Tax Evasion and Avoidance July August 2010

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Tax Evasion and Avoidance July August 2010

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Taxation

Taxation
who have a legal requirement to file a tax return, but do not file on
time. The underreporting gap is the tax owed by taxpayers who file
returns on time, but underreport the amount of tax they owe. The
underpayment gap is the loss of revenue owed by taxpayers who file
returns on time, but do not pay their reported tax due on time. The
largest component of the tax gap is expected to be underreporting.

Tax Evasion and Avoidance- A Real Challenge for Bangladesh to
Achieve Millennium Goal
Md. Abdul Based Mondal, FCMA*
Mohan L Roy**
Abstracts: Tax evasion tendency of all walks- of- lives is nothing new in this country. It is surprisingly noticed that last year
42 lawmakers did not pay taxes. The NBR chairman quoted that only 1.5 percent (2.238 million) of the country’s 150 million
people holds TIN (Tax Identification Number) and out of which 97.63 percent are non-corporate TIN holders and the rest
2.37 percent are corporate ones. Irrespective of country’s identity falls in the so called categorization third world or first
world, tax dodging prevalence is common. However, in Bangladesh this problem is acute. No attempt has been taken yet to
estimate tax evasion amount. In this study effort, we simply screen out the loopholes of the implied taxing approaches and
the tax revenue regimes in particular meet the gap often. Of the four primary tax revenue segments viz., income tax, VAT
and supplementary duty, customs and excise, and others, the VAT segment lies in lowest ebb. This study envisages opinion
how to silt the loopholes and reduce the tax gap at minimum level.
Keywards: Tax Gap, TIN, Black money, White money, Business Expenses, Personal expanses.

1.0 Prologue
The difference between the amount of tax legally owed and the
amount actually collected by a government is called the tax gap. In
the economics of tax gap, Nobel laureate economist Gary Becker
(1968) theorized the ‘economics of crime’ stating as long as the
country’s laws fail to plug loopholes of taxing system, the misdeed in
government revenues remain alive ( Allingham and Sandmo,1972). In
this outlook, the purpose of taxation is to take out as much money as
possible from the population to serve the sovereign with the least
possible fuss and bother. That which could not be collected – at least
not without a lot of ‘‘hissing’’ and other unpleasantness – is
handpicked left interrupted by further law. Yet as citizens of a
democratic system every one expects that the burden of financing
the public services that citizens demand should be allocated in a fair
way among the people. Unanimously mostly agree that tax liability
should be allocated in a way based on people’s ability to pay tax. As
citizens of a democratic state, every concern people believes that the
tax laws peoples’ elected representatives have enacted meet people’s
standards of fair dealing. Thus, all able and conscious citizen should
do care about taxes owed, reported and paid, albeit overpaid taxes
benefit the sovereign.
This paper addresses issues related to measurement of the tax gap –
the difference between tax liability under the National Board of
Revenue (NBR) tax rules and taxes paid by the payers. In view of
doing this, we review the main components of the tax gap in present
perspective and retrospect, and go and get how the NBR estimates it.
With the succeeding parts, some major issues in national policies for
ballpark figure of tax gap are drawn. Probable inherent
* Mr. Md. Abdul Based Mondal, B. Sc., FCMA, Additional Director, Education, ICMAB, Dhaka
** Mr. Mohan L Roy, M.Com (Fin), M. Com (Mgt), M. Com (Acc), Associate Professor, Finance
and Accounting, IBAIS University, Dhaka.

The Cost and Management, July-August, 2010

flaws of the exiting policies for current estimates and suggestive
actions are also pencil in finally. The country’s tax gap estimation is
leaded by the changing political government’s views (Chowdhury, R.
A. 2008), albeit some people might mull over this a dubious honor.
However estimating underpayment taxes that supposedly be paid on
time but are not materialized inherently differ in different political
regime (see table 3). Observed quantities of revenues collection
actually differ in three governments’ rule1.

