Session II: RECENT AND UPCOMING FISCAL REFORMS IN SOUTH AISA

CENTRE FOR POLICY DIALOGUE (CPD)B A N G L A D E S H

a c i v i l s o c i e t y t h i n k – t a n k

Presentation byMustafizur RahmanMustafizur Rahman

mustafiz@cpd.org.bd

Fiscal Reforms in Bangladesh: Evolution, and Future Initiatives

Workshop onCOLLABORATIVE RESEARCH ON

SOUTH ASIA TAX SYSTEMSSingapore: 08-09 August 2010

Presentation Outline

1. Introduction: Salient Features of Bangladesh’s Current Fiscal Scenario

2. Growth Trends and Revenue Structure of Bangladesh

3. Major Fiscal Reforms in Recent Times

4. Fiscal Initiatives in the Budget for FY2011

5. Medium Term Fiscal Plan

6. Areas of Research Interest

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Fiscal Reforms in Bangladesh: Evolution, and Future Initiatives

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1. Introduction: Salient Features of Bangladesh’s Current Fiscal 1. Introduction: Salient Features of Bangladesh’s Current Fiscal ScenarioScenario

Salient Features of Tax System

Notwithstanding the various fiscal reforms of the recent past, Bangladesh fiscal system

continues to suffer from a number of major weaknesses:

Low Level of Revenue Mobilisation

Regressive Nature of Taxation

High Tax Incidence

Low Tax Base

High Degree of Tax Evasion

Limited Administrative Capacity

Resource Constraints (Human and Logistics)

Centralised Taxation System

Cumbersome Legal Procedures

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2. Growth Trends and Revenue Structure of Bangladesh2. Growth Trends and Revenue Structure of Bangladesh

Over the past years total revenue and tax receipts as % of Bangladesh GDP have increased – from 6.5% and 5.5% respectively in FY1982 to 11.2% and 9.4% respectively in FY2010

Tax receipts roughly generate four-fifth of total revenue National Board of Revenue (NBR) is the apex tax authority of the

government which is entrusted to mobilise tax revenue Average annual growth of total tax revenue for FY1982-1991 period was

13.77%; it came down to 11.8% during FY1992-2001. However, average annual growth picked up between FY2002-2010 and was 14.21%

However, tax-GDP ratio is still significantly low when compared to other countries (average tax revenue as % of GDP in South Asian countries is about 12%)

Fiscal Year Revenue as % of GDP Tax Revenue as % of GDP

1982 6.48 5.47

1992 8.21 6.61

2002 9.48 7.80

2010 11.22 9.37

Revenue and Tax Revenue as % of GDP

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Customs duty (import tariff) used to be the preeminent contributor to the revenue envelope in the early 1980s – accounting for 42% of total tax revenue of the country in FY1982 and 35% in FY1992

In FY1992 VAT was introduced with a view to gradually replace the sales tax; over the years VAT emerged as one of the major components of tax revenue

However, dependency on the tax collection at import stage was high at that point – 51% of total tax collection originated from CD, VAT and SD at import stage

Growth Trends and Revenue Structure of BangladeshGrowth Trends and Revenue Structure of Bangladesh

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1990s was the decade of trade liberalisation in Bangladesh as import duty was slashed considerably (average duties coming down from about 60% to 20%)

As a result, in FY2010, the share of CD and total tax collection at import stage declined to 14.7% (35% in FY1992) and 35.3% (51% in 1992) respectively

VAT emerged as the predominant component of tax mobilization: VAT (import plus local) as % of total tax revenue has gone up from 22% in FY1992 to 33% in 2002 and a further 37% in FY2010

Contribution of Income tax has increased over the last decade – from 16% of total tax in FY1992, to 18% in FY2002 and finally 26.4% in FY2010

Growth Trends and Revenue Structure of BangladeshGrowth Trends and Revenue Structure of Bangladesh

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3. Major Fiscal Reforms in Recent Times: Income Tax3. Major Fiscal Reforms in Recent Times: Income Tax

1. Tax Base Introduction of ‘initial exemption limit’ (tax-base as ‘total income’) instead

of ‘filing threshold system’ (tax-base as ‘taxable income’) in FY1993 Current tax exemption limit: Tk 165,000 (USD2,357); per capita annual GNI

– USD700 Tk. 180,000 (USD2,571) for Female and Senior citizens (65 years and

above) Tk. 200,000 (USD2,857) for persons with disability

2. Tax Rate Income tax rate in Bangladesh maybe considered to be high.

Category of Taxpayer Tax Rate

Personal (Highest Rate) 25.0

Bank, insurance and other financial institutions (Listed/Non-listed)

42.5

Dividend income of corporate tax payers 20.0

Mobile phone operator 45.0 (35.0 for listed cos)

Listed for public trade 27.5

Not listed for public trade 37.5

Major Fiscal Reforms in Recent Times: Income TaxMajor Fiscal Reforms in Recent Times: Income Tax

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3. Administrative Measures Introduction of large Taxpayers Unit (LTU) for income tax in

FY1999 Introduction of withholding tax being final discharge of tax liability

in FY1999 (at present total items are 20 in number out of 44 items under source-tax)

Advance income tax payment on quarterly basis if tax-base exceeds a limit

Assessment on the basis of report of a outsourced chartered accountant in FY2001

Introduction of Central Intelligence Cell (CIC) in FY2004 Mandatory provision for Tax Identification Number (TIN) for

registration of assets and business (land, vehicle etc.) in FY1991 Introduction of online submission of tax returns for personal

income at a pilot basis in FY2011 Strengthening of inspection, survey, search and seizure

