Reliance on indirect taxes raising poverty

The government's excessive reliance on indirect taxes such as value-added tax (VAT) is putting a higher burden on low-income individuals, leading to a rise in poverty and inequality, according to the findings of a study released yesterday.

"There is a significant positive correlation between indirect taxes and poverty. Each one percentage point increase in the indirect tax burden leads to a 0.42 percent rise in poverty," read the study, conducted by the Research and Policy Integration for Development (RAPID) with support from the International Growth Centre (IGC).

The organisation unveiled the study at an event at the Six Seasons Hotel in Dhaka.

Md Deen Islam, associate professor of Economics at the University of Dhaka and research director at RAPID, presented the keynote.

The study said the National Board of Revenue currently collects almost two-thirds of its revenue from indirect sources of tax, raising concerns about the effect of such taxes on poverty and inequality.

The study said that poverty had decreased from 50 percent in the year 2000 to 24 percent in 2016.

However, income inequality had risen.

The study cited cross-country analysis and said that a one percentage point spike in the indirect tax burden leads to a 0.1 percent increase in income inequality.

Furthermore, a 1 percent rise in income correlates with a substantial 0.084 percent decrease in poverty, it added.

RAPID said an expansion of the tax net was essential to collecting more revenue from direct sources.

Indirect taxes such as VAT to boost tax revenue should be used strategically, particularly in sectors associated with higher or luxurious consumption, it added.

The study suggested a cost-benefit analysis before allowing tax exemptions.

"Alternative measures, such as automated and user-friendly technology and service-oriented attitude are imperative to enhancing tax compliance. Policing and threats are generally not effective in increasing tax compliance," it said, adding that the adoption of an automated system for notifications could be effective in ensuring greater compliance.