STAR BUSINESS REPORT

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 percentage point 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 decreased from 50 percent in 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 percentage point increase in income inequality.

Furthermore, a 1 percentage point rise in income correlates with a substantial 0.084 percentage points 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.

Mahfuz Kabir, research director of the Bangladesh Institute of International and Strategic Studies, said no policy would please everyone, but social justice must be considered when forming policies.

Mohammad Abu Yousuf, director general of the finance division of the finance ministry, said the government should ensure proper taxation from taxable persons alongside expansion of the tax net.

In many cases, taxable individuals that are supposed to pay Tk 2 crore can simply pay Tk 20 lakh, he explained.

Towfiqul Islam Khan, senior research fellow at the Centre for Policy Dialogue, said challenges in data interoperability posed a major problem to proper taxation.

Speaking as the special guest, MM Fazlul Haque, member of the National Board of Revenue, said the NBR faced challenges related to tax structure, including tax exemptions.

Economist and RAPID Chairman Mohammad Abdur Razzaque moderated the session.