Growing Unease: Revenue Shortfall & High Inflation

Revenue shortfall and rising inflation Should be taken seriously as note of caution.

National Board of Revenue (NBR) has resumed operations of online tax return system since the second week of September. Earlier 526,487 taxpayers , more than double from 2022-23,had submitted their tax statements through the eReturn system for 2023-24. For the last fiscal year, there was a revenue shortfall of Taka 381.57 billion against the revised target of Taka 4.1 trillion. This year too NBR faces an uphill task to meet a colossal target of Taka 5.41 trillion. While govt is tightening the monetary policy, it will be difficult for NBR to double the growth of revenue collection. ADB downgrades Bangladesh's growth forecast to 5.1 % and increases the inflation forecast from 7% to 10%¹. These are worrying developments. In this backdrop, NBR's revenue challenge has also gone up. Sensing the inflationary pressure, governor announced to hike the policy rate by 50 basis points and another one is likely in the coming weeks.

Though income tax is the second highest source of revenue after VAT, only Taka 50/70 billion is generated from online tax return. Last fiscal year, NBR collected Taka 1.31 trillion from income tax. I personally think a user friendly, easy and Bengali online return system would fetch more tax return and revenue for the NBR. If people can submit tax return through button phones/ e-mail, then the number of return submission may go up by manyfolds. NBR' s inability to attract a large number of NRBs to pay taxes plays a role not augmenting the revenue. We inked deal with other countries to avoid double taxation in FDI ,but we did not do so on the income of binationals. If we sign accord with the USA,UK,UAE,Saudi Arabia,Malaysia, Singapore and other countries, a large number of binationals and NRBs will feel encouraged to submit tax. Now NRBs do not show their wealth generated in one country to other country's tax file. Double taxation is reported to be the main reason. This issue needs to be addressed. Special benefits like transfer of funds abroad should be aimed at those who disclose their foreign wealth in the tax files of their country of origin. It will prevent money laundering and bring many NRBs under local tax net. Currently, Bangladesh is running a special campaign similar to Pakistan that allows citizens living home and abroad to deposit their US dollar at the interest bearing accounts of some designated banks. The step is a desperate measure to swell the forex reserve. If Bangladesh Bank takes special measures like financing small and medium business ventures of NRBs abroad on the condition that they provide details of their wealth abroad, then many will feel encouraged to comply the new regulation.

Similarly, many shop owners at home who feel shy to submit their tax return will pay taxes if govt offers some special benefits. For instance, if govt declares people with TIN and BIN get special treatment like reserved places ahead of others in availing govt services,paying utility bills, discounted credit facility etc then many will come forward to pay taxes.

If many of the digital centers set up at the post offices during the time of previous regime are used to train personnel to prepare and submit tax returns for others ,then NBR may get new taxpayers from the upazilas and villages.

I noticed that during tax calculation business income deducts depreciation of equipment, furniture. Right now 10% depreciation cost is allowed to deduct from business income. If it is lowered to 8% or 5% ,taxes from business income as well as revenue earnings from direct taxes will increase. I already share some ideas to increase revenue and number of tax payers in my piece titled "New Tax Act and eReturn System II" ,written in January this year.²

At the same time, if corporate tax is raised by 1%,from 27.5% to 28.5% for non-listed and from 22.5% to 23.5% for listed companies, then govt's revenue will augment by manifold. Unfortunately, the previous govt planned to lower it to 25% and 20% respectively. I think govt should undo the decision given the uncomfortable situation it faces now. ³

To increase tax to GDP ratio every year by 0.5% is really a tough job for the NBR given its current capacity. The ongoing worker's agitation slashed 15% order. Waterlogging still a problem in the flash-flood hit areas. In this backdrop, business as usual will not help the govt to attain its goal. Quick review of revenue policies, drastic cut in public expenditures and radical steps in revenue collection may yield in good outcome.

References:

1. Asian Development Outlook,September 2024. Link: https://www.adb.org/where-we-work/bangladesh/economy
2. "New Tax Act And eReturn System II",Rezaul Hoque,https://hoquestake.blogspot.com, January 27,2024. Link: https://hoquestake.blogspot.com/2024/01/new-tax-act-and-ereturn-sytem-ii.html?m=1
3. "Corporate Tax Cut To 25%", The Daily Star,June 06,2024.Link: https://www.thedailystar.net/business/bangladesh-national-budget-fy2024-25/news/corporate-tax-cut-25-3628386