Assignment

on

“Taxation In Bangladesh”

Course Code: ECON305

Course Name: Economics of Public Sector

Submitted To:
Mala Rani Das
Lecturer
Department of Economics
Jahangirnagar University

Submitted By:
Shahrin Siddika Chaity
Class Roll: 454
Exam Roll: 170612
Batch: 46
Department of Economics
 Jahangirnagar Univesity

Taxation in Bangladesh

Introduction

In Bangladesh, the principal direct taxes are personal income taxes and corporate income
taxes, and a ad valorem tax (VAT) of 15% levied on all important goods. The top income tax
rate for people is 25%. For the 2004/05 tax year (July 1 2004–June 30 2005) the most
corporate rate was 45%. Eventually, publicly traded companies in Bangladesh are charged a
lower rate of 30%. Banking sectors, financial institutions and insurance companies are often
charged 45% rate, rest of the companies are taxed at 37.5% rate. Since 1 July 2002, the VAT
rate on hardware and software has been reduced to 7.5%, and a number of other agricultural
equipment and electricity supplied to the agricultural sector was exempted from VAT
altogether. VAT on the transfer of land is additionally to be abolished. Important agricultural
implements and irrigation pumps had previously been excluded from certain taxes.1

Taxation:

To tax is to impose a financial charge or other levy upon a taxpayer (an individual or legal
entity) by a state or the functional equivalent of a state such that not paying is punishable by
law.

Taxes are also imposed by many sub national entities. A tax incorporates direct tax or indirect
tax, and might be paid in money or as its labor equivalent (often but not always unpaid labor).
A tax is additionally defined as a “pecuniary burden laid upon people or property owners to
support the govt., a payment exacted by authority.” A tax “is not a voluntary payment or
donation, but an enforced contribution, exacted pursuant to government” and is “any
contribution imposed by government whether under the name of toll, tribute, impost, duty,
custom, excise, subsidy, aid, supply, or other name.”

Some transfers to the public sector are just like prices. Examples include tuition at public
universities and costs for utilities provided by local governments. Governments also obtain
resources by creating money (printing bills and minting coins), through voluntary gifts
(contributions to public universities and museums),by imposing penalties (traffic fines), by
borrowing, and by confiscating wealth. From the view of economists, a tax is a non-penal, yet
compulsory transfer of resources from the private to the general public sector levied on a
basis of predetermined criteria and without respect to specific benefit received.2
1
http://unpan1.un.org/intradoc/groups/public/documents/UNPAN/UNPAN014 405.pdf

2
https://doi.org/10.1080/01900692.2020.1744645

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In modern taxation systems, taxes are levied in money, but in-kind and corvée taxation are
characteristic of traditional or pre-capitalist states and their functional equivalents. The
method of taxation and also the govt. expenditure of taxes raised is commonly highly debated
in politics and economics. When taxes don't seem to be fully paid, civil penalties (such as
fines or forfeiture) or criminal penalties (such as incarceration) is also imposed on the non-
paying entity or individual.

Tax Classifications

Direct Tax:

A direct tax may be a sort of tax is collected directly by the govt. from the persons who bear
the tax burden. Taxable individuals file tax returns on to the govt. Examples of direct taxes
are corporate taxes, income taxes, and transfer taxes.

Indirect Tax:

An indirect tax is a type of tax collected by mediators who transfer the taxes to the govt., and
also perform functions associated with filing tax returns. The customers bear the final tax
burden. Examples of indirect taxes are nuisance tax and value added tax (VAT).

There are different kinds of taxes, which could either be direct tax or indirect taxes, including
capital gains tax, corporation tax, consumption tax, inheritance tax, property tax, excise duty,
retirement tax, tariffs, wealth tax or net worth tax, toll tax, and capitation.3

Purposes and Effects

Money provided by taxation are utilized by states and their functional equivalents throughout
history to hold out many functions. Some of these include expenditures on war, the
enforcement of law and public order, protection of property, economic infrastructure (roads,
tender , enforcement of contracts, etc.), construction, social engineering, and the operation of
government itself. Governments also use taxes to fund welfare and public services. These
services can include education systems, health care systems, pensions for the elderly,
unemployment benefits, and public transportation. Energy, water and waste management
systems are common public utilities. Colonial and modernizing states have also used cash
taxes to draw or force reluctant subsistence producers into cash economies.4

Governments use differing types of taxes and vary the tax rates. This is done to distribute the
tax burden among individuals or classes of the population involved in taxable activities, like
business, or to redistribute resources between individuals or classes in the population.
Historically, the nobility were supported by taxes on the poor; modern social insurance

3
https://www.britannica.com/topic/taxation/Classes-of-taxes

4
https://www.economicsdiscussion.net/government/taxation/taxation-objectives-top-6-objectives-of-
taxation-discussed/17450

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systems are intended to support the poor, the disabled, or the retired by taxes on those who
are still working. In addition, taxes are applied to fund foreign aid and military ventures, to
influence the macroeconomic performance of the economy (the government’s strategy for
doing this can be often called its fiscal policy – confer tax exemption), or to alter patterns of
consumption or employment within an economy, by making some classes of transaction more
or less attractive.5

A nation’s tax system is usually a mirrored image of its communal values or/and the values of
these in power. To create a system of taxation, a nation must make choices regarding the
distribution of the tax burden—who can pay taxes and the way much they'll pay—and how
the taxes collected will be spent. In democratic nations where the public elects those
accountable of creating the tax system, these choices reflect the kind of community that the
public and/or government wish to form.

In countries where the general public doesn't have a big amount of influence over the system
of taxation, that system could also be more of a mirrored image on the values of these in
power. The resource collected from the general public through taxation is usually greater than
the quantity which may be employed by the govt. The difference is named compliance cost,
and includes for instance the labor cost and other expenses incurred in complying with tax
laws and rules. the gathering of a tax so as to spend it on a specified purpose, for instance
collecting a tax on alcohol to pay directly for alcoholism rehabilitation centres, is named
hypothecation. This practice is usually disliked by finance ministers, since it reduces their
freedom of action. Some economic theorists consider the concept to be intellectually
dishonest since (in reality) money is fungible. Furthermore, it often happens that taxes or
excises initially levied to fund some specific government programs are then later diverted to
the govt. general fund. In some cases, such taxes are collected in fundamentally inefficient
ways, for instance highway tolls.6

Some economists, especially neo-classical economists, argue that taxation creates market
distortion and leads to economic inefficiency. They need therefore sought to spot the type of
legal system that might minimize this distortion. Also, one among every government’s most
fundamental duties is to administer possession and use of land within the geographical area
over which it's sovereign, and it's considered economically efficient for state to recover for
public purposes the extra value it creates by providing this unique service.

Since governments also resolve commercial disputes, especially in countries with common
law, similar arguments are sometimes wont to justify a nuisance tax or value added tax.
Others (e.g. libertarians) argue that the majority or all sorts of taxes are immoral thanks to
their involuntary (and therefore eventually coercive/violent) nature. the foremost extreme

5
https://www.economicsdiscussion.net/government/taxation/taxation-objectives-top-6-objectives-of-
taxation-discussed/17450

6
https://www.researchgate.net/publication/345082285_The_Importance_of_Taxation_and_the_Role_of_Indir
ect_Taxes_in_Developing_Countries_A_Survey_of_Literature

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anti-tax view is anarcho-capitalism, during which the supply of all social services should be
voluntarily bought by the person(s) using them.7

Canons of Taxation

A tax has no reference to the benefit received by the payer. Also, the charge is compulsory.
Hence in distributing the burden of taxation, a person’s share can't be decided with regard to
the benefit derived by him.

