Jamaluddin Ahmed FCA PhD

The former President of the Institute of Chartered Accountants of Bangladesh and the former General Secretary of the Bangladesh Economic Association. He is currently the Chairman of Emerging Credit Rating Limited.

Part-II

Tax Evasion in Bangladesh involves the violation of tax law, where taxpayers do not report their exact taxable income or tax to be paid on that income, as per taxation law. While all countries experience tax evasion, the problem is more serious in developing countries, such as Bangladesh. Causes of Tax Evasion in Bangladesh includes, high tax rate, corruption in the NBR, political intentions, lack of information, inefficient tax administration, inadequacies and complexities of tax law, and lack of knowledge. The consequences of tax evasion result in, informal economy, distortion of the tax law, erosion of tax base, losing creditability of tax administration. The traditional remedial measures to curb tax evasion are, amnesty scheme, rewards initiatives for income tax officials, income tax fair, central Intelligence Cell in the NBR, and poor tax compliance reflects a poor tax culture in Bangladesh.

Political settlements, informal institutions and the negotiation of tax reform explains the persistence of a tax system characterised by low revenue collection and extensive informality in Bangladesh. It combines analysis of long-term formal and informal institutions and of micro-level incentives shaping negotiation of short-term reform. On one hand, the domestic tax system in Bangladesh is, by conventional measures, among the least effective tax systems in the world, characterised by manual administration, low revenue, and high levels of discretion and corruption. On the other hand, despite the appearance of significant dysfunction, economic growth has been consistently positive, while high profile tax reform efforts have faced almost across-the-board resistance from political, economic, and administrative elites. The space for discretion within the law is closely linked to the broader challenge of very limited administrative modernisation. In case of Bangladesh by contrast, and despite modest recent progress, NBR has largely maintained an outdated ‘control’ based system, which relies on the physical monitoring of taxpayers in order to enforce compliance. This is reflected, among other things, in extremely low levels of automation, and has allowed NBR officials to retain substantial discretion and thus, opportunities for collusion with, or extraction from, taxpayers.

The basic inefficiency of the system has been exacerbated by a high degree of administrative fragmentation. Whereas there has been a trend across lower-income countries toward greater integration across administrative units, the NBR remains divided into three highly autonomous divisions: Direct Tax, VAT, and Customs. The relative absence of data sharing across departments severely undermines administration and opens space for collusion, arbitrariness, and abuse, while fragmentation also creates additional costs for taxpayers. These challenges have been underpinned by significant human resource constraints within the NBR. Hiring is subject to the common constraints of civil service recruitment through the Public Service Commission, making the hiring of staff with the specialised skills necessary for modern tax administration particularly challenging. Even when tax assessments have been effective, enforcement mechanisms have been weak.

Informal institutions and the political logic of the tax system dominated by invisible elite group including bureaucratic resistance, rigidity and politicization. The most important resistance to reform has come from the business community, which has at various times been explicitly cited by the government, both publicly and privately, as the reason for altering or abandoning reform initiatives.

Rent allocation, economic growth and political patronage. Political elites and the existing settlement, mystery is the absence of a stronger push for reform by the political leadership despite extremely low levels of revenue collection with which to finance government programmes and patronage networks. On one hand, parts of the political leadership have demonstrated a genuine desire for reform and have, at times, taken concrete steps to pursue that goal. The informality of the system allows it to serve an important political function as a conduit for distributing patronage, as a source of funding for the political leadership, and as a means to preserve and support continued economic growth. On balance this combination of political constraints and political benefits has outweighed the desire for reform, as leaders have opted for the certainty of the current system rather than the uncertainty of change. The ability of the political leadership to deploy the NBR to deliver patronage to business allies has been important to strengthening informal ties linking political elites to leaders within the business community.

Tax Evasion and black money in Bangladesh. The Size of Informal or Black economy in Bangladesh have been have been estimated based on sources from which the black money was generated by Barkat (2021, table-19). According to the calculations, Government of Bangladesh receives only 25% of tax revenue only 25% and the remaining 75% turns into black or in informal in shape. Information presented (Barkat, 2021) from 1972-2019 reflects BDT 8,41,419 as the cumulative size of black economy. Share of this informal economy according to sources varies from 20-50% of receipts forms as a part of informal or black economy. The private sector deprives government in case Banks, industry, and insurance company 25%, in case of VAT 50%, import duty 40%, export duty 50%, Stamp duty-land revenue, transport tax, toll, registration fee, narcotics duty, service sector, non-commercials sales, in each case, maximum revenue is collected approximately 40% and the remaining 60% entering into black economy league. In case of black-marketing black money routed from government captured only 2% of the total and remaining 98% joins the cumulative stock black or informal economy. The 98% of this informal money are shared among customs, income tax, VAT, police, civil administration, Trade union leaders and elected politicians according to the informal sharing model among these parties which changes from time to time depending on relative power structure. With regards to black money routed from Bribe (2018-19) indicated equal to 4% of annual GDP. Based on the above scenario the black money routed from tax and non-tax revenue have been calculated BDT 8,41,419 crores at 2018-19 financial year. Comparison of black money routing from NBR-64.7%; taxes from non-NBR 2.9%; Non-tax receipts 2.1% got lost.

