In the Addis Ababa Action Agenda 2015, which aims to provide a global framework for financing the Sustainable Development Goals, countries committed to enhancing revenue administration through modernised, progressive tax systems, improved tax policy, and more efficient tax collection.

It also committed to improving the fairness, transparency, efficiency and effectiveness of the tax systems, including by broadening the tax base and continuing efforts to integrate the informal sector into the formal economy in line with country circumstances.

With the tax-GDP ratio hovering around 10 per cent, Bangladesh's tax-GDP ratio is much below the average of South Asian countries (16.4 per cent). This is mainly because of the poor tax compliance rate, in both income tax and value-added tax (VAT), which contribute about 80 per cent to the revenue collection of the National Board of Revenue (NBR).

The Eighth Five-Year Plan, covering FY21 to FY25, has set the target of raising the tax-GDP ratio to 12.26 per cent by 2025.

The Covid-19 pandemic underlines the need for a strong, resilient domestic financial system, which is stable, facilitates an inclusive economy, and provides public goods such as the universal health system. Effective public revenue generation is of critical importance to finance the kind of system that is better able to deal with the pandemic.

Against the background, the NBR needs to prepare and implement a five-year tax modernisation plan. The plan may aim at reforming both tax policy and tax administration to improve tax compliance.

REFORMING TAX LAWS

The VAT and SD Act, 2012, implemented in July 2019, appears to be largely a return to the structure of 1991. It is widely regarded as a missed opportunity to reform the task in a positive direction. Although the standard VAT rate is 15 per cent under the VAT Act, there is currently a multitude of applicable VAT rates.

The most fundamental criticism is that there are too many VAT rates, which 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. 

The Act needs to be reviewed, and efforts may be made to return to the original VAT and SD Act, 2012, to the extent possible by consolidating various differentiated rates and turnover-based regimes into a unified structure.

The present Income Tax Ordinance, 1984, is outdated to keep pace with the changing time.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

BROADENING TAX NET

Voluntary compliance may be increased by a strong and efficient third-party reporting system. The tax net may be broadened by giving emphasis on withholding taxes, reducing tax exemptions, and linking different services with the tax system.

REVIEWING TAX EXEMPTIONS

In the amended VAT Act, 2012, there are numerous provisions of tax exemptions. So is the case with the Income Tax Ordinance 1984. Time has come to review the exemptions given to individuals or corporate bodies in case of income tax and goods and services in case of VAT. The government should restrict tax exemptions.

ENHANCING TAXES ON DEMERIT GOODS

Significant increases in the taxes of demerit goods such as tobacco products, alcohol, and goods-creating pollution deserve the attention of policymakers.

The Addis Ababa Action Agenda also highlights tax and price measures on tobacco as key mechanisms to reduce demand and save lives while increasing domestic resources for development.

Research shows that the government intervention in the form of increasing prices and SD of the low segment of cigarettes and introducing a specific tax is projected to generate substantial additional revenue in a year.

COMBATING TAX AVOIDANCE AND EVASION

Tax avoidance and evasion are rampant in Bangladesh. According to the Economic and Social Commission for Asia and the Pacific (2014), the estimated tax gap is 7.5 per cent of the gross domestic product.

Some multinational corporations try to shift money to their headquarters through the transfer pricing mechanism.

The NBR should strengthen its central intelligence cell and other intelligence offices to address tax avoidance and evasion, which exploit gaps and mismatches in tax rules.

DIGITALISATION OF TAX SYSTEM

At present, there is automation in the registration of income tax and VAT. Little automation of tax processes results in low tax compliance. Therefore, the NBR needs to fully automate the tax system and integrate the information technology in the three tax wings to create synergy.

TAX DISPUTE RESOLUTION

Dispute resolution is a key issue in taxation. Up to mid-March 2021, some 33,318 tax cases were pending in different courts, involving about Tk 66,114 crore, according to data from the NBR.

For resolving tax disputes, the NBR can take a two-pronged approach: taking the initiative to get the pending cases disposed of and reducing the tax pendency in the courts by strengthening the mechanism of alternative dispute resolution (ADR).

This is likely to bring a huge chunk of money to the government exchequer. We may follow the South Africa model that disposes of more than 80 per cent tax cases through the ADR mechanism.

STRENGTHENING NBR

The government should redefine the status and regulatory powers of the NBR, delineate the relationship between the Internal Resource Division and the NBR, restructure the NBR and its field formations by function and type, ensure adequate coordination among the three tax wings, provide service to taxpayers through a web-enabled tax administration (e-registration, e-filing of tax returns, e-payments, e-refunds), introduce incentive schemes for NBR officials, develop a strategic communication and taxpayer outreach and education programme, and develop human resources and institutional capacity of the NBR.

FINANCIAL INCLUSION

According to the Labour Force Survey 2016-17, more than 85 per cent of the people are employed in the informal sector, of whom about 92 per cent are women. The pandemic has added more people to the informal sector. The government can generate additional revenue by bringing the informal sector into the formal one through financial inclusion.

IMPROVING GOVERNANCE IN REVENUE SECTOR

There are allegations of corruption in the revenue sector. Therefore, combating corruption is needed to reduce the cost of doing business and boost revenue collection.

ESTABLISHING REVENUE REFORM COMMISSION

The government may establish a Revenue Reform Commission to analyse the tax system and make specific, measurable, achievable, realistic and time-bound recommendations to reform the tax policy and the tax administration.

The author is a former chairman of the National Board of Revenue. He can be reached at ahmed.nasiruddin@gmail.com.