Adam Smith’s Canons:

The principles or canons of taxation enunciated by Smith were so important that they need
become classic.8 They are:

(1) Canon of Equality:

“The subjects of each State,” Smith asserted, “ought to contribute towards the support of the
govt as nearly as possible in proportion to their respective abilities, that is, in proportion to
the revenue which they respectively enjoy under the protection of the State. within the
observance or neglect of this maxim consists what's called the equality or inequality of
taxation.” Equality here doesn't mean that each one tax-payers should pay an equal amount.
Equality here means equality or justice. It means the broadest shoulders must bear the
heaviest burden. This canon has given rise to 2 theories:

(i) Equality of Sacrifice Theory:

It means the burden of taxation should involve an equal sacrifice for each individual. This
equality, however, though good in theory, is difficult to achieve in practice. Sacrifice is
subjective, something within the mind and feelings of an individual . it's difficult to live.
Besides, it's to require into consideration the amount of dependents on the earning member
within the family and their standard of living.9

(ii) The second principle indicating justice is that the Ability or Faculty Theory:

Which hold that the rich should be made to pay something quite proportionate to their
income? a person with an income of Rs. 500 per month won't , other things being equal, feel
an equivalent pinch in parting with Rs. 50, as a person with an income of only Rs. 50 feels in
paying Rs. 5 (though the share is that the same), because the former’s faculty to pay is
bigger . On this principle is predicated progressive taxation, i.e., increasingly higher rates of
taxation as incomes – increase. Proportional taxation won't do justice.
7
https://www.researchgate.net/publication/228152115_The_Three_Goals_of_Taxation

8
https://library.croneri.co.uk/cch_uk/btr/101-200

9
https://www.academia.edu/41391819/RELEVANCE_OF_ADAM_SMITH_CANONS_OF_TAXATION_TO_THE_MO
DERN_TAX_SYSTEM

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(2) Canon of Certainty:

Adam Smith further said, “The tax which each individual has got to pay need to be sure and
not arbitrary. The time of payment, the quantity to be paid ought all to be clear and plain to
the contributor and to each other person.” The individual should know exactly what, when
and the way he's to pay a tax otherwise it'll cause unnecessary suffering. Similarly, the State
should also skills much it'll receive from a tax.

(3) Canon of Convenience:

Smith wrote, “Every tax needs to be levied at the time or within the manner which it's
presumably to be convenient to pay it.” Obviously, there's no sense in fixing a time and
method of payment which aren't suitable. Land revenue in India is realized after the harvest
has been collected. This is often the time when cultivators can conveniently pay.

(4) Canon of Economy:

Lastly, Smith held that “every tax need to be so contrived as both to require out and exclude
of the pockets of the people as little as possible over and above what it brings into the general
public treasury of the State.” this suggests that the value of collection should be as small as
possible. If the majority of the tax is spent on its collection, it'll take much out of the people’s
pockets but bring little or no into the State’s pocket. it's not a wise tax.10

Lastly, Smith held that “every tax have to be compelled to be so contrived as both to require
out and prevent of the pockets of the people as little as possible over and above what it brings
into the public treasury of the State.” this implies that the value of collection should be as
small as possible. If the majority of the tax is spent on its collection, it'll take much out of the
people’s pockets but bring very little into the State’s pocket. it's not a wise tax.

Other Canons of Taxation:

Economic science has progressed much since the days of Smith. Later writers have added to
his canons. The additions are:

(5) Canon of Productivity:

This canon emphasizes that a tax should herald a considerable amount of money to the State.
After all, the foremost object of the taxing authority is to secure funds. Therefore, a tax which
doesn't yield a decent income isn't of much use. it's better to have sort of taxes which yield
good revenue instead of many taxes yielding barely .

(6) Canon of Elasticity:

This canon points out that a tax should automatically introduce more revenue because the
country’s population or income increases. There should be an automatic link between the

10
https://doi.org/10.2139/ssrn.3783037

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needs of the State and resources of the people. If, in an emergency, a rise within the rate of
the tax brings in increased income, the tax is elastic.

(7) Canon of Simplicity:

It argues that the system should be simple; otherwise there would be confusion and, worse
still, corruption. During the war and after, certain taxes, e.g., on sale of cloth and lather
essential supplies in India resulted in corruption mainly because they lacked in simplicity.

(8) Canon of Variety:

It is also necessary that the system off a country should be diversified. Reliance on just kind
of taxes is risky. The revenue won't be sufficient, nor will or not it's fair, because it'll not
touch an outsized number of individuals . so as to be just, a system must be broad-based.
Soon be adequate, it must be diversified, having a large coverage over commodities and
persons.

(9) Canon of Flexibility:

‘Flexibility’ in taxes is different from ‘elasticity’ mentioned earlier as a canon. Flexibility

connotes the absence of rigidity within the tax system . a flexible tax quickly adjusts to the
new conditions; on the opposite hand, elasticity implies that income are often increased.
Presence of flexibility could also be a pre-condition for elasticity. Lack of flexibility during a
tax can cause financial troubles to a State.11

The Four “R”s

Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and
Representation. 12

The main purpose is revenue: taxes raise money to spend on armies, roads, schools and
hospitals, and on more indirect government functions like market regulation or legal systems.

A second is redistribution. Normally, this implies transferring wealth from the richer
sections of society to poorer sections.

A third purpose of taxation is repricing. Taxes are levied to affect externalities: tobacco is
taxed, as an example, to discourage smoking, and a carbon tax discourages use of carbon-
based fuels.

A fourth, consequential effect of taxation in its historical setting has been representation.
The American revolutionary slogan “no taxation without representation” implied this: ruler’s
tax citizens and citizens demand accountability from their rulers because the opposite section
of this bargain. Studies have shown that direct taxation (such as income taxes) generates the

11
https://journals.sagepub.com/doi/abs/10.1177/109114218601400405
12
https://guichet.public.lu/en/entreprises/fiscalite/notions-fiscales/principes/classification-impots.html

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simplest degree of accountability and better governance, while indirect taxation tends to
possess smaller effects.13

Tax incidence

Law establishes from whom a tax is collected. In many countries, taxes are imposed on
business (such as corporate taxes or portions of payroll taxes). However, who ultimately pays
the tax (the tax “burden”) is about by the marketplace as taxes become embedded into
production costs.14

Relying on how quantities supplied and demanded vary with price (the “elasticities” of
supply and demand), a tax are often absorbed by the vendor (in the shape of lower pre-tax
prices), or by the customer (in the shape of upper post-tax prices). If the elasticity of supply is
low, more of the taxes have gotten to be paid by the supplier.

If the elasticity of demand is low, more are getting to be paid by the customer and
contrariwise for the cases where those elasticities are high. If the vendor might be a
competitive firm, the tax burden flows back to the factors of production looking forward to
the elasticities thereof; this includes workers (in the shape of lower wages), capital investors

(in the shape of loss to shareholders), landowners (in the shape of lower rents) and
entrepreneurs (in the shape of lower wages of superintendence).15

13
https://www.sheffield.ac.uk/finance/staff-information/howfinanceworks/fourrs

14
https://gspp.berkeley.edu/assets/uploads/courses/notes/Lec1-Tax-Incidence.pdf

15
http://unpan1.un.org/intradoc/groups/public/documents/UNPAN/UNPAN014 405.pdf

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To illustrate this relationship, suppose the market value of a product is $1.00, which a $0.50
tax is imposed on the merchandise that, by law, is to be collected from the vendor. If the
merchandise has an elastic demand, greater portions of the tax are absorbed by the seller.
This will be actually because goods with elastic demand cause an outsized decline in quantity
demanded for a little increase in price. Therefore so on stabilize sales, the vendor absorbs
more of the additional tax burden. as an example , the vendor might drop the price of the
merchandise to $0.70 so that, after adding within the tax, the customer pays an entire of
$1.20, or $0.20 quite he did before the $0.50 tax was imposed. during this example, the
customer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and thus the vendor
has paid the remaining $0.30 (in the form of a lower pre-tax price).16

Types of Taxes

Paying Taxes

Taxes are monies paid by citizens and residents to federal, state, and native governments. The
money collected from these taxes help fund for services provided by the govt. It is the one
amongst the foremost sources of state revenue. types of taxes include tax , sales tax, and
property tax .

