The  tax system of a country has two key elements: tax policy and tax  administration. The political economy analysis is vital to understand  the factors responsible for facilitating and hindering tax reforms in  tax policy and administration in a country and taking reform measures.

FACTORS INHIBITING TAX REFORMS IN BANGLADESH

Article  83 of the Bangladesh Constitution stipulates that no tax shall be  levied or collected except by or under the authority of an act of  Parliament. This highlights that taxation is a political phenomenon in  Bangladesh.

The political economy of tax reforms has  to be understood in the broader context of governance in Bangladesh.  Significant recent research has focused on the "paradox of Bangladesh,"  with continued economic growth despite problems of governance, including  a high level of corruption as shown by different governance indicators.

The  persistent weakness of the existing tax system is the product of  well-established informal rules, norms, and networks that have served  the broader interests of several political, business, and bureaucratic  elites (political settlement). This political settlement has ensured  predictably low tax rates and the strategic distribution of economic  rents despite the existence of widespread corruption, discretion, and  informality.

For example, the low price of cigarettes  is a reflection of this political settlement. Cigarette companies try  to convince the policymakers and bureaucrats to keep the prices and  taxes of cigarettes low on the unfounded pretext of illicit trade in  cigarettes.

Despite certain tax reform projects, there  is little motivation on the part of political leadership and business  people for tax reforms because they derive significant benefits from the  favourable tax treatment (tax exemptions) accorded to them.

Many  members of Parliament have significant business interests, resulting in  conflicts of interest. Conflicts of interest give rise to corruption  through making compromised decisions in an official capacity to derive  personal benefits. The National Board of Revenue (NBR) is responsible  for both tax policy formulation and tax administration, giving rise to  conflicts of interest.

A case in point is the VAT reform.

The  political economy of taxation in Bangladesh is reflected in the  seven-year delay in the implementation of the VAT and SD Act, 2012  because of political and electoral considerations.

Unlike  the original VAT Act, 2012 with a single VAT rate and little tax  exemptions, the amended VAT Act, implemented in 2019, came with multiple  rates (7) and widespread tax exemptions. The most fundamental criticism  is that too many VAT rates can cause revenue leakage and severe  economic distortions. Available evidence shows that the VAT performance  has not improved relative to other taxes since the new law was  implemented in July 2019.

The present Income Tax  Ordinance, 1984, is outdated to keep pace with the changing need of  time. So, a new income tax code is needed to put in place an efficient  and modern income tax regime.

We also see this play  out within the tax administration. Owing to the absence of substantial  automation, the NBR has largely maintained an outdated control-based  system, which has allowed tax officials to retain substantial  discretion—and thus opportunities for collusion with, or extraction  from, taxpayers.

For example, the authority of  issuing statutory regulatory orders (SROs), bypassing the Parliament, is  an expression of discretionary power of the NBR. At the core of current  arrangements is an apparent contradiction: the system promises low and  predictable tax rates to key business actors through collusion and  corruption while also offering significant discretion and rent-seeking  opportunities to some tax officials and political actors.

The  basic inefficiency of the tax system has been exacerbated by a high  degree of administrative fragmentation. Whereas there has been a trend  in low-income countries toward greater integration across administrative  units, the NBR remains divided into three highly autonomous tax wings:  Income Tax, VAT, and Customs.

The relative absence of  data sharing across tax wings severely undermines administration and  opens space for collusion, arbitrariness, and abuse, while fragmentation  also creates additional costs for taxpayers. The end result of these  weaknesses is a tax system characterised by extremely high degrees of  informality, widespread discretion, and the regular negotiation of tax  liabilities.

At a broad level, the NBR itself has been  found to be the most steadfast resistant to tax reforms. As the NBR  officials enjoy substantial discretionary power, this opens the door to  systemic corruption that is organised and sanctioned at every level of  the administration. As such, some officials within the board are  strongly resistant to any reform programme that would reduce their  discretionary power, including through increased transparency.

For  example, the NBR drew an outline of the Modernisation Plan covering tax  policy and tax administration during 2011-2016. It was placed before  the Parliament. However, with the retirement of the then chairman,  little reform measures were undertaken. Thus the strength of  bureaucratic resistance is consistent with patterns elsewhere in the  civil service.

IDENTIFYING DYNAMICS THAT MIGHT TEND TO SHIFT EXISTING POLITICAL SETTLEMENTS

Except  for registration in income tax and VAT, other tax processes are mostly  manual. The outbreak of the Covid-19 pandemic has underscored the need  and has given an opportunity for full automation of the core functions  of income tax and VAT.

MAKING TAX REFORMS EFFECTIVE

Tax  reforms must be homegrown. Reforms must be owned by the finance  minister with the active support of the NBR and the strong backing of  the Prime Minister's Office.

The NBR may draw up a five-year tax reform plan covering several issues.

The  first issue may include rationalising corporate tax rates. While India  and Pakistan have two corporate tax rates, we have six. The time has  come to revisit the corporate tax rate structure to attain the dual  objectives of reducing the cost of doing business and enhancing  government revenue.

Second, the tax net may be  broadened by giving emphasis on withholding taxes, reducing tax  exemptions and linking different services with the tax system. Third,  the digitalisation of the tax system is essential to improving tax  compliance.

Fourth, the tax administration needs to  be strengthened to combat tax evasion and improve tax governance. Fifth,  tax policy may be separated from the tax administration. The Internal  Resources Division of the finance ministry should be entrusted with tax  policymaking while tax administration should remain with the NBR.

Tax  reforms should be properly reflected in the annual performance  agreement of the government. The parliamentary standing committee on the  finance ministry needs to monitor the progress of reforms, and the  media may report to the public.

Development partners  may get involved in the automation of core functional areas of income  tax with a particular focus on integrating the automation of the tax  system with the existing VAT reform strategy. Both income tax and VAT  should use the same platform and share information seamlessly to create  synergy.

Development partners may also help the NBR  return to the original 2012 VAT Act to the extent possible by  consolidating various differentiated rates and turnover-based regimes  into a unified structure.

The author is a former chairman of the National Board of Revenue. He can be reached at [email protected].