The revenue lost through illegal means such as bribe 12%; black marketing 10.9%; others 7.5%; totaling illicit transactions arrive at 30% of total money lost from crediting into government exchequer. Barkat (2021) calculation of black money from 1972-2019 mainly on the basis of three assumptions. First- black money estimating 20% of GDP, second-25% of GDP, third- 30% of GDP and fourth-33.33% of GDP.  Bangladesh Economic Association started its journey as a regular practice to present alternative budget to government of Bangladesh before Official Budget Presentation at the Parliament since 2015. This BEA alternative budget has provoked sensation among professionals, researchers, and think tanks, even among the government officials and NBR. Analysis of BEA alternate budget from 2015 to 2021 indicated that GoB can increase revenue from current position in terms of income, profit and capital gain tax 3.83 times; VAT 1.31 times; import duty 1.92 times; export duty 3.56 times; customs duty 1.89 times; supplementary duty 0.94 times total non NBR controlled revenue 2.63 times. Revenues collected from non-NBR tax-Narcotics tax 190.13 times; stamp duty non-judicial 1.13 times surcharge 1.17 times; surcharge 1.17 times. Total non-NBR taxes 5.28 times compared to traditional mechanisms taxes non-tax revenue could be increased to 2.74 time and from other sources 5.16 times.

Nonprofessional Chairperson of the NBR. The chairperson of the NBR works in the administrative service without having any professional and technical knowledge, such as in Australia, New Zealand and IRS. For example, the commissioner of the ATO is a professional taxation officer with a strong economic and law background (Peter Costello, 2005),  and also the New Zealand Inland Revenue Commissioner Bob Russel (Mark Prebble 2007). The IRS has tax attorney, William Wilkins, as the IRS Chief (Christian DesRochers, 2010). This not the case in the Bangladesh NBR. To mitigate this problem, the officers of the ITDB recommend that the chairperson of the NBR be professional with background in taxation ( Report of the Bangladesh Civil Service-Taxation Association, 2003).

Why the National Board of Revenue in Bangladesh cannot be dynamic.The National Board of Revenue provides about 90 percent of the country’s total internal revenue. This specialized organization was founded in 1972 by Father of the Nation Bangabandhu Sheikh Mujibur Rahman immediately after the independence of Bangladesh through the Great War of Liberation. BCS (Customs and Excise) and BCS (Tax) cadre officers are in charge of the National Board of Revenue and its field level offices.  Prior to 1979, the Chairman of the National Board of Revenue was appointed by the Honorable President under the Presidential Order No. 8 issued in 1972. But later military governments, in defiance of the 1972 order, formed the Department of Internal Resources, which created a new degraded position of the National Board of Revenue as the revenue wing. This is not the end. Provision was made to appoint the Secretary of the Department of Internal Resources as ex-officio Chairman of the Board of Revenue. In other words, the military decree finalized the appointment of a general administration cadre officer, who has no experience in conducting important and sensitive tasks such as formulating and mobilizing policies, as heart of a technically and professional organ of GoB. This provision, issued during the tenure of the military government revoking the ordinance of the presidential order, remains unchanged even on the 50th anniversary of independence.

The result is that the economy fails to meet its annual revenue targets, despite its enormous potential. During 20 fiscal year from 2001-2006 Bangladesh was downgarded to the list of failed state by different international organisations.  All over the world, even in South Asia, our position in terms of tax-to-GDP is at an all-time low. But we are about to emerge as a middle-income country and in 2041, we are thinking of transforming our economy into a prosperous country. All of this depends on whether we are able to raise enough resources internally. This is reflected in our tax-to-GDP ratio, which is currently below 10 percent and has been hovering around this rate for a long time. The picture of development that we see now and hope to see in the future, will not be sustainable in the long run unless significant progress is made quickly in this regard.