Income Tax

These are paid on a federal level and in some cases to state or local governments similarly.
“Taxable income” is actually money obtained through wages, self-employment, and tips and
from things like sale of property. the majority of individuals pay their income taxes by having
the cash withheld from their paychecks. The proportion of income tax a personal is required
to pay will vary consistent with earnings. income tax rates are generally lower for those who
make less money. However, any individual who earns an income, live in the us and satisfies
certain criteria is required to file a income tax return and also pay any taxes that they owe.17

Social Security and Medicare Taxes

These varieties of taxes are usually withheld from your paycheck. Social Security benefits are
provided for retired workers and their families, for disabled workers and their families and
also surely relations of deceased workers. Medicare (healthcare) taxes provides for medical
services (this applies for people aged 65 and above). within the large majority of cases, a will
qualify for Social Security retirement benefits and Medicare benefits after having served a
period of 10 years (or 40 quarters) over the course of your life. However, within the case of
disability benefits for you or your family it's likely that you simply would require but 10
years of labor counting on your earnings.

Sales Taxes
16
https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-
elasticity-tutorial/a/elasticity-and-tax-incidence

17
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/973287
/v355x1-notes-about-tax-classes.pdf

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Sales taxes are more or less state or local taxes and typically added to the buying cost of
certain thing. These taxes are going to be supported the value of things and help fund for
services provided by state and native government, like roads, police, and firefighters.

Property Taxes

These are also state and native taxes that are charged on your home and land. In most
situations, these property taxes contribute to funding of local public schools and other
services within the area person.

This is a thought summary. It aims to denote how different types of taxes are categorized, and
to spotlight the strong and weak points of every type. Government is supported by resources
drawn from the economy. Reciprocally, government protects the economy from foreign and
domestic enemies, undertakes large-scale infrastructure works of general benefit, and
enforces the rights, obligations and bargains necessary for economic activity during a civil
society. In modern industrial society, a tax either claims some of the flow useful in economic
transactions between people, or takes an area of someone’s accumulated stock useful.18

Tax revenue Summary of Bangladesh

Bangladesh Tax Revenue was reported at 2.652 USD bn in May 2021. This records an
increase from the previous number of 2.279 USD bn for Apr 2021. Bangladesh Tax Revenue
data is updated monthly, averaging 422.663 USD mn from Jul 1990 to May 2021, with 371
observations. The data reached an all-time high of 3.583 USD bn in Jun 2019 and a record
low of 87.797 USD mn in Jul 1990. Bangladesh Tax Revenue data remains active status in
CEIC and is reported by CEIC Data. Bangladesh Bank provides Tax Revenue in local
currency. Bangladesh Bank average market exchange rate is used for currency conversions.
Tax Revenue covers Central Government only. 19

18
https://www.oecd-ilibrary.org/sites/dcee7545-en/index.html?itemId=/content/component/dcee7545-en

19
https://www.ceicdata.com/en/indicator/bangladesh/tax-revenue

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Despite economic slowdown due to the Covid-19 pandemic, revenue collection posted a 17
per cent growth in the just-concluded fiscal year (FY) over that of the previous FY thanks to
the contribution of the large corporate taxpayers.20

The National Board of Revenue (NBR) managed to collect Tk 2.56 trillion in the FY 2020-21
against Tk 2.18 trillion in the previous FY, according to the provisional figures obtained by
the FE on Sunday. The NBR officials expected that the amount would go up further in the
final count as the Research and Statistics Wing of the board has started compiling data from
the field offices of income tax, customs and VAT. However, the NBR missed the revised
revenue collection target (Tk 3.01 trillion) by Tk 450 billion and the original target (Tk 3.30
trillion) by Tk 740 billion during the last FY.21

The income tax wing collected Tk 850 billion, VAT wing Tk 940 billion, and customs wing
Tk 770 billion during the period under review. In FY 21, the VAT collection target was Tk
1.10 trillion, followed by income tax Tk 970 billion and customs duty Tk 940 billion. Field-
level officials said the effort-based collection through monitoring and investigation along
with black money whitening opportunities have contributed to the higher revenue growth
despite the pandemic.22

On average, the NBR achieved 14 per cent growth in revenue collection over the last five
years. Higher operating profits made by banks have helped the large taxpayers' unit (LTU)
under the income tax wing surpass the target for the last FY. Tax collection from the LTU
grew by 15.38 per cent in FY 21.23

The data until June 30 last of the money whitening opportunity is yet to be finalised as some
of the field-offices were taking time to compile their data. Until May 25 last, 10,404 people
disclosed their money availing the blanket opportunity offered since July 1, 2020.24
20
https://tradingeconomics.com/bangladesh/personal-income-tax-rate

21
https://nbr.gov.bd/uploads/publications/IMG_20210704_0001.pdf

22
http://bdlaws.minlaw.gov.bd/act-672.html

23
https://thefinancialexpress.com.bd/economy/bangladeshs-tax-revenue-posts-17pc-growth-1625452979

24
https://tradingeconomics.com/bangladesh/corporate-tax-rate

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The government received taxes worth Tk 14.45 billion against some Tk 144.59 billion
whitened under the opportunity. During the period from 2005-06 to 2019-20, a total of Tk
145.95 billion undisclosed income has been formalised under such opportunities. VAT
collection from tobacco, cement, pharmaceuticals and mobile phone companies increased
significantly last year.25

However, all of the three wings missed their revised target for last FY, but achieved
impressive growth over the corresponding period of previous FY. The tax collection in the
month of June witnessed a substantial growth as the officials made all-out efforts to offset the
financial crunch of the government amid the Covid-19 pandemic.

In FY 2019-20, the revenue collection had posted a negative growth for the first time since
the independence. However, the government has set the original target of revenue collection
for the current FY equivalent to that of the last fiscal for the first time, aiming to give some
relief to the taxpayers affected by the pandemic-induced lockdown.26

VAT collection grew by 5.13 per cent, while income tax grew by 5.59 per cent in July-March
period. However, the NBR is still lagging behind its original target by Tk 495.01 billion in
this period. To achieve the revised target, the tax collection authority will have to mobilize
Tk 1.23 trillion more taxes in April-June period. However, field-level officials said they
might not be able to collect the expected volume of revenue due to the ongoing lockdown. 27

The country was almost shut in that period last year when Covid-19 hit first. The businesses
already learnt how to survive in the prolonged pandemic, April to June (last quarter of FY) is
the peak time for revenue collection. In the Q3 of the current FY, the NBR collected Tk
684.70 billion VAT, Tk 558.03 billion income tax, and Tk 539.88 billion export-import taxes.
In the month of March alone, the board collected Tk 84.83 billion VAT, Tk 89.51 billion
income tax, and Tk 77.51 billion export-import taxes. The government is likely to set Tk 3.30
trillion tax revenue collection target for upcoming FY, 2021-22.