Dishonesty of tax officials and hissing of paying taxes to
respective order: Sleaze tax officials cooperate the tax payers who
intend to evade taxes is an open-secrete matter in the most
developing country like Bangladesh. When they detect an instance of
evasion, they refrain from reporting in return for illegal gratification or
bribe. Corruption by tax officials is a serious problem for the tax
administration in a huge number of underdeveloped countries like
Bangladesh (Khan and Senhadji, 2000). Measuring the tax gap
resulting from tax administration traditional and annoyance strategies
imposes special challenges; more work needs to be done on this.

5.0 Time befitting Taxation Policy formulation and
Implications
The tax gap measures can be developed and made completing
ongoing work on flow-through entities, and setting in motion
processes that would ensure continuous annual updating of
individual tax gap measures, even if that involves fewer random
audits per year, in place of the occasional large random audit study. A
system should be devised to systematically identify firms and
individuals who do not file any tax return. Survey, online return
submission, electronic record management and enhancement of
scope of withholding tax may be added with the system.
5.1 Black money–white money concept: In this country tax evasion
is an enlargement trade and the parallel and underreporting money
has been conservatively estimated at Tk. 360 billion. This magnifies
the socio-economic woe. What then may be the policy implications
concerning tax underreporting? Tax amnesty means giving full legal
approval to deliberate and systematic evasion of tax and also
payment of tax at reduced rates (Baree, M.A. 1992). Any such
provision is self-contradictory anti-compliance. Govt. rules are meant
to create and maintain a weak balance between the conflicting and
divergent interests of various individuals and groups in the society
and as such no law should contain such conflicting and opposing
elements which would tear down its very rationale and basics. The
entire breadth of our fiscal law, rules and tax machinery becomes
hollow and serves no purpose when such tax amnesty has been
continued year after year. The justification to tax any income higher
than the amnesty rate can be seriously questioned and may be
termed a great slip in our fiscal discipline. It is reported that out of an
estimated Tk.360 billion of black money in our economy only 2.98
billion have been declared not even 10% of the estimation. The
invisible social cost of this policy is enormous and beyond any
repairable limit (Khan, Z. A. et al., 2000). What government can do is to
strengthen its machinery to catch the lawbreakers in the first place
instead of opening the door and then beginning back to the thieves.
Moreover, the practice does have a serious effect upon the morale of
tax officials.
5.2 Social awareness program: Create awareness among the people
The Cost and Management, July-August, 2010

Tax gap by sources in absolute Taka and percent figure with respect to
the total gap are presented in table-1. The biggest single line item in
the tax gap is customs income comprising import duty,
supplementary duty, and excise in the business and individual income
tax, which amounts to Tk. 65 billion or almost a 41 percent of the
estimated tax gap4. Adding in the underpayment of value added tax
(VAT), the underpayments of business income on individual income
tax returns contributes to 58 percent of the total tax gap; over half of
the underpayments gap attributable to total taxpayers. Based on the
NBR estimates, the tax gap crisis is primarily a crisis of underreporting
of tax by individual taxpayers with income from businesses, rents and
royalties, farms, partnerships, and other flow through entities (Sarker
and Kitamura , 2002). Most of the tax gap comes from noncompliance
by individuals and businesses participating in officially recorded
economic activities, who are either failing to file tax returns,
underreporting tax owed on tax returns, or failing to pay taxes due on
time (Rahman and Yasmin, 2008). But the tax gap also includes tax
evasion by participants in illegitimate activities in the subversive
financial system (Rashid, 2007), that is, the portion of economic
activity that goes unrecorded in official economic statistics. These
partakers are informal suppliers, such as moonlighting professionals
who work ‘‘off the books’’ and do not report income or taxes owed
(Chowdhury, R. A. 2008). The tax gap, however, does not count unpaid
taxes by people engaged in the portion of the subversive economy
consisting of all illegitimate activities.
Table-1: Tax Gap by Sourcesa (2009-10)

2.0 Tax Evasion and avoidance - in perspective and
retrospective

Sources Tax

The gross idea tax gap leads two meaning2–tax evasion and tax
avoidance. The tax evasion also translates two meanings as (a)
understatement, concealment by the tax payers of the income and
the tax due on it or simply of the taxable object, or (b) failure to pay a
tax voluntary and on time. The second, tax avoidance on the other
flip, is the use of shortcomings in the existing fiscal laws to evade
taxes unintended by the legislators. The most recent tax
administration ballpark figure of crores taka that some car importers
dodge by manipulating the ages of used cars. The NBR estimates this
gap of import duty is an extra Tk.1000 crores earnings likely3. The net
tax gap is the gross tax gap in any tax year less payments of that
year’s tax liability that come in later through either voluntary late
payments or NBR enforcement activities. Payments of interest and
penalties associated with late payments or underreported tax liability
are not counted in either the gross or net tax gap measures.