Significant weaknesses in the existing system. At present, one of the officers in the General Administration Cadre is appointed as Secretary of the Department of Internal Resources for a term of two to three years, who ex-officio serves as the Chairman of the National Board of Revenue. Revenue administration is a complex and sensitive field. There are many subtle technical issues, which are almost impossible to handle without a long professional experience. As a result, those who are currently in office are not able to initiate any fundamental reforms outside of routine activities. The depressing situation in the implementation of the projects of the Internal Resources Department indicates that the reform activities related to the increase in revenue collection are not going ahead properly. The report of the Ministry of Planning has also reflected this from time to time.

Due to their professional inexperience, the appointed chairman almost completes their term, as soon as they have a thorough understanding of the business practices of the country, the tendency to pay taxes, the culture of the officials and employees of the revenue administration, etc. As a result, in many cases, they become heavily dependent on a third party and are forced to make many wrong decisions, which have a far-reaching negative impact on the country’s economy. Then when they get some idea, they don’t get any chance and time to use their knowledge. Then a new official arrives and the continuum of failure is further lengthened.

There is confusion over the current status of the National Board of Revenue. The 1979 circular stipulates that the members of the Board shall be ex-officio Additional Secretary to the Government and the first Secretary shall be the Deputy Secretary. But in reality, the administrative and financial proposals of the National Board of Revenue have to be forwarded to other ministries or departments through the Department of Internal Resources, after approval by the Chairman of the Board. It is a system of dualism. The reason is the chairman of the National Board of Revenue and the secretary of the internal resources department are the same person. Many important decisions are delayed, which hampers the board’s operational and reform activities. That is why the notification of 1979 has turned the National Board of Revenue into a de facto department, which is having a profound negative effect on the government’s revenue collection process.

The structure and limitation of Tax Administration.While these developments have benefited both taxpayers and tax administrations, the current tax administration system continues to have some significant structural limitations as to the outcomes it can achieve. These limitations, described briefly below, can lead to persistent problems for tax compliance, compliance burdens and revenue collection.

A heavy reliance on voluntary compliance. While tax is not voluntary, the widespread use of the term “voluntary compliance” recognises that in many parts of the current tax system, taxpayers make choices as to the reporting, calculation and payment of tax. These choices are not just whether to comply or not to comply, but also cover choices as to the effort made in order to get things right, such as record keeping, taking the time to fill in forms correctly, resolving any lack of understanding and meeting reporting requirements and deadlines. Tax administrations currently put a lot of effort into supporting voluntary compliance, including through the development of new digital services, new communication channels and the development of more taxpayer- centric approaches. However, where compliance choices remain, inevitably some of the choices made will result in significant amounts of tax not being paid, whether deliberately, or by failing to take reasonable care or through mistakes. To measure the impacts on revenue, a number of administrations estimate the difference between how much tax should be collected and how much tax is actually collected through tax gap analysis. Based on the tax gaps as measured in a number of FTA countries, a reasonable estimate for the average tax gap across FTA members is probably in the range of 5% to 10%.

Meeting tax requirements can take a lot of effort and cost. In the case of pay-as-you-earn systems for salaried employees (discussed further below), tax is something that can usually be built into the systems that employers use for payroll purposes. For many other parts of the tax system, including other personal tax liabilities (such as capital gains, rental income etc.), meeting tax requirements is usually not built-in to the systems that taxpayers use for their own purposes (such as business accounts). Instead, taxpayers have to take additional active steps to understand, process, calculate and report tax liabilities as well as keep records for tax assurance purposes. While the overall costs of compliance are difficult to measure, many studies find that both monetary and opportunity costs can be significant.1 For example, the European Commission Action Plan for Fair and Simple Taxation Supporting the Recovery Strategy noted that the cost of tax compliance for SMEs may amount to up to 30% of taxes paid (European Commission, 2020).

Tax is often a “downstream” activity. The calculation, reporting and payment of tax is often done at the end of a tax period, usually more frequently for VAT than for personal or corporate income tax. This information is then subject to verification checks within the administration and when risks are identified, or in some cases through random selection, tax audits are conducted. These range from desk audits of specific issues to full on-site audits. The downstream nature of taxation can lead to tax uncertainty, with implications for financial planning, cash-flow management and investment, as well as additional costs from verification processes. The often long gap between taxable events and the payment of tax can also create payment risks. For example, the latest figures reported by FTA members show collectable tax debt amounting to EUR 820 billion (OECD, 2019).

Taxation is often a stand-alone activity. While more attention is being given to the development of whole-of-government approaches to improve service and compliance, in general the different systems used by different government agencies make it difficult to share data or use common processes. This can result in a number of issues. It can create additional frictions for taxpayers as citizens, for example by being unable to use their identity credentials across government and potentially being subject to multiple different reporting requirements. It can mean that some miss out on benefits they may be entitled to, particularly more vulnerable groups. It can also make it more difficult to address fraud if information available to one part of government is not able to matched and analysed with other relevant information.