Boosting Tax Revenue

Boosting tax revenue is an important challenge for lower-income countries, which only
collect20% of their GDP in taxes, compared to 35% on average for OECD countries (Besley
and Persson 2013a). Low levels of tax revenue limit countries’ ability to redistribute income
and invest in public goods1and have been highlighted as major impediments to inclusive
growth(United Nations 2014).Recent research shows that tax revenue can be increased by
designing tax systems and incentives which consider the constraints faced by tax
administrations in low income countries (Best et al. 2014, Pomeranz 2015a, Khan, Khwaja,
and Olken 2015, Naritomi 2015).In particular, tax administrations have docility monitoring
25
https://www.ceicdata.com/en/indicator/bangladesh/tax-revenue

26
https://www.thefinancialexpress.com.bd/economy/bangladesh/tax-revenue-soars-2265pc-in-march-
1619582054

27
http://bdlaws.minlaw.gov.bd/act-672/section-49114.html

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income and transactions, due to the structure of their economy and lower fiscal capacity,
which leads to informality and tax evasion. Given these constraints, we ask whether
developing countries can rely on the corporate income tax to raise revenue, and how should
they optimally design it? Two important features in the design of the corporate income tax
are the tax rate and definition of the tax base. When tax evasion is a primary concern, firms
behavioral response to higher tax rates can be large, which limits the range of optimal tax
rates. In addition, the standard corporate tax base, which allows for all costs to be deducted,
might not be desirable since it provides evasion opportunities both on the revenue and on the
cost margin.28

Existing Tax Expenditure Measures in Bangladesh

The tax system of Bangladesh includes several tax expenditure measures under the broad
headings of direct taxes and indirect taxes. These provisions, introduced with the enactment
of the tax law, have been subject to changes from time to time. the main policy objectives
behind the tax expenditure measures in Bangladesh are to accelerate the method of
industrialization, to draw in foreign currency through increasing exports and foreign direct
investment (FDI) and to make sure Social Security and welfare of low and modest income
groups. Tax expenditure measures exist in sectors like Public Services, Agriculture, Labor
and Employment Affairs, Transport and Communication and Social Security and Welfare,
etc.29

Tax Expenditure Measures under Direct Taxes

Various tax expenditure measures exist for corporate and personal tax payers under the
prevailing income tax law. These are summarized below.

Corporate Income Tax

Tax holiday facility is allowed to newly set-up industrial undertakings, physical infrastructure
facilities and tourism industry subject to certain specified conditions so as to promote
industrialization and employment generation. Exemptions and deductions are applicable to
incomes from firms in Export Processing Zone (EPZ), 50 per cent of income for export
earnings, power generation companies, computer software businesses, agriculture-related
industry, micro credit for NGOs, government , welfare activities, etc. in particular,
concessionary rate is allowed at the speed 20 per cent for people who don't enjoy tax holiday
or accelerated depreciation, 15 per cent for textile and jute industries and 25 per cent for state
agency, etc. Accelerated depreciation is allowed at the rate 100 per cent for new firms.30

Personal Income Tax

28
https://www.oecd.org/tax/tax-policy/oecd-classification-taxes-interpretative-guide.pdf

29
https://tradingeconomics.com/bangladesh/corporate-tax-rate

30
https://nbr.gov.bd/uploads/publications/64.pdf

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Exemptions and deductions are admissible to individual incomes from agriculture-related
activities, income of foreign technicians in EPZs, remuneration of diplomats and foreign
employees of an embassy, income of an indigenous person of Hill Tracts region as
individuals, income from specified savings instruments, etc. additionally, 15 per cent tax
rebate is allowed on investment in provident fund, Deposit Pension Scheme (DPS),
insurance, shares, bonds, etc.31

Tax Expenditure Measures in Indirect Taxes

Under the various acts of indirect taxes, exemptions and deductions are given within the area
of customs duty, supplementary duty and ad valorem tax (VAT).

Customs and Supplementary Duty

Exemptions are granted to local industrial units of variety of specific sectors, viz. EPZ
enterprises, power generation companies, poultry and dairy farms, etc. Concessionary rates
are applicable to agro-processing, textile and leather industry, educational institutions,
hospitals, privileged persons, etc. Incentives are also given to those sectors, which are
complying with the international and bilateral agreements and conventions.32

Value–Added Tax

Goods and services exempted from VAT include food and agricultural products, animal
products, poultry sector, agriculture inputs, basic services for living, social welfare services,
culture related services, finance and financial activities related services, transport services,
personal services, etc.

Tax Rebate for Investment

Rate of Tax Rebate:

Amount of allowable investment is either actual investment in a year or up to 25% of total

income or Tk. 10, 00,000/- whichever is less. Tax rebate amounts to 10% of allowable
investment.

Types of investment qualified for the tax rebate are:

– Life insurance premium

– Contribution to deferred annuity

– Contribution to Provident Fund to which Provident Fund Act, 1925 applies

– Self contribution and employer’s contribution to Recognized Provident Fund

– Contribution to Super Annotation Fund

31
https://www.researchgate.net/publication/345340171_Fundamentals_of_Taxation_Introduction_to_Tax_Pol
icy_Tax_Law_and_Tax_Administration

32
https://tradingeconomics.com/bangladesh/corporate-tax-rate

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– Investment in approved debenture or debenture stock, Stocks or Shares

– Contribution to deposit pension scheme

– Contribution to Benevolent Fund and group insurance premium

– Contribution to Zakat Fund (Zakat: Islamic Tax)

– Donation to charitable hospital approved by National Board of Revenue

– Donation to philanthropic or educational institution approved by the govt.

– Donation to socioeconomic or cultural development institution established in Bangladesh

by Aga Khan Development Network

– Donation upto five lac to

(1) Shishu Swasthya Foundation Hospital Mirpur, Shishu Hospital, Jessore and Hospital for
Sick Children, Satkhira run by Shishu Swasthya Foundation, Dhaka,

(2) Diganta Memorial Cancer Hospital, Dhaka,

(3) The ENT and Head-Neck Cancer Foundation of Bangladesh, Dhaka; and

(4) Jatiya Protibandhi Unnayan Foundation, Mirpur, Dhaka;

– Asiatic Society of Bangladesh;

– Muktijudha Jadughar;

Tax Withholding Functions

In Bangladesh withholding taxes are usually termed as tax deduction and collected at source.
Under this technique both private and public limited companies or the other organization
specified by law are legally authorized and bound to withhold taxes at some point of creating
payment and deposit an equivalent to the government Exchequer. The taxpayer receives a
certificate from the withholding authority and gets credits of tax against assessed tax on the
idea of such certificate.33

Major Areas for Final Settlement of Tax Liability in Bangladesh

Tax deducted at source for the subsequent cases is treated as final discharge of tax liabilities.
No additional tax is charged or refund is allowed within the following cases:

– Supply or contract work

– Band rolls of handmade cigarettes

33
https://www.researchgate.net/publication/228129578_Human_Rights_Taxation_Les_Droits_De_L'Homme_E
t_L'Impot

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– Import of goods

– Transfer of properties

– Export of manpower

– Real estate business

– Export value of garments

– Local shipping business

– Royalty, technical know-how fee

– Insurance agent commission.

– Auction purchase

– Payment on account of survey by surveyor of a general insurance company

– Clearing & forwarding agency commission.

– Transaction by a member of a stock exchange.

– Courier business

– Export cash subsidy34

Tax Holiday

Tax holiday is allowed for certain industrial undertaking, tourist industry and physical
infrastructure facility established within 1st July, 2008 to 30th June, 2011 in fulfillment of
certain conditions.

Tax holiday is allowed to industries subject to the relevant rules and procedures set by the
National Board of Revenue (NBR) for the subsequent period according to the situation of the
establishment.

In Dhaka and Chittagong Divisions (excluding 3 hill districts): 5 years.

In other divisions (including 3 hill districts of Chittagong Division): 7 years.

The period of such tax holiday are calculated from the month of commencement of
commercial production. The eligibility of tax holiday to be determined by the NBR and the
time of the commencement of commercial production is certified by the respective
sponsoring agencies. The industrial establishment should be registered under the companies
Act. 1994.

