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RECENT AND UPCOMING FISCAL REFORMS IN BANGLADESH

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RECENT AND UPCOMING FISCAL REFORMS IN BANGLADESH Powered By Docstoc
					             Workshop on
  COLLABORATIVE RESEARCH ON SOUTH
          ASIA TAX SYSTEMS
              Singapore: 08-09 August 2010
Session II: RECENT AND UPCOMING FISCAL REFORMS
                   IN SOUTH AISA


         Fiscal Reforms in Bangladesh:
        Evolution, and Future Initiatives
                     Presentation by
                 Mustafizur Rahman
                  mustafiz@cpd.org.bd

           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 think – t a n k
               Fiscal Reforms in Bangladesh:
              Evolution, and Future Initiatives


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

                                                       2
1. Introduction: Salient Features of Bangladesh’s Current Fiscal
     Scenario

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




                                                                                          3
2. 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%

                       Revenue and Tax Revenue as % of GDP

    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


       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%)

                                                                                          4
Growth Trends and Revenue Structure of Bangladesh




   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
                                                                                 5
Growth Trends and Revenue Structure of Bangladesh




   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
                                                                                 6
3. 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                              42.5
    (Listed/Non-listed)
    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

                                                                                          7
Major Fiscal Reforms in Recent Times: Income Tax

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

                                                                              8
Major Fiscal Reforms in Recent Times: Income Tax


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”




                                                                         9
Major Fiscal Reforms in Recent Times: Indirect Tax

   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


                                                                         10
Major Fiscal Reforms in Recent Times: Indirect Tax

   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
                                                                        11
Major Fiscal Reforms in Recent Times: Indirect Tax

   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




                                                                              12
Major Fiscal Reforms in Recent Times: 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




                                                                        13
Fiscal 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

                                                                        14
5. Medium Term Fiscal Plan

                  Revenue and Tax Revenue as % of GDP
    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
   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
                                                                                15
Medium Term Fiscal Plan

   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
                                                                             16
6. 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




                                                             17

				
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