Digital Transformation of Tax Administration.The digitalisation of society, moving at an increasingly rapid pace, now offers opportunities as well as challenges to all parts of society, including tax administration. These changes provide an opportunity to address some of the structural limitations of the current system of tax administration, moving away from sequential taxpayer-facing processes and beginning to integrate taxation processes into the systems used by taxpayers as part of their daily lives and businesses. Such integration will allow compliance-by- design outcomes to an increasing extent as well as possible step-change reductions in compliance costs for taxpayers. This will, of course, be easier where the tax affairs of an entity or individual are less complex, but even where taxpayers have highly complex structures, such as multinational enterprises, some more straightforward aspects of taxation may still be capable of being put into the background in this way.

A visualisation of Tax Administration.The core elements of Tax Administration 3.0 are set out below. While this digital transformation will take some time, not least because of the need to spread the costs of change for administrations and taxpayers, in this vision tax administration is increasingly.

Embedded within taxpayer natural systems. Paying taxes will become a more seamless experience over time integrated into daily life and business activities as much as possible. Natural citizen and business behaviours and systems will increasingly be the starting point of taxation processes. Tax administrations and private sector organisations will increasingly collaborate in creating innovative and joined-up services, adding value to the taxpayer, reducing administrative burdens and assuring secure, transparent and highly reliable outcomes. Adapting taxation processes to fit in with taxpayers’ natural systems will facilitate compliance by design and “tax just happening”. Free-riding and being non-compliant will increasingly require deliberate and burdensome additional activities.

Part of a resilient “system of systems.” In addition to tax administration tasks currently carried out by businesses, such as Value Added Tax (VAT) and pay-as-you-earn (PAYE) systems, many digital platforms will also become “agents” of tax administration carrying out tax administration processes within their systems. Tax authorities will no longer be the single point of data processing and tax assessment. Instead, tax administration is conducted within a resilient network of seamlessly interacting trusted actors without one single point of failure. Some digital platforms are collecting tax and transferring payments instead of data, while others identify taxpayers and liabilities and share results and tax relevant information rather than all transaction data. Public and private actors join-up in collaborative governance models. Governmental bodies ultimately oversee and assure the quality, robustness and reliability of operations and outputs.

Real-time tax certainty provider. In order to stay synchronized with daily life and business transactions and events, tax administration processes will be increasingly real-time or close to real-time. Not all tax liabilities can be settled in such a short cyclic manner, so additional balancing mechanisms may be needed, such as real-time taxpayer accounts (possibly with crediting and debiting of tax payments and refunds). In most cases, swift and accurate provision of tax certainty is provided. Artificial intelligence tools and algorithms will support the characterisation and assessment of liabilities and will increasingly support decision- making.

Transparent and trustworthy. Taxpayers will have the opportunity to check and question taxes assessed, paid and due in real-time. It will be clear which rules have been applied to which data, reflecting facts and circumstances. This will allow taxpayers to challenge both automated and human decision-making. Citizens and businesses can check the origin and accuracy of the data used and can grant or deny access to personal data sources not required for tax purposes. Although the tax legislation might still be complicated, to taxpayers the underlying tax administration process and results will be increasingly accessible and transparent.

An integrated part of whole of government. Taxation is increasingly joined-up with other government services and functions, as well those of private actors, employing common engagement models with citizens and business. One digital identity will support a seamless connection between processes and data sources. Payments, benefits and refunds are matched and balanced from a citizen and business perspective.

A human touch and high tech adaptive organisation. Although change is the only constant factor, a taxpayer-centric perspective will be the focal point around which tax administration processes are structured and governed. The key success factor is the intertwining of human staff and skills with advanced analytics and decision-supporting tools such as AI. This combination will support taxpayer compliance in the reducing number of areas where compliance choices still remain. It will also detect anomalies, leakages and flaws in the tax system. The agility of people, processes and systems assures that the tax administration can stay aligned with societal and economical change as well as respond to changes in circumstances, including crises. Such a transformation requires many things to come together which, although incremental in nature, should ideally be designed with the end goal in mind. Otherwise, the incremental changes could become dead- ends or result in what, over time, may become expensive and inefficient legacy systems. This will requires a comprehensive long-term strategy, including the involvement of other parts of government and the private sector, and long-term funding. Before unpacking this further in section below are two example of systems where compliance might be built-in and burdens reduced or, in some cases, largely eliminated. The first concerns the possible future development of automated self-driving cars, already being piloted to a limited extent. The second, is a more familiar example of how personal income tax is already being addressed in a largely seamless and frictionless manner from the perspective of the taxpayer.