34
https://www.researchgate.net/publication/258029365_Implementation_of_Taxation_Laws_in_Bangladesh_I
n_Search_of_an_Innovative_and_Effective_Mechanism_for_Increasing_the_Number_of_Tax_Payers

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Tax holiday facilities are often availed by industries coming into commercial production
within 30 June 2000 A.D. 35

Tax Avoidance

Tax avoidance is that the legal utilization of the tax regime to one’s own advantage, to reduce
the quantity of tax that's payable by means that are within the law. By contrast, tax evasion is
the general term for efforts not to pay taxes by illegal means. The term tax mitigation may be
a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the
pejorative term tax avoidance. Latterly the term has also been utilized in the tax regulations
of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax
avoidance which exploits loopholes in the law.36

Some of those attempting to not pay tax believe that they have discovered interpretations of
the law that show that they're not subject to being taxed: these individuals and groups are
sometimes called tax protesters. An unsuccessful tax protestor has been attempting openly to
evade tax, while a successful one avoids tax. Tax resistance is the declared refusal to pay a
tax for conscientious reasons (because the resister doesn't want to support the govt. or a
number of its activities). 37

Tax resisters typically don't take the position that the tax laws are themselves illegal or don't
apply to them (as tax protesters do) and they are more concerned with not paying for
particular government policies that they oppose.

Public Opinion on Tax Avoidance

Tax avoidance may be considered to be the dodging of one’s duties to society, or

alternatively the right of every citizen to structure one’s affairs during a manner allowed by
law, to pay no more tax than what's required. Attitudes vary from approval through neutrality
to outright hostility. Attitudes may vary depending on the steps taken within the avoidance
scheme, or the perceived unfairness of the tax being avoided.38In the judiciary, different
judges have taken different attitudes. As a generalization, as an example, judges within the
UK before the 1970s regarded tax avoidance with neutrality; but nowadays they regard it
with increasing hostility.39

Taxes and Economic Growth

The formula for economic development and curing poverty is well known: Security of
property rights, low taxes, reasonably free trade and stable and readily convertible currency
35
https://nbr.gov.bd/taxtypes/income-tax/income-tax-paripatra/eng

36
http://www.icmab.org.bd/wp-content/uploads/2019/12/8-Tax-Evasion-BANGLADESH.pdf

37
https://www.researchgate.net/publication/258029365_Implementation_of_Taxation_Laws_in_Bangladesh_I
n_Search_of_an_Innovative_and_Effective_Mechanism_for_Increasing_the_Number_of_Tax_Payers

38
https://nbr.gov.bd/taxtypes/income-tax/income-tax-paripatra/eng

39
https://doi.org/10.1007/978-1-349-24004-3_10

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— the policy that has been demonstrated to be highly successful in moving countries from
third world to first world.

In the past century there has been an enormous improvement in human well being, almost all
of it from economic development, almost none of it from redistribution. The most extreme
exercises in redistribution created gigantic suffering, and resulted within the murder of about
a hundred million people.40

The question then is: Are taxes dangerously high in the advanced countries as well? Are taxes
so high that cutting taxes will, in few years, increase the returns to the government? This is
derided as “voodoo economics”, yet it's fairly obvious that ruinous taxation could be a major
part of why the third world is Third World . Is then taxation also keeping the first world much
poorer than it would otherwise be? For the u. s., I defined “high taxes” because the federal
government taking over 18.1% of GDP, for during the Reagan Revolution, the archetype of
“voodoo economics” the largest portion of GDP taken by the federal government was slightly
over 18%. Alternatively, I defined “a high taxes period” as any period where the federal
government took substantially and persistently more than 18% of GDP.41

Growth for the primary three high tax periods was negative – possibly because they were
trying to soak the rich, unlike Clinton, possibly because they failed to have the internet boom
increasing their revenues and boosting growth, unlike Clinton, possibly because Clinton
“ended welfare as we all know it”, whereas the early high tax periods were great society
taxes. we really need statistics giving a breakdown on who is paying taxes to distinguish
between these possibilities. We also need statistics giving hints on who is goofing off and
going underground. In Third World countries it's largely the poor who go underground,
which is consistent with the conjecture that it absolutely was “ending welfare as we know it”
that made the difference, but the Reagan experience suggests that what smacks down the
economy is high taxes on the rich, who have the option of fleeing or retiring.42

Necessity of Tax Revenue to Reinforce Economic Development

There are several theories that discuss the relationship between economic growth and taxation
though no theory is conclusive. it's observed that tax revenue as a proportion of GDP has
risen remarkably in the developed countries in course of time, but the level of growth shows a
stable condition. The conclusion of this finding is that economic growth isn't effected by
taxation (Myles, 2000). Empirical studies regarding the relationship between taxation and
development or economic growth provide mixed results. but for the government there is
hardly any avenue rather than taxation to fund public goods and pay for development works.
the reality becomes obvious when one looks at the tax to GDP ratio of the developed
countries. The tax to GDP ratio of some developed and OECD countries are mentioned below
for a straightforward grasp of the problem.

40
https://regfollower.com/2020/06/12/bangladesh-national-budget-for-fy-2020-21/

41
http://www.icmab.org.bd/wp-content/uploads/2019/12/8-Tax-Evasion-BANGLADESH.pdf

42
https://doi.org/10.1007/978-1-349-24004-3_10

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The tax to GDP ratio in the developed countries speaks for the actual fact that taxation is sine
qua non for development. The developing countries very often struggle to finance the public
goods and development works due to the lack of finance. Taxation, no doubt, provides the
main source of finance. The tax to GDP ratio in developing countries remain low. which
means the developing countries cannot mobilize enough internal resource to spend for the
public goods. The OECD states, ‘Increased domestic resource mobilization is widely
accepted as crucial for countries to successfully meet the challenges of development and
achieve higher living standards for his or her people. Additional tax revenues enable
governments to simultaneously strengthen infrastructure development, enhance the standard
of education and promote social cohesion.’ Regarding the inner resource mobilization in
developing countries, particularly in Asian countries, the OECD (2017) states, ‘Tax-to-GDP
ratios continue to vary widely across Asian countries. While some countries have
experienced a decline in tax revenues in recent years, tax-to-GDP ratios have increased in
most countries since 2000. In spite of these increases, further efforts are needed to increase
tax revenues in developing countries within the region to support domestic resource
mobilization.’ 43

However, for the economic development of a country tax to GDP ratio should touch the
minimum threshold. Consistent with the IMF the threshold should be around 15% marks.
Smith (2018) states, ‘both the IMF and OECD clearly believe that the tax-to-GDP ratio
matters. it's a straightforward measurement, perhaps crude as a result, but it can give a clear
indication of the direction of travel of tax policy and administration in any given country,
which might then be accustomed measure against economic growth and development.’ it's
observed that tax to GDP ratio in developed OECD countries is much higher than the
developing countries although there is difference among the OECD countries regarding tax to
GDP ratio. But the developing countries, though experiencing some improvement, have to
work hard to realize the expected level of tax to GDP ratio. 44

While the developed countries collect tax around 40 percent or more revenue the developing
countries typically collect taxes of between 10-20 percent of GDP.OECD (2017) noted that in
spite of the rise in tax to GDP ratio within the developing countries, particularly the Asian
countries, further efforts are imperative to augment tax revenue in developing countries to
pave the way for internal resource mobilization that may provide for further expenditure in
areas like infrastructure, health and education. Increase within the tax GDP ratio speaks for
the power of the countries in collecting much needed taxation and to spend a similar for
development works.

Chris Morgan, KPMG’s global head of tax policy states, ‘Research by the IMF shows that
once a tax-GDP ratio gets above around the 15% threshold, this creates a platform for
investment. It means there's sufficient revenue collected so as to speculate in infrastructure
and education, for instance , and this will have a huge effect on an economy.’ While
developing countries are constantly trying to increase the collection of tax revenue, they're
43
https://doi.org/10.1007/978-1-349-24004-3_10

44
. https://doi.org/10.1515/revecp-2015-0002

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facing multiple problems in their efforts to boost revenue. The recent growing concern is the
insufficient international tax program.