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4. Special Tax Incentives

Tax holiday

4 years (for Dhaka and Chittagong) to 6 years (other areas) up to FY2011

10 years for export-oriented industries in EPZs

15 years for power generation companies from FY2010 (along with other tax-exemptions on their expenditures)

Accelerated depreciation scheme

Exemption of agriculture farming activities (excepting two areas)

Periodic initiatives to allow “whitening of black money”

Major Fiscal Reforms in Recent Times: Income TaxMajor Fiscal Reforms in Recent Times: Income Tax

Major Fiscal Reforms inMajor Fiscal Reforms in Recent Times Recent Times: Indirect Tax: Indirect Tax

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Introduction of VAT through repeal of Sales Tax, Business Turnover

Tax and shifting of 90% of excisable goods and services in FY1992

VAT rate: 15%

Truncated rates are common – However, upward revision of

truncated rates and significant withdrawal of truncated rates

through introduction of standard rates in FY2011 (28 services

from 52)

Zero tax on export

LTU-VAT was established with effect from 1 October 2004

Provision of tariff value for VAT since FY1993

Provision of withholding VAT was made applicable for both goods

and services

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Introduction of trading-stage VAT and provision for delegation of Magistracy power to the VAT officers since FY1997

Introduction of VAT refund system since FY1998

Introduction of license to VAT consultants since FY1999

Introduction of compulsory registration irrespective of annual turnover since FY2000

Introduction of advance trade VAT (ATV) on commercial importers since October 1, 2004 and replaced by VDS (VAT deducted at source) at import-stage since FY2011

New provision to issue a unified registration number to each registered person for VAT and income tax purposes incorporated in FY2008; however, this has not been implemented as yet

 Customs, Excise and VAT Appellate Tribunal established from October 1, 1995

Provision of outsourcing of external auditing professional since 1993-94

Major Fiscal Reforms in Recent Times: Indirect TaxMajor Fiscal Reforms in Recent Times: Indirect Tax

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Excise, Taxes & Customs (ETAC) Data Computerization Project with

major finance from the World Bank (December 1989 - June 1999)

for IT-based tax management system

Implementation of ASYCUDA (Automated SYstem for CUstoms

DAta) software, which was launched as a project of the NBR in

1991 with financial assistance from UNDP. The project was

redesignated as SPEED (Special Processing of Electronically

Entered Declaration) at the implementation stage

Infrastructure Development Surcharge (IDSC) was first imposed in

FY1997 at import stage and was later withdrawn in FY2008

Major Fiscal Reforms in Recent Times: Indirect TaxMajor Fiscal Reforms in Recent Times: Indirect Tax

Major Fiscal Reforms inMajor Fiscal Reforms in Recent Times Recent Times: General Reforms: General Reforms

Help Desk opened at the NBR Head Office in November 2007 to

help visitors and other persons seeking assistance with regard to

income tax, VAT and customs duty

Citizens Charter of the NBR published in January 2008

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Fiscal Initiatives in the Budget for FY2011Fiscal Initiatives in the Budget for FY2011

Following “Plan of Action” is to be implemented in FY2011 : Freeze/take over of bank accounts of tax defaulters. Bilateral meeting with the aim of settling outstanding income

taxes Strengthen monitoring mechanism with a view to ensure

deposit of withholding tax and outstanding income tax Strengthen legal initiatives to end large-revenue related

disputes and appealed legal cases in the higher courts of law Settle audit disputes Retrieve household asset holding number from municipality

and trade-license related information of businesses and thus identify new tax payers

Identify forged TIN Regular visit in order to coordinate the works of field level

offices Establish tax offices at district level Create tax related database

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The government in its Sixth Five Year Plan has set a target to improve revenue-GDP ratio and tax-GDP ratio to 14.1% and 11.8% respectively by FY2015

Reforms aimed at strengthening tax administration and improving taxpayer services during FY11-15 will continue to focus on the following measures: Improve monitoring of tax collection and the impact of measures to

expand the tax net De-link tax collection from tax officials by allowing payment through

banks and/or online rather than through tax offices

5. Medium Term Fiscal Plan 5. Medium Term Fiscal Plan

Fiscal Year Revenue as % of GDP Tax Revenue as % of GDP

2010  11.2 9.4

2011P 11.9 9.7

2012P  12.5 10.2

2013P  13.1 10.8

2014P 13.6 11.3

2015P 14.1  11.8

Revenue and Tax Revenue as % of GDP

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Improve procedures for ensuring timely deposit of tax revenues at the point of collection

Establish a special tribunal to prioritise resolution of long-standing tax payment cases

Improve publicity and information to encourage individuals and firms to register and pay tax

Undertake action to fill vacant positions in NBR (currently 8,000), improve on-the-job training and undertake other capacity building measures

Develop one-stop service centres to provide information and advice to taxpayers and create a more positive tax compliant environment

Further simplify tax forms and improve tax payment procedures such as payment through mobile phones

Implement an integrated automation strategy covering taxpayer submissions, assessment, permissions and approvals, and payments

Make all rules, regulations, SROs, notices and other orders available on the NBR website immediately after they had been issued

Introduce e-governance and online tax payment systems

Medium Term Fiscal Plan Medium Term Fiscal Plan

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6. Areas of Research Interest6. Areas of Research Interest

Indepth Review of Fiscal Reforms in Bangladesh

Economic Cost-Benefit Analysis of Fiscal Incentives in

Manufacturing Sector

Incidence of Indirect Tax

Equity Dimensions in Bangladesh’s Tax System

Modalities to Broaden Income Tax Base