How to maximise tax revenue without imposing regressive taxes
"Takar khoje sarkar" (Government looking for money)—this was a top story of a reputed daily on January 12. No wonder, in its desperate hunt for money in the wake of a fiscal deficit, the incumbent government has resorted to the most easily accessible option: raising indirect taxes.
The recent decision to increase and impose additional value-added tax (VAT), customs and supplementary duties (SD) on as many as 100 consumer goods and services—that, too, in the middle of a fiscal year—has come as a flash flood to an already inflicted community. These additional taxes have added insult to injury to the people who are already severely hit by high inflation. Understandably, it has sparked a sharp protest from consumers as well as criticism from economists, businesses, political parties, and civil society, in face of which the government has decided to retract its decision for some items and services.
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Given the fact that tax is the lifeline of a civilised society, and that the tax-GDP ratio in Bangladesh is one the lowest in the world, the importance of mobilising enough tax revenue cannot be overemphasised. However, the issue of how it is done has never gone unchallenged anywhere in the world. Interestingly, in Bangladesh, despite people's strong resentment about this "how" aspect of tax revenue, pragmatic proposals on how tax should be collected in an efficient and effective way as well as in a win-win situation seldom come from the concerned stakeholders.
Tax structure in most developing countries is historically characterised by their heavy reliance on indirect taxation, such as VAT, customs and SD. This is even truer in Bangladesh's case as more than 70 percent of its meagre tax revenue, equivalent to barely eight percent of GDP, comes from indirect taxes. (According to the World Bank data, the average tax-GDP ratio of developing countries is 25.6 percent, the OECD average is 35 percent, and the world average is 15.34 percent).
Indirect taxes, equally levied on poor and rich people with the possibility of double taxation, are characterised by their regressivity. On the other hand, a good tax administration relies more on progressive tax, such as income tax where taxpayers pay taxes according to their ability.
In Bangladesh, the tax gap as exemplified by its low tax-GDP ratio is huge. Tax gap means the gap between the potential tax and the actual collection, and results from a set of factors, including weak tax administration, narrow taxbase, tax evasion, and broad-based exemptions. Alternatives to imposing new and/or additional indirect taxes lies in addressing these factors.
Economist Adam Smith argued that taxation should be based on the four principles: fairness, certainty, convenience, and efficiency. Fairness underscores the compatibility of taxpayers' ability with their conditions, including their ability to pay in line with their income and lifestyle.
Of all taxes, income tax is believed to be most progressive so long as it observes the principle of fairness. On the other hand, while indirect taxes are relatively convenient and efficient in terms of collection, they mostly disregard the principles of fairness and certainty.
The number of registered income taxpayers crossed the one-crore mark last year—a heartening increase from 35 lakh a few years back. However, this figure is believed to represent only 25 percent of the taxable population. That is to say, even if half of the potential taxpayers could be brought under the tax net, the existing 30 percent share of income tax could be doubled. Furthermore, though the existing taxpayers complain of high rates of personal income tax, it can be argued that there are ample opportunities for increasing the direct tax collection by following the "ability to pay" principle as well as by reducing widespread evasion. For example, people in posh areas and leading a lavish life with luxurious cars and flats should be able to pay higher amounts of taxes according to their income.
Widespread tax evasion—both direct and indirect—is another formidable antagonist in our tax culture. Evasion takes place first by dodging the tax net, and then, when forced into the tax net, by evading taxes in numerous ways. One example could be cited to indicate the extent of tax evasion in Bangladesh. According to a 2020 report of the VAT Intelligence Wing under the National Board of Revenue (NBR), only 175 out of 13,245 traders at Pink City Market, Mouchak Market, Rajdhani Market, New Rajdhani Market, Chawkbazar, Armanitola, Bangshal and Sutrapur areas in Dhaka submitted VAT returns, and only 1,937 traders had VAT registration numbers. I am not sure whether income tax intelligence has undertaken any such study which, if done, might have revealed equally startling facts.
In order to significantly reduce, if not remove, tax evasion and plug loopholes, there is no alternative to strengthening the tax administration, both in terms of its integrity and physical resources. Additionally, the synergy of responsible businesses, individuals and tax administration needs to be built to drive away the ghost of unholy alliance among tax evaders and their cohorts in tax administration. Particularly, businesses which clamour about the imposition of VAT, SD and customs duty, which are actually not paid by them but by end-users, should come forward with their proposals of how income tax can be made more efficient and effective.
According to media reports, as of the July-September period of FY2025, the NBR fell short of its revenue collection target by around Tk 25,597 crore. The recent fiscal measure of increasing commodity taxes is expected to raise an additional amount of Tk 12,000 crore. It is not certain whether this has been done just to satisfy the IMF conditionalities. This kind of ad-hoc measure erodes the principles of fairness, certainty and convenience in taxation, and hence should have been avoided.
Given that taxation is fundamental to sustainable development, and the ability to raise revenue and manage public expenditure is of core importance to every state, taxation has a direct bearing on good governance and vice versa. The good governance principles of rule of law, responsiveness, transparency, and accountability have immeasurable significance on what taxes are imposed and how they are collected. It is empirically proven in many countries that policy and administrative measures endowed with these principles contribute to revenue maximisation in a fair and equitable way. For this, what is most essential is the political will of the government "of the people, by the people, and for the people."
Dr Ahmed Munirus Saleheen is a tax researcher and a former senior secretary of the Government of Bangladesh. He can be reached at ahmedmsaleheen@gmail.com.
Views expressed in this article are the author's own.
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