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Discretionary tax policy hindering collection

M S Siddiqui
THETax-GDP ratio is very low with about 10% in Bangladesh, but keeps improving at a slow pace. Both tax and non-tax revenues as a percent of GDP have been increasing over the years. But the status is the worst among the SAARC countries. Both the Tax-GDP ratios and revenue-GDP ratios are the lowest in Bangladesh among the seven SAARC countries too. The average SAARC Tax-GDP ratio is about 15%. The Corporate Taxpayers are the highest income tax payers. Out of total income tax, the share of corporate income tax was the highest (72.1 percent) during 1981-82 to 1985-86, while in 2007-08, it was around 59.1 percent.
In case of personal income taxes it shows that only 13 percent taxpayers paying around 73 percent of tax revenue collected through personal income taxes and interestingly about 53 percent taxpayers pay only 0.08 percent taxes. The burden is unevenly distributed among the registered taxpayers. In reality a major portion of taxes is paid by a small group of people with higher marginal rates. Bangladesh tax structure is biased against the poorer class, especially in the rural areas. This view is often expressed by a section of the community, particularly in the urban sector, that the present tax structure weighs heavily against the business and entrepreneur class. It is due to the fact that the effective tax rate is higher in the urban sector than in the rural sector because of the difference in the nature of tax and the intensity at which such tax is imposed on the two sectors, and the structure of consumption and income between urban and rural sectors.
The complexities in the tax laws are cost-incurring. Huge resource costs in terms of administrative costs (tax collection costs) and compliance costs (taxpayers' costs) in terms of out-of-pocket costs and non-monetary costs. However, many of these complexities are beneficial for those who can exploit them. The livelihood of the tax lawyers and corruption of Tax officials is dependent on the complications of the tax code. The complexities in the tax laws are also cost-incurring. Huge resource costs in terms of administrative costs (tax collection costs) are involved for these. The NBR's administrative costs wereTk. 5,705.2 million in 2007-08 to collect lit. 474,356.6 of tax. Thus, average annual tax collection costs (per Taka 100 of tax) in 2007-08 was Tk. 0.51 for indirect tax and Tk. 0.60 for direct tax and hence a total of Tk. 1.20 for overall tax (including the NBR's Head Office costs).
From the perspective of taxpayers, the costs of complexities are mainly related to compliance, which include the following: Direct monetary outlays for professional guidance, expenses for recordkeeping and 'supplies' (stationeries, files, etc.), expenses for buying latest tax publications, cost of audits, appeals and lawsuits. Time spent by the taxpayers on their tax affairs for preparing return, activities such as researching the tax law, meeting with an advisor, or arranging financial affairs to minimize taxes added to the cost, which is hardly assessable in terms of money.
Salary is the main source for Government employees, it includes all kinds of pay, dearness allowance, overtime allowance, bonus, leave salary, advance pay, all allowances, pay for rent free accommodation, pension, interim relief, house rent allowance and contribution of NPS. And following the items does not include such as Children Education allowance, Hostel subsidy and Transport allowance. In Income Tax Ordinance, 1984, an exclusive definition is given in Section 2(58) where it is said that salary includes: (a) any wages, (b) any annuity, pension or gratuity, (c) any fees, commissions, allowances, perquisites or profit in lien of in addition to salary and wages, (d) any advance salary; and (e) any leave encashment. Based on this definition of salary and practical situation elements of salary can be identified as income of any Government or Private officials.
Income Tax Ordinance, 1984, has allowed the government officials, having taxable income, to pay income tax on their basic salary and enjoy exemption on other allowances. But for many years the income tax for government employees is deemed paid by their employer that is government. However, if a private employer pays income tax for its employees, such payments are considered income, which creates additional tax burden for the employees of the private firm.
Since 2010, officials of all the government offices are paying tax on their basic salary while officials of private companies are paying tax on both basic salaries and other allowances.
But another discrimination created by an order of Ministry of Finance and complexities over collection of income tax on allowances and other income of the officials of state-owned enterprises (SoEs) and autonomous bodies have created confusion among the taxmen in the current fiscal year. According to the income tax rules the officials and employees of the SoEs and autonomous bodies, who have taxable income, have to pay income tax on both of their allowances and basic salaries while finance ministry's order allowed them to pay tax only on their basic salaries that full government officials are enjoying, tax officials said.
Taxmen are puzzled over two contradictory rules of the government on collection of income tax from the officials of SoEs and autonomous bodies. Due to the order the tax of employees of SOEs are same as of Employees of private companies. According to a comprehensive report at a daily newspaper, NBR deducts the tax at source from salaries drawn by government officials. According to available data the NBR receives more than 50,000 tax returns every year out of more than 1.0 million government officials. The tax official said the government would earn additional Tk 4.0 billion tax by imposing tax on allowances of the officials of the state-owned bodies.
Since tax is so pervasively related to our life, the taxpayers should not be a victim of complexity of the tax laws. Contradictions and complexities for employees among government, autonomous and private organizations have created frustration among the tax payers. This seems discriminatory, that encourages employees of private firms to avoid or evade taxes and frustrate the SOE employees. Such discriminations are responsible to create social inequality and distortion in the tax system of the country with negative impact on her Tax-GDP ratio and hindering the expansion of tax base as well. The contradictions and complexities of law and rule should be corrected as soon as possible.
The writer is Legal Economist. E-mail: shah@banglachemical.com