Pay-as-you-earn and pre-filling of tax returns. Closer to home for tax administrations is the long-standing compliance-by-design example of PAYE systems. From the perspective of salaried employees, this is transparent in its outcome (i.e. notification of the amount of tax deducted) but largely invisible and burden-free in its operation.

Where the employer has complete information about the individual taxpayer’s taxable position from verified sources (including from the tax administration) and there are no special allowances for the individual (e.g. for children or specified expenses), then there are no compliance choices for the employee to make. (Of course the employer will still have compliance choices, for example remitting payroll taxes on time and in full.) With PAYE systems, tax is just something that happens and any changes in the tax burden at the individual level can only be sought through political processes and not through exercising compliance choices. For the tax administration, there will be no need to interact with the individual employee other than in a few circumstances. Of course, in most countries, complications are increasingly being put into the background.

Two closing thoughts to end this paper. First, the vision of Tax Administration  is neither a futuristic debate nor something that will be arrived at naturally by continuing to develop the current system of tax administration with its inherent structural limitations. To use the analogy above, getting to the self-driving car does not come from continued incremental improvements to current car design. Second, to note that there is some urgency to the journey to Tax Administration, both because of the scale of possible benefits presented here and the new challenges arising from increased digitalisation described in the near future. Bangladesh-Revenue Projection 2021-22 The following table shows a projection of tax revenue based on assumption of 8 %, 9%, 10%, 11%, and 12%. Revenue Projection in terms of GDP growth rate has been held at 4.304% as calculated based on historical average (e.g. 34.84*104.3=36.34). The current collection rate has been calculated as 7.72% based on the average weighted historical collection data (e.g.2.81/36.34=7.72%). The base year has been held as 2021 with a tax collection amount of Tk 2.56 trillion at the GDP amount of Tk 34.84 trillion. The tax revenue amounts for 2026 have been calculated based on the tax revenue collection targets of 8%, 9%, 10%, 11%, 12% and the current rate of 7.72% (e.g. 5.16/43.01=12%). This projection does not include NON-TAX Revenue. 2021 is considered the base year for this projection. Through digitalization of ID and revenue system potential revenue collection can be increased from 946% at 9% tax/GDP ratio, 17.90% at 10% tax/GDP ratio, 26.34% at 11% tax/GDP ratio, and 34.78% at 12% tax/GDP ratio. 

Recommendations

The digital technology ecosystem -An ecosystem of interdependent digital technologies. These include, computing power, Internet of Things, Block chain, 5G networks, Artificial Intelligence, Cloud computing, and Big data. The installation of Next-generation wireless networks: “5G” and beyond, extracting insights from data creates value, identify the Vectors of digital transformation: Scale, scope and speed.  Data on Ownership, assets and economic value, Vectors of digital transformation. Relationships, markets and ecosystems, are essential.  Prepare for more people and things going online than ever before. Invest in broadband to empower future technologies.  Promote competition and remove barriers to investment to boost connectivity.  Expand access in rural and remote areas to connect everyone.  Rural areas lag behind urban and other areas in broadband access at sufficient speeds. Enhance access to data to unleash its potential.  Foster more sophisticated Internet usage for all.  Realise the potential of digital government. 

Public-private co-operation on the collection of value-added tax on online sales, municipal tax collection, driving licenses, all highway, bridge toll collections, 90,000 Village ha and bazars, all Upazilla tax-VAT, Land Tax-all other tax and levies,  of union-UZ, District Council, and other local government taxes should be brought under digital payment system. Digital technologies create new opportunities for co-operation between the public and private sectors. For example, such co-operation has taken place in the context of more efficient and effective tax collection. Several countries have introduced liability regimes for digital platforms related to value-added tax or goods and services tax (VAT), with the objective to reduce the costs and risks for tax authorities of administering, policing and collecting VAT on the ever-increasing volumes of online sales. Some countries have introduced a regime that makes digital platforms liable for assessing, collecting and remitting the VAT due on online sales facilitated by the platforms.

While being implemented by a growing number of jurisdictions, this regime is still relatively new, in particular with regards to online sales that involve the importation of low-value goods. Some of these countries have complemented this approach with voluntary or obligatory information-sharing arrangements between platforms and tax authorities, as well as educational measures targeted to sellers on platforms. Other countries have chosen to limit requirements for digital platforms to information-sharing and specific measures to tackle possible fraud by online sellers.