As a result of the gaps in the international taxation rules, the Multinational Corporations
(MNCs) are avoiding huge amount of revenue while their income are sourced in the capital
importing i.e., developing countries. it's estimated that because of the insufficient
international tax policies the developing countries lose at least $100bn a year (Rolling,
2018).45

Challenges for Bangladesh in Mobilizing Internal Revenue

Being a developing country Bangladesh tax administration faces formidable challenges in

mobilizing internal resources in terms of tax revenue. Mahmood (2019) states, ‘The
mobilization of domestic resources still remains a key challenge for Bangladesh to achieve its
economic and social objectives.’ The challenges and problems of mobilizing internal
resources are multiple. The revenue collection remains dominated by indirect taxes while tax
plays the vital role in developed countries. 46

Be that as it may, the current revenue challenges for Bangladesh are briefly discussed below:

1. Narrow Tax Base

It is observed earlier that tax to GDP ratio in developing countries is much lower than in
developed countries. The Ramphal Institute notes, ‘In many developing nations, both within
and outside the Commonwealth, a small and under-developed tax base represents a
significant obstacle to the progression of both access to and quality of services for citizens.
The wealthiest members of national populations, who make up a small proportion of the total
population, often avoid paying what can be seen as their fair share of tax, denying
governments much needed revenue. Conversely a much larger proportion of the population
work in the informal economy, outside the remit of regulatory structures, they receive no
formal protection and are not taxed for their work.’

Bangladesh has a very narrow tax base. The tax to GDP ratio was 11.17 per cent in 2016-17
which remains one of the lowest in the world. The tax administration in Bangladesh is
characterised by the dominance of enormous informal sector that contributes to the poor tax
base of the country.The rate of informal economy in Bangladesh stood at 27.60% in 2015
(Medina and Schneider, 2018). Agriculture sector virtually remains outside the tax net.
Tackling informal economy is very difficult on the part of the tax administrations of
developing countries. Very often tax administrations of developing countries are considered
poor and inefficient for numerous reasons. Alm et al (1991) state, ‘It is widely believed that
the tax base in most developing countries has been severely eroded by legal tax avoidance
and illegal tax evasion, brought about largely by poor tax administration.’ Although the tax
administrations of the developing countries are branded as inefficient, of late Bangladesh tax
administration has made remarkable progress in terms of collecting the revenue against the
45
https://doi.org/10.1186/s40008-020-00215-3

46
https://doi.org/10.1515/revecp-2015-0002

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revenue collection target as set by the government. Reform programs are ongoing with a
number of projects on direct and indirect taxes.47

It is expected that Bangladesh tax administration can build up its capacity to deal, inter alia,
with the challenge of informal economy by enlarging the tax base. It is suggested that it is
possible to expand the tax base by encouraging the formal sector. Auriol and Warlters (2004)
suggest, ‘[B]y creating a special status for small entrepreneurs (e.g., without limited liability)
associated with discounted entry fees and some benefits (for example, easier access to
microcredit or to electricity connection) governments of poor countries may increase their
taxation bases.’ Bangladesh can consider such measures that may help expanding the tax
base.

2. Taxing Digital Economy

The world economy is experiencing fast track digitalization. Developing countries like
Bangladesh is not an exception. Like many other developing countries Bangladesh is putting
emphasis on the digital economy. Gradually Bangladesh is becoming a global market for
digital outsourcing (Zaman, 2019). According to OECD (2015), ‘The digital economy if the
result of a transformative process brought by information and communication technology
(ICT), which has made technology cheaper, more powerful and widely standardized,
improving business processes and bolstering innovation across all sectors of the economy.

‘The digital economy poses a broader challenge for the policy makers in that it relates to
nexus, data and characterization for direct tax purposes. It poses another major challenge of
implementing Value Added Tax (VAT) covering the transactions where goods, services and
intangibles are acquired by private consumers from offshore suppliers (OECD,
2015).According to BEPS action 1 the digital economy involves the issue of unparalleled
reliance on intangibles, the massive use of data, the use of multi-sided business models
acquiring values from externalities created by free products and difficulty to identify
jurisdictions where the income is sourced.

These issues pose a formidable challenge for the tax administrations of Bangladesh. It is to be
mentioned here that recently Bangladesh enacted legal provisions to tax digital economy. For
example Ride-sharing services like Uber, Pathao, Sohoz are operating in the major cities of
Bangladesh, particularly Dhaka and Chittagong. The US-based Uber Technologies Inc.
launched their ride sharing service in Dhaka in 2016. Number of users of Uber increased to
200,000 in Dhaka in November 2017, within one year of its launch (Dhaka Tribune, June 7,
2018). Like other countries, the tax authority of Bangladesh also has started to consider the
tax potential of the online sectors. In June 2018, the National Board of Revenue (NBR) has
introduced a 5 percent value added tax (VAT) on ride-sharing service providers.

Finance Act 2018 introduced the supply for tax to be deducted at source under Section 52AA
of the income tax Ordinance, 1984, on apps-based ride sharing services at the rate of 3%-4%
based on the base amount, by the ride sharing service provider. Although Bangladesh is
making gradual progress in terms of it’s capacity building, but to tackle the serious issue like
47
https://doi.org/10.1016/j.jpubeco.2004.07.002

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taxation of digital economy will take time. It is expected that with international cooperation
Bangladesh will be able to build requisite capacity to tackle the problems arising from digital
economy taxation.48

3. MNCs Tax Avoidance and International Tax Rules

Another big challenge for Bangladesh tax administration is to combat the problem of tax
avoidance and evasion by the Multinational Corporations (MNCs) operating in Bangladesh.
The problem of tax avoidance by MNCs is a problem sans frontier. The MNCs exploit the
loopholes of the international taxation rules and avoid huge amount of tax revenue to the
detriment of the capacity of the states to provide for public goods. For example, in 2009-
2013, Amazon, Google and Starbucks paid a combined total of only £57.7 million despite
revenues of nearly £32 billion over the same period. Only 0.18% of revenues were paid in
corporation tax (Connell, 2014). It is estimated that global revenue losses due to tax
avoidance by corporations could be up to $600 billion each year with approximately $400
billion in developed countries (Sikka, 2018).49

One of the means of tax avoidance by the MNCs is the transfer pricing. Transfer pricing
refers to non-arm’s length international transactions between associated enterprises. This has
the effect of negatively impacting the revenue base. This affects much the developing
countries. For example, approximately $100 billion of tax revenue lost by developing
countries annually because of transfer pricing activities from 2002 to 2006(Hollingshead,
2010). Report on transfer pricing by the MNCs reveal that during 2008 to 2012 income tax
year the Indian income tax authority made transfer pricing adjustment to the tune of
$15.42bn. Glaxo Smyth Kline paid $3.4 billion to the IRS due to transfer pricing adjustment
since 1989 (Hilzenrath, 2006).

In 2012 the Hungarian tax department unearthed 160 million Euros from transfer pricing
adjustments. In2013Vietnamese tax administration made a transfer pricing adjustment at an
amount of $110m. In 2011-2012 the Colombian tax administration collected 9.13 million US
dollar as a result of transfer pricing adjustment (Loeprick, 2015). So it is quite understandable
to what extent revenue is avoided by the MNCs due to transfer pricing activities. Though no
data is available, it can be anticipated that Bangladesh is also losing huge amount of revenue
due to transfer pricing by the two hindered MNCs operating in Bangladesh. Keeping in mind
the gravity of the problem, Bangladesh enacted transfer pricing law in 2012 with effect from
tax year 2014. 50

The TP rules in Bangladesh have been framed like the OECD and the UN TP guidelines. The
transfer pricing law in Bangladesh, inter alia, made rules to conduct transfer pricing audit
after the MNCs submit statement if international transactions. But the fact remains that
Bangladesh has not yet been able to go for audit due to lack of capacity and logistics. In the
meantime the OECD is imparting training to the officers of the tax department to build the
48
https://doi.org/10.1787/241216205486OECD
49
https://nbr.gov.bd/uploads/publications/107.pdf

