Close all loopholes for tax evaders despite their ability to pay

At the current stage of our country's economy, achieving revenue targets necessitates the introduction of a "push factor." No matter the cost, there must be a strong effort to elevate revenue collection to the desired level. A significant number of people who are eligible to pay taxes have yet to be included in the tax network. On the other hand, efforts are being made to bring into the tax and customs framework sectors that should be taxed but currently aren't. In both cases, there is a need to move forward with a refined and reformed plan to create or implement a taxpayer-friendly and automated incentive-based system. In other words, for those who are capable of paying taxes but aren't, we must encourage them while simultaneously closing all loopholes that allow tax evasion. Effective measures must be taken to remove any obstacles or complexities that exist in the tax payment and collection processes.

Efforts to improve tax collection have been ongoing since the 1990s, but without significant success. Previously, our economy was largely dependent on import trade. Since our domestic production system was not very strong, there were few opportunities to collect taxes or VAT aside from import duties. However, as Bangladesh’s economy began to shift from a trading-dependent to a manufacturing-dependent one in the 1990s, tax collection started to increase more than customs duties. As Bangladesh’s export earnings grew, driven by remittances and the ready-made garments industry, and import costs declined proportionately, the issue of internal revenue collection gained national importance. At the same time, after the fall of the Soviet Union in the early 1990s, the global economy underwent a new polarization. As a result, developing countries like Bangladesh found it harder to receive foreign loans and aid as they did in the past, making domestic revenue collection even more critical for low-income countries aiming for rapid development.

Despite the government's efforts at various levels, Bangladesh’s tax-to-GDP ratio remains far from the desired level. Achieving this goal still requires significant work. Bangladesh has one of the lowest tax-to-GDP ratios in the world. Each year, the national budget sets an ambitious tax collection target, but it is rarely achieved. The revenue collection target is often high, but there isn't always a clear strategy to achieve it. Efforts focus on bringing more eligible taxpayers into the tax net while also trying to quickly bring newly emerging financial sectors under taxation. However, this effort takes time due to inefficiencies in personnel and capacity at the revenue collection departments, and the move to automate the revenue collection process still feels incomplete.

In some cases, efforts to motivate taxpayers to participate in the tax system have been overshadowed by overly rigid and complicated procedures that may discourage compliance. If the tax collection process becomes too difficult and bureaucratic, people who are not yet in the tax net may be afraid to enter, while current taxpayers may lose the motivation to pay correctly. Taxpayers could have resolved many of their grievances and issues through a Tax Ombudsman, but although this institution exists in over a hundred countries, Bangladesh abandoned its Tax Ombudsman early on.

There is room to revive the Tax Ombudsman institution by addressing the legal issues that led to its dismissal. Both taxpayers and tax administrators need to shift their mindset. If we assume that all taxpayers are as educated, responsible, and knowledgeable about the law as they are in developed economies, our tax strategy is bound to fail. In such a situation, instead of fostering a progressive tax environment, we may create a regressive one. If new taxpayers are not being brought in, the existing ones may feel overburdened and seek ways to avoid paying taxes.

Each year, amendments are made to the three existing revenue collection laws. Although a new tax law replaced the 1991 VAT Act in 2012, it wasn't fully implemented until 2019. Efforts to reform and modernize the Customs Act of 1969 are ongoing, and the Income Tax Ordinance of 1984 was renewed in 2023. Additionally, the annual budget contains an increasing number of revisions. For example, around 70 amendments are proposed annually for income tax laws alone. Such frequent changes can overwhelm those involved and create additional complexity in enforcement.

Taxpayers often face uncertainty when making business and investment decisions. When amendments to the law are applied for three or more years, it takes time to fully understand and follow the changes. Moreover, delays in issuing tax circulars and ambiguities in their content can hinder proper tax collection. Failure to resolve these issues could result in further complications and difficulties for institutional and environmental stakeholders, ultimately hindering efficient tax collection.

From the beginning of the fiscal year, the country faces natural disasters and various other issues, leading taxpayers to request extensions on tax deadlines. To address this, a law was introduced allowing individuals to file income tax returns until November, extending the deadline from three months to five months after the end of the fiscal year. However, this delay causes disruptions in the fiscal system, as the government continues to spend while awaiting revenue, often leading to increased bank borrowing. Without timely tax payments, financial management becomes challenging, and the utility of the expected revenue decreases.

To improve the revenue collection system, we need to reform laws and procedures in a way that ensures clarity and efficiency. If legal loopholes are not addressed, achieving large-scale tax collection will remain difficult. Therefore, without addressing these gaps in legal and administrative procedures, it will become increasingly challenging for the National Board of Revenue (NBR) to meet its targets.

The author is former Secretary, former Chairman of the National Board of Revenue, and former Member of the Planning Commission.
Written by: MA Khalek.