FY18 budget: An exercise in aggressive revenue collection

Dhaka,  Mon,  21 August 2017
Published : 16 May 2017, 19:31:04
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FY18 budget: An exercise in aggressive revenue collection

Asjadul Kibria
There will be a higher tax burden on the people in the upcoming fiscal year (FY18). Finance minister AMA Muhith has already made it pretty clear. In several pre-budget talks, he said that he would put pressure on the people for paying more taxes. 

The government plans to set a record 30 per cent growth target of tax-revenue collection in the upcoming budget with the new Value Added Tax (VAT) regime as a strong tool in hand. The VAT law, designed under the guidance of the International Monetary Fund (IMF), has drawn strong resistance, especially from the businesses as it would introduce a flat 15 per cent VAT across the board. The government, however, hinted to lower the rate and is likely to set it at 12 per cent. 

By introducing a strict VAT law, the government, the critics say, will actually widen tax inequality. First, it will increase the government's dependence on indirect taxation. Second, it will be applicable equally to all without considering the income level and spending capacity. Third, the provision of excessive penalties and enhanced discretionary power given to the VAT officials will widen the option of rent-seeking. Fourth, though the system will be automated, it is yet to be tested in real world and complains are already there about some flaws in the system that may disrupt the operation. 

Again, one major lacuna of the new VAT law is that it is not considering the real value addition, and will be levied on the presumption that there is always equal value addition in all the sectors. Nevertheless, the government is firmly determined to implement the law with effect from the first day of the next fiscal. The budget for the next fiscal is largely dependent on VAT.

The finance minister's another instrument to generate higher revenue is to 'hugely strengthen' the National Board of Revenue (NBR). He strongly believes that NBR has now better manpower and logistics to collect higher revenue. However, the minister is also relying on people's 'positive attitude' to come under the tax net. It is reflected in the incremental number of Tax Identification Number (TIN).  At the end of last fiscal year, total number of TIN holders was 1.40 million which doubled within a year and reached 2.85 million at the end of first week of May this year. By the end of current fiscal, it may hit 3.0 million. 

No doubt, the number of TIN is still very low compared to the total population as well as the number of economically active people. While the number of the country's bank account holders is around 70 million, only 3.0 million TIN holders means a large number of people are still not under the tax net although many of them are paying tax at sources. 

With the increased number of TIN holders and stronger NBR, the finance minister is optimistic that he can now mobilise record amount of domestic resources. In the ongoing fiscal year's (FY17) budget, original target for tax revenue was set at Tk 2.1 trillion. With 30 per cent increase, next year's revenue target may be set between Tk 2.6 trillion and Tk 2.7 trillion. 

Though the capacity of NBR is said to have improved, its level of efficiency is yet to be tested. The important thing here to note is that tax officials are not liable to account for their actions in collecting revenue, so a high target will result in an undesirable aggressive drive to collect taxes. 

While the taxmen will 'pressurise people for paying more taxes', they are apparently indifferent to the rising trend of resource outflow from the country, in the form of capital flight or illicit financial flow. Latest estimates by the Global Financial Integrity showed that during 2005-2014, illicit financial outflows from Bangladesh stood to $7.58 billion every year on an average and in 2014, it stood at $9.10 billion. This means, financial resources are incrementally fleeing the country to avoid taxes. The amount of average annual outflow is more than twice the size of the current fiscal year's budgetary target of non-tax revenue and more than one-fourth of the target of tax revenue. 

Illicit financial outflows cover illegally earned money -- be it through tax evasion or illegal economic activities like smuggling, drug trafficking etc. Thus, to check such outflows, it is important to curb such activities which requires better governance of fiscal measures. Without focusing on this area adequately, the government is actually risking further increase of resource outflows. 

The finance minister has said that the upcoming budget is his last chance to generate huge revenue for the development spending as the next budget -- budget for FY19 -- will be an election budget. That means, he may provide some relief and sop to the tax payers and business community in FY19 budget. To bankroll such sops, he needs additional resources in his coffer. FY18 budget is likely to be designed in that direction.

asjadulk@gmail.com

 
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