Income tax
VAT
Custom
Others
Total

The gross tax evasion and avoidance have three components – nonfiling, underreporting of tax owed, and underpayment (see table-2).
The three components are mutually exclusive and add up to the total
tax gap. The non-filing gap is the tax not paid on time by taxpayers
1. BNP, Caretaker and Bangladesh Awami League (2005-06; 2006-08;2008-09)
2. Baree, M.A. (1992), p.371
3. The Star Business, Dhaka Friday, June 4, 2010.

Target
Tk (in billion)
165.6
227.89
232.36
4.69
630.54

%
27.5
33.99
38.09
0.77

Collection
Up to April 2010
Tk (in Blln)
%
112.5
68
188.5
83
167.3
72
3.142
67
471.4
75

15

and motivate the wealthy section of the society to pay taxes. Apart
from the NBR, it must be ensured that the tax payers should be free
from various complications and harassments in tax offices while
coming to pay taxes. The NBR in alignment with the government
concerned department can initiate motivational campaign in raising
consciousness explaining how regular payment of taxes serves the
country and ensures justice in the society. This can be done not only
by appropriate NBR personnel, educational campaigns and by
seeking support and co-operation from professionals like chartered
accountants, tax lawyers, etc. A strong fiscal and financial discipline in
all the government departments, agencies or enterprises may
increase its legitimacy (Rahman and Shilpi, 1996). People must
encourage regional and other types of co-operation among tax
administrators to reduce the extent of tax evasion by individuals,
domestic and transnational corporations. This may be achieved by
arranging frequent meeting, seminars, education program for tax
payers, exchanging information, etc.
5.3 Broad band tax net: A wide base and a low rate structure would
maximize the tax revenue. Presumptive tax on professionals such as
accountants, lawyers, doctors, engineering and management
consultants, university teachers may be brought to the tax net.
Assessments on coaching center, private university, English medium
schools, and private educational institutions for professional
development are still at large from tax net. The fiscal (2010-11)
budget failed to bring them in tax notice. Special turnover tax (not
VAT) may be imposed on coaching centers and private educational
institutions including university and English medium schools. Certain
tax administration measures, such as selectively increasing the audit
frequency and audit thoroughness for upper bracket tax payers and
for hard to catch individuals, firms or professionals such as doctors,
lawyers, etc., use of cross checking procedures in line with other
social or economic indicators of the assesses may be used to re-fix
the presumptive tax pointed out earlier.
5.4 Special watch-dog for excise and turnover taxes: It presumes
that the business houses and industrial firms are engaged in tax
evasion in a significant scale. The success of government machinery
for revenue collection is largely relied on administering the gamut
involves in collection process, NBR policies and the honesty of the tax
payers. The national budget 2010-11 precludes cigarette, bidi, gul,
zarda, chanachur, juice, energy drink and M.S products from cottage
industries facilities is an appreciable step but policy formulation is
not enough to plug the loopholes of the perpetrators movements.
5.5 Reengineering custom duty net: Halting evasion of tax by
means of under invoicing, proper valuation of should be placed at
most important custom centers of the country. The present custom
net is too poor to fish many cross borders trade. Tax evasion by multinational companies through transfer pricing is a global
phenomenon. Revenue people in many countries including USA,
India have been given special power and training to examine
extensively the transfer pricing mechanism of those companies. In
this country too, there is possibility of tax underreporting through
this mechanism.
5.6 Simplified Income Tax system: The present income tax system is
too complicated to understand. Chartered accountants, tax lawyers
and related professionals often