘The discussion on digitalising the taxation system began several years ago, and various initiatives have been undertaken to achieve this goal. However, it still has not been fully realised’ remarked the Former Member of Tax Policy, NBR, Mr Md. Alamgir Hossain. He emphasised that one of the main reasons for the delayed digitalisation of the taxation system is a lack of planning. He urged addressing these issues and working towards effective solutions.
Mr Shams Mahmud, Director, Bangladesh Garment Manufacturers and Exporters Association (BGMEA), and Former President, Dhaka Chamber of Commerce & Industry (DCCI), pointed out that 86 per cent of domestic revenue is generated from Dhaka and Chittagong, while many businesses across the country operate without paying taxes. Technology will play a crucial role in increasing tax compliance. He recommended that the software used in taxation should be made bilingual to ensure clarity and understanding.
Mr Syed Khaled Ahsan, Senior Public Sector Specialist, The World Bank, commented ‘Digitalisation of the taxation system alone will not make taxpayers more compliant. Effective tax administration requires on-the-ground enforcement to ensure compliance and to realign taxpayer activities accordingly’.
High-level policy makers, trade specialists, business leaders, academics, development practitioners, civil society activists, international development partners and journalists were present at the dialogue, many of whom participated in the discussions.