What really drives our low tax to GDP ratio!
A medium-term macroeconomic policy statement from the Ministry of Finance shows that the tax-to-GDP ratio for the five years from 2017 to 2020 averaged 9.9%, down from 10.2% in the previous report. This rate is the lowest among SAARC countries, less than half of Nepal. Even war-torn Afghanistan’s tax-to-GDP ratio is better than Bangladesh’s.
For the low tax/GDP ratio, several factors are implicated. Limited tax coverage, peripheral deficits, tax exemptions, tax evasion, litigation, deductions, corruption in filing collected taxes, lack of skilled labor, technical incompetence, poor control system, etc. are under discussion, but not in the solution process.
In the financial year 2010-2011, revenue collection was around Tk 80,000 crore. But in 2021-2022, revenue collection will be around Tk 3,00,000 crore. In just ten fiscal years, revenue collection has almost quadrupled.
While there are certainly issues with the tax policy, collection and enforcement regime in Bangladesh, there may be more than what was initially revealed.
First, questions can be asked about the GDP accounts. Why? The government’s growth rate is not consistent with that of the World Bank (WB). After a delay of nearly a year and a half, the BBS had to cut its FY19-20 GDP growth figures by 1.73% over objections from the World Bank, IMF and research institutes. nationals.
Then there is the matter of relining. Bangladesh’s per capita income increased by $327 when the BBS updated the base year for calculating GDP. However, the main purpose of rebasing is to simplify the calculation of GDP, not to increase growth and national income. And the nine new sectors included in the rebasing had already contributed to GDP in agriculture, industry or services.
According to economists, the BBS does not accurately subtract inflation from the figures for national income, labor income, household income, etc., resulting in higher domestic growth.
On March 4, 2022, the South Asian Network for Economic Modeling (SANEM) questioned the BBS inflation data by releasing its survey data. According to SANEM, the average year-on-year food inflation in February this year for marginalized urban groups was 12.46%, which is considerably higher than the official estimate of 5.22%. Such an underestimation of the inflation rate can also inflate real GDP.
In other words, data distortion at several levels could be one of the factors contributing to a low tax-to-GDP ratio.
Moreover, due to potentially inflated GDP figures, the debt-to-GDP ratio is still quite low despite the country’s increasing external debt. According to the Bangladesh Bank, the country’s total public-private external debt is $90.69 billion at the end of calendar year 2021, but our debt-to-GDP ratio is said to be negligible.
If one of the two economic ratios is satisfactory, while the other is extremely unsatisfactory, this indicates that there are issues surrounding the common element between them. In other words, it was the inflated GDP data that drove down both the debt-to-GDP and tax-to-GDP ratios.
The declining tax-to-GDP ratio is a widely debated economic issue in the country. What is not addressed is the issue of political malpractice in taxation, administrative liability, and multi-step political and administrative extortion.
We succeeded in reforming the system of collection of income tax at the source of the monthly salary. But corruption prevails in plans to modernize the revenue system based on foreign currency loans.
Incompetent foreign companies have been tasked with modernizing the technical infrastructure for collecting and processing revenue. It is unwise to buy expensive EFD machines for VAT collection without focusing on the end-to-end payment system.
The low rate of tax collection in Bangladesh is directly linked to our political and administrative irregularities. Politicians, businessmen and industrialists evade taxes by using their offices and tax inspectors are powerless against them.
Additionally, political and bureaucratic influencers are placed on the boards of various organizations, creating a “conflict of interest” in tax collection. Tax inspectors can hardly contact these organizations or companies.
The private sector in Bangladesh continues to evade income tax year after year by involving influential people in the running of the organization. From reputable companies to private educational institutions, no one is immune to this malpractice.
Another issue is the NGO-style business operations model. Income tax evasion is very common in the Bangladeshi private sector by showing ambiguous costs, that corporate dividends are fully spent on various areas of management including salaries, allowances, development, entertainment, training, transport and social expenditure. Surprisingly, the majority of businesses operate at a loss year after year.
Although it is difficult to collect direct tax on income from large and medium-sized enterprises, the government tactfully collects tax indirectly on VAT. VAT is still an indirect tax. Everything except rice, pulses and vegetables is subject to VAT.
There are also other discrepancies in tax policy. For example, the non-taxable income limit in Bangladesh is only three lakh taka. But even in India it has long been 5 lakh rupees. As prices skyrocket beyond the reach of ordinary citizens in 2022, the government has made more revenue by raising import duties.
Although the direct income tax is low, the rate of duty and VAT in Bangladesh is almost the highest in this region. But corruption is rampant in the manual VAT collection system. With and without the assistance of VAT inspectors, traders and retailers can evade the amount of VAT paid by the buyer.
Unfortunately, the government has not yet designed a proper payment system to know the actual amount of VAT paid at source. Consequently, a significant part of the VAT collected is plundered by corrupt officials and their accomplices.
Adoption of cashless transactions also appears to be slower than expected. People withdraw cash from ATMs to buy, deposit into mobile banking wallets, transfer to another person’s mobile account, or make payments.
We are still unable to achieve the seamless flow of electronic funds transfer between mobile and traditional banking systems. Moreover, the cost of electronic transactions remains high and constitutes one of the main reasons for the reluctance to adopt it. Thus, payment in cash remains the obvious choice. Unfortunately, cash transactions also largely help people circumvent the tax system.
Extortion is the biggest indirect tax in the country. Traders, tradesmen, vehicles, freight trucks, and even peddlers are all forced to pay extortion. There are arguments that small and medium enterprises in Bangladesh are unwilling to pay income tax as they are forced to pay massive extortion fees at different levels. This is also one of the reasons why our raw material prices and production costs are so high.
Bangladesh’s tax-to-GDP ratio is only 10%. But this is consistent with the size of the formal economy which constitutes about 11% of the economy. To increase the tax-to-GDP ratio, the country’s formal sector needs to be expanded.
According to the International Labor Organization (ILO), the average monthly wage in various unskilled and low-skilled labor sectors in Bangladesh is only $48. Garment workers earn a maximum of $100, the lowest in South Asia. How can you pay taxes with such a low income? How can you intend to levy higher tax rates in the informal sector, which accounts for 89% of the country’s total labor market?
Then comes the issue of digitization. Without sensible digitization of the payment system, it would be difficult to fight corruption and improve tax collection.
Additionally, tax authorities should prioritize tax evasion by large corporations and high-income earners to end tax evasion.
The tax rate in Bangladesh is not vertical rather than horizontal. As the direct taxes of the wealthy and merchant classes are low, the government continues to impose a heavy burden of indirect taxes on the general middle class, lower class and marginalized economic classes by imposing VAT, import taxes on daily necessities and other surcharges.
In this way, the tax collection process in Bangladesh is structurally unfair and cannot be allowed to continue.
Faiz Ahmad Taiyeb is a Bangladeshi columnist and writer living in the Netherlands.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.