Taxation policy is one of the major tools used by the government to create a sustainable revenue base for implementing public programmes successfully. An efficient tax administration and collection system can generate more resources for the government to spend on delivery of public goods and services. In recent years, Bangladesh has experienced an average annual growth rate of 6.0 per cent. However, the tax-GDP ratio has remained significantly low. This ratio - tax revenue as a percentage of GDP (gross domestic product) - is a standard performance assessment tool for a country's tax system. In 2005-06, the ratio was calculated at 7.14 per cent. While the ratio has since improved, amounting to 9.29 per cent in FY 2014-15, it is still less than many other Asian countries. The ratio has remained mostly static in the last decade.
In fact, Bangladesh is the only country in the South Asian region with a tax-GDP ratio below 10 per cent. In neighbouring India, the ratio is well above 15 per cent. The government has, however, addressed this issue in the 7th Five-Year Plan, setting a tax-GDP ratio target of 14.1 per cent. Recent tax policies have focused more on increasing indirect tax revenue, particularly through VAT collection. The digitisation of the VAT system is a step towards that goal. Even then, this will be a particularly onerous task given that only 1.0 per cent of the population currently pays income tax, thus increasing the burden on indirect tax revenue.
In Bangladesh, tax revenue constitutes a major share of the total revenue for the government. An inefficient tax system can adversely affect total revenue and subsequently the government's ability to spend on public service delivery and undertake development programmes. In recent years, the government's revenue and expenditure have shown a diverging trend. In FY 2014-15, the government expenditure was Tk 762.97 billion more than total revenue. Therefore, this might indicate a greater reliance on domestic and foreign borrowing by the government.
Why is the government not getting enough revenue to match its expenditure? Analysis of the administration and revenue collection of the National Board of Revenue (NBR) provides some answers. Both internal and external limitations have resulted in large amounts of unpaid taxes that span across tax zones. In recent years, although direct tax revenue has increased, data shows that the amount of unpaid tax was Tk 100 billion during FY2013-14, an amount that far exceeded the direct tax revenue collected.
The difference between unpaid income tax and collected income tax is similar across tax zones, with some of the worst performances in terms of unpaid or pending income tax revenue in some of Dhaka's tax zones. A further analysis reveals that there is a difference between actual income tax claims and adjusted income tax claims. The adjusted income tax claims are the amount expected to be received from taxpayers after negotiations between NBR officials and the taxpayers. Critics argue that these negotiations are mostly a reflection of the rent-seeking behaviour of the concerned stakeholders. It is plausible that tax officials engage in under-the-table negotiations with individuals or corporations to determine the amount of tax to be paid. However, it remains unclear why the eventual income tax collected from the official adjusted tax amount is so low and may allude to even greater inefficiencies of revenue collection.
Internal inefficiency of the NBR in the form of inadequate administrative capacity could be one of the reasons for dampened revenue collection. Administrative capacity of the tax authority is one of the key determinants of the level of revenue collection. The NBR Annual Report shows that the number of vacant positions at NBR for all classes of officers rose between FY 2011-12 and FY 2012-13. Vacant positions for second and third class officers rose from 1,000 to 3,800 and from 2,500 to 4,500 respectively. However, vacant positions in the first and fourth grades were fewer than in second and third grades. The high volume of vacant positions speaks of shortage of tax collectors, given the number of taxpayers, and the subsequent capacity of the NBR to collect tax revenue.
Often, it is not quantity, but rather quality that is a crucial factor. Absence of qualified tax collectors can diminish the efficiency of the tax revenue collection system. Studies find that many assessing officers do not have the proficiency level required to be efficient tax collectors. Without these qualifications, tax officers often fail to complete tax evaluations and properly assess documents, audit reports, and account books. If this is the case, it can encourage greater non-compliance among the taxpayers.
External factors, particularly the massive backlog of cases, have also contributed to a large volume of unpaid tax revenue. When the tax-related cases get backlogged, the tax revenue to be paid to the NBR remains pending, further adding to the unpaid revenue amount. Compared to the rest of the country, Dhaka's tax zones performed poorly in terms of disposal of income tax cases. The number of cases filed was higher in tax zones where the difference between the adjusted income tax claims and the actual income tax collected was more pronounced. The number of pending cases increased in nearly all tax zones from FY 2012-13 to FY 2013-14. Sylhet had the highest number of backlogged cases, followed closely by Comilla, Khulna, Rangpur, and Dhaka.
Assessment of the relation between backlogged income tax cases and unpaid income tax revenue shows that zones with fewer income tax-related cases filed also have lower unpaid tax revenue. In other words, zones with lower unpaid tax to income tax cases ratio represent a better performing zone. That may be one of the reasons for poor revenue mobilisation across the country. Graph-I displays the relationship of unpaid income tax against income tax cases filed across tax zones, which is an indicator for revenue collection performance.
Although there have been a number of reforms in the tax system in recent decades, the findings indicate existing institutional inefficiencies have led to poor tax collection. Additionally, lack of judicial expertise at NBR has caused case backlogs. Better administrative and regulatory capacity at NBR along with taxpayer education can encourage greater compliance and increased revenue growth. Taxpayers' morale in Bangladesh can be particularly low because absence of transparency and accountability in government spending dissuades taxpayers from paying their taxes. NBR sources, however, claim that the government intends to digitise tax collection and filing system with an emphasis on better taxpayer services and taxpayer education. A more informed taxpayer is more likely to be compliant and submit his/her taxes.
To reduce the gap between projected and actual tax revenue as well as to improve tax-GDP ratio, the government needs to redouble its efforts to increase tax revenue and encourage greater tax compliance. This will allow Bangladesh to improve its tax-GDP ratio, and reach the target of 14.1 per cent as set in the Seventh Five-Year Plan to expand the fiscal space in the country and to reduce dependence on loans.
Kaneta Zillur and Nabila Zaman are Research Associates at BRAC Institute of Governance and Development.