50
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capacity. The National Board of Revenue (NBR) set up a separate transfer pricing cell to deal
with the transfer pricing cases. The Finance ACT 2019 made the provision of a new return
for the companies that contains separate column requiring to furnish statement of
international transactions along with the return. It is hope d that the new provision will help
auditing the transfer pricing cases in a more effective way. 51

4. Poor Third Party Tax Information Reporting System

Third party information reporting (TPIR) is a tax enforcement tool that is widely used by the
tax administrations around the world. OECD (2009) states, ‘Information reporting obligations
‘refer to a legislated requirement on the payers of income to report periodically to the revenue
body relevant information (e.g. name and identification number of payee and amount and
date of payment), either as an integral component of a withholding regime or as a separate
standalone requirement in relation to a prescribed category of payments. Such reports, where
they are systematically matched with tax records, enable the revenue body to verify the
amount of income reported by taxpayers in their returns, to identify potential discrepancies,
and to identify non-filers.’ According to Brooks (2001) TPIR is the most effective way to
ensure tax compliance. Under this system third party payers are required to send the
information of the payments to the tax authority. The tax authority then matches the data with
that of submitted by the taxpayers. This system makes the income visible and discourages
non-compliance. Alm et al (2004) finds that taxpayers who earn relatively more nonmatched
income are less compliant compared to individuals who earn relatively less non-matched
income. Tax information reporting provides valuable information about the taxpayers’
income that is being used by the tax authorities to ensure voluntary compliance. It is observed
that in the IRS taxpayers with income subject to information reporting are more compliant
than the income not subject to reporting system. For example income subject to 100 %
reporting system shows 99% compliance rate while income that is not subject to reporting
system shows 37% compliance rate (Lederman and Dugan, 2019).52

Currently Bangladesh income tax law contains legal provision regarding information
reporting. Section 75B of the Income Tax Ordinance 1984 states, ‘Government may, by
notification in the official gazette, require any person or group of persons responsible for
registering or maintaining books of account or other documents containing a record of any
specified financial transaction, under any law for the time being in force, to furnish an
Annual Information Return, in respect of such specified financial transaction. The Annual
Information Return referred to in sub-section (1) shall be furnished to the Board or any other
income tax authority or agency, in such form, manner and within such time as may be
prescribed.’ The present information regime is narrow in scope and the NBR retains the
discretion to decide whether return should be sent to it or not. The tax administration should
craft a comprehensive tax information regime so that voluntary compliance can be ensured by
encouraging formal economy in the country. This remains a challenge for Bangladesh.53
51
https://nbr.gov.bd/uploads/publications/107.pdf

52
https://doi.org/10.1016/0264-9993(93)90021-7

53
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5. Poor Tax Culture

To ensure sustainable development of a country tax culture is vital (UNDP, 2008). Tax
culture reflects the taxpaying mentality or compliance mentality of taxpayers of a country.
Tax culture is country specific and it is developed over the years in a gives society and
becomes blended with the customs and habits of the people of the society.

It is a phenomenon. Nerre (2001) defines tax culture as follows: A country-specific tax

culture is the entirety of all relevant formal and informal institutions connected with the
national tax system and its practical execution, which are historically embedded within the
country’s culture, including the dependencies and ties caused by their ongoing interaction.
Poor tax compliance reflects a poor tax culture. It is observed that developing countries like
Bangladesh face a formidable challenge to improve revenue collection in an efficient, fair and
consensual way. One of the factors of such challenge is poor tax culture (IMF et al 2011).

Poor tax compliance indicates poor tax culture. In Bangladesh tax culture is considered as the
regular payment of tax. This becomes evident when the Prime Minister of Bangladesh Sheikh
Hasina, on the eve of the national tax day in 2010, called the people of Bangladesh to develop
a tax culture by paying taxes regularly, which is a precondition for economic and social
development (The Daily Star, 2010).Bangladesh’s poor income tax compliance indicates the
country’s insufficient tax culture. The picture becomes clear when one looks into the statistics
of return and tax payments.

At present, 3.1 million people hold Taxpayer’s Identification Numbers (TIN) and of them,
1.6- 1.7 million submit tax returns. It is estimated that there are at least, eight million taxable
people in the country (Dhaka Tribune 2017). Neighboring country India has 95 million
taxpayers (Mishra & Prasad 2018). Tax ratio to Gross Domestic Product (GDP) in
Bangladesh is 11.17% which is one of the lowest in the region. So lack of tax culture poses a
formidable challenge for the tax administration of Bangladesh. Under the circumstances it is
imperative that Bangladesh takes initiative to improve tax culture by inciting patriotism
among the citizens, by removing knowledge gap, removing tax law complexities, removing
corruption, encouraging formal economy and by strengthening the enforcement measures of
the tax laws.54

Recent Initiatives of Bangladesh Tax Administration

Recently Bangladesh has graduated to the rank of middle income earner country club. Under
the circumstances foreign aids are no more available for Bangladesh. Bangladesh is now on
its own. There is no other alternative for Bangladesh than to strengthen the process of
mobilizing internal resources. Bangladesh has to go a long way in terms of revenue collection
to achieve the sustainable development goals (SDGs). Though tax administration in
Bangladesh has not been able to expand the tax base to a remarkable extent, it has not
stopped in its endeavour. Bangladesh took some important initiatives to augment the revenue

54
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collection and increase the tax to GDP ratio to the expected level. Following is a brief
account of some of the initiatives taken by the NBR to reform the taxation system: 55

1. Introduction of New VAT Law

Introduced in France for the first time, Value Added Tax (VAT) was introduced in
Bangladesh in place of Sales Tax in 1991. The purposes of the introduction of the new VAT
were to replace the old age sales tax, mobilize more internal revenue, to introduce a single
flat rate covering a wide range of goods and services production, and ensure equity by
bringing transparency and accountability in the taxation system of Bangladesh (Lalarukh and
Chowdhury, 2013). However, because of some inherent defects it its application, the old
VAT Act has been replaced by the VAT Act of 2012 which came into effect from 1 July
2019. It is expected that the new VAT Act would be able to collect more VAT than its
predecessor did. 56

2. The New Direct Code

The NBR has taken an initiative to modernize the direct tax laws by adopting the new direct
tax code. Income tax was imposed under the Income Tax Act 1922 and the Act continued up
to 1984. The 1922 Act was very complicated. So to simplify 19 THE COST AND
MANAGEMENT ISSN 1817-5090, VOLUME-47, NUMBER-04, JULY-AUGUST 2019 the
income tax law Government of Bangladesh set up a commission to prepare a report on
income tax law. At the suggestions of the inquiry commission the Income Tax Ordinance
1984 was enacted. The Act is still in operation. On the other hand Gift Tax Act 1990 is in
operation to impose gift tax on the property gifted. Travel tax is also collected from the
passengers who travel abroad. The Income Tax Ordinance 1984 is also considered
complicated. So to remove the complicacies and make the income tax law at per with the
international best practice, the NBR is currently working on the introduction of a new income
tax law. At the same time to make user friendly the gift tax act and the travel tax act all will
be included within the new income tax law known as the Direct Tax Code. It is expected that
the new Code will be implemented soon.57

3. Expansion of Income Tax Department

In 1992 the income tax department saw the first expansion. Some new taxes zones were
created and post of the required officers and human resources were created. The first ever
expansion of the income tax department was a success in terms of mobilizing direct taxes in
the country. After that in 2003 Large Taxpayers Unit (LTU) was set up to provide services to
the large taxpayers who pay most of the income tax in a year. The government has designated
the large Taxpayers Unit as the pilot zone for the implementation of the reform in direct tax.
The establishment of the LTU is considered as successful in ensuring taxpayer friendly
environment, facilitate smooth one stop taxpayer service, reducing compliance cost and

55
https://assets.kpmg/content/dam/kpmg/bd/pdf/Taxation-Handbook-2019.pdf
56
https://assets.kpmg/content/dam/kpmg/bd/pdf/Taxation-Handbook-2019.pdf

57
https://nbr.gov.bd/uploads/publications/107.pdf

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building a relationship of trust and confidence between the taxpayer and the department
among others. Besides the LTU income tax, VAT LTU has been in operation in Bangladesh
that collects VAT from big 170 business organizations.

However, in 2012 there was an expansion program of the income tax department in which
some new taxes zones were created, new posts of officers and other human resources were
created. The expansion has been a success. The purpose of the expansion was achieved
evidenced by the contribution of the income tax to the exchequer. A new expansion program
is underway. To keep pace with the growing economy and to expand the tax base at the base
level of the geographical locations of Bangladesh the govt. of Bangladesh has decided to go
for another expansion of the income tax department. At the same time an equivalent
expansion program is underway within the indirect tax administrations of the NBR.

4. Alternative Dispute Resolution System

The Finance Act, 2011 has incorporated ADR provisions for dispute resolution in income tax,
VAT and customs. By ADR mechanism, the NBR and taxpayers can settle their differences
with the help and guidance of an umpire called facilitator. In the field of income tax the
Finance Act 2011 inserted a new chapter XVIIIB alternative dispute resolution. Section 152A
to 152S, deals with the detailed provisions of alternative dispute resolution among the tax p
ayer and the department. The ADR system is successfully running in the direct tax
administrations.58

5. BITAX Project

The BITEX project is an ongoing project in the field of direct taxes set up to facilitate on line
return submission by the taxpayers. Provision is also there to make offline entries of the
returns submitted manually. 6. Reforms in the Customs Administration To collect customs
duty, the Customs Act 1969 is now in operation in Bangladesh. In order to accommodate the
trade facilitation provisions of the WCO Revised KYOTO Convention and therefore the
WTO Trade Facilitation Agreement, the NBR has undertaken a task to amend its existing
Customs Act. Accordingly, a new Customs Act in Bangladesh will be enacted soon. The new
Customs Act will be a major reform in the field of customs administration. The new act will
improve the customs regime through automation. The new law would facilitate the traders for
submission of electronic declarations for exports and imports, electronic submission of
advance cargo declarations for imports and introduce green channel for honest traders.
Besides currently customs departments are running some customs modernization projects
with the help of the World Bank group.

The effect of Covid-19 Pandemic in Taxation:

The COVID-19 pandemic saw a major shift among most tax administrations to remote
working by many of their staff. As tax administrations consider the form of the workplace
post-pandemic, many are examining the options for a few degree of continued remote
58

https://www.britannica.com/topic/tax-incidence

Exam Roll: 170612

working for workers on a longer-term basis. Such a shift needs careful consideration because
it touches many aspects of an organization, from information technology through to
employment policy and organizational culture. The impact of the corona virus disease
(“COVID-19”) has been profound. The rapid spread of the virus has strained local medical
infrastructures, led to restrictions on travel and social contact, and created unprecedented
disruptions to the global economy.

During the pandemic period, many enterprises have faced curtailment of their operations, and
have been forced to close offices and other business premises forcing those businesses to
change how their business is conducted (e.g. working from home). In many jurisdictions,
international travel was either suspended or severely restricted for a number of weeks leaving
people stranded in jurisdictions where they might not otherwise be. This temporary
dislocation of people can have tax consequences for those individuals and the businesses for
which they work.59

In light of the exceptional circumstances, on 3 April 2020, the OECD Secretariat issued
guidance on the application of international tax treaty rules in circumstances where cross-
border workers or individuals were stranded in a jurisdiction that was not their jurisdiction of
residence. The guidance was issued as an urgent response to requests from concerned
jurisdictions which as a result of the COVID-19 pandemic had taken unprecedented measures
that affected the mobility of individuals such as restricting travel and implementing strict
quarantine requirements. For that reason, the paper was published under the responsibility of
the Secretary-General of the OECD stating that the opinions expressed and the arguments
employed therein did not necessarily reflect the official views of OECD member countries.

These unprecedented measures imposed or recommended by governments, including travel

restrictions and curtailment of business operations, (broadly referred to in this guidance as
“public health measures”) have been in effect in most jurisdictions in various forms and
stages during most of 2020, 2021 and may remain in effect in 2022.60

Reason behind Tax-GDP Ratio Being Low in Bangladesh and the Way to boost it

Despite positive process in recent years, Bangladesh has one of the lowest tax-to-GDP ratios
(9.3 percent) within the South Asian region. It is 23.1 percent in Nepal, 16.8 percent in India
and 11.0 percent in Pakistan.

Income tax is one among the main components of tax income . Besides tax , there are two
other major sources of revenue—value added tax (VAT) and customs . The projection of total
revenue collection from tax , VAT and customs for the year 2020-21 is estimated to be Tk
378,000 crore, where the National Board of Revenue (NBR) will contribute Tk 330,000
crore. Of that, Tk 103,945 crore will come from income, profit and capital tax, while Tk
59
https://www.oecd-ilibrary.org/taxation/tax-administration-towards-sustainable-remote-working-in-a-post-
covid-19-environment_fdc0844d-en

60
https://www.oecd.org/coronavirus/policy-responses/updated-guidance-on-tax-treaties-and-the-impact-of-
the-covid-19-pandemic-df42be07/

Exam Roll: 170612

125,162 crore is getting to be collected through VAT. Past record shows collection from
VAT has always been above that of income tax—which puts a burden on marginalised people
through double taxation and as a result, inequality has worsened over the years. At an
equivalent time, due to globalization, both custom and import-stage supplementary duties are
likely to say no in relative terms. Under the circumstances, the govt is about to reinforce its
revenue mobilization through tax.61

Unfortunately, in Bangladesh, an outsized number of people and firms are unregistered and
therefore the overwhelming majority of registered individuals and firms with taxable income
aren't curious about paying taxes. According to a NBR study, about four crore people within
the country have the capacity to pay taxes, but the bulk of them don't pay tax on their income.
At present, NBR has about 40 lakh registered taxpayers but only 22 lakh submitted their tax
returns in FY 2018-19. The study also found that there are 213,505 companies registered with
the Registrar of Joint Stock Companies (RJSC), of which about 45,000 companies submitted
tax returns.62

Tax evasion may be a significant issue in Bangladesh—as companies with huge revenues
also evade taxes. In addition, businessmen who collect VAT from consumers evade tax
through under-reporting.

Conclusion

Bangladesh, being a developing country faces some daunting challenges in mobilizing tax
income. With a poor tax net and lowest tax to GDP ratio Bangladesh is walking ahead to
achieve the SDGs through collection of much needed tax revenue. Although infested by some
intimidating problems Bangladesh has registered significant growth of economy and
therefore the collection of tax income from direct and indirect revenue sources. Mahmood
(2019) states, ‘Despite the inherent weaknesses in the taxation system, it also delivers
reasonably predictable tax revenue which provides a certain degree of certainty to the
government. At an equivalent time, it serves the interests of all powerful interest groups
within the country. The tensions over sharing the rent is usually mitigated by bargains based
on the distribution of power among the parties involved.’ The taxation challenges discussed
in the article are not peculiar to Bangladesh. They are the common traits of the tax
administration of any developing country. The present revenue administration is very much
aware of the problems that impede revenue collection. The government is sincere to unravel
the issues. It is expected that the NBR would take necessary initiative to make some
necessary reforms in the field of domestic and international taxation rules with a view to
combating the problem of tax evasion and avoidance in the country.63

Reference:
61
https://www.researchgate.net/publication/328237126_Study_of_the_tax_management_problem

62
https://www.theigc.org/wp-content/uploads/2014/09/Mansur-Et-Al-2011-Policy-Brief.pdf

63

https://scholar.harvard.edu/files/stantcheva/files/lecture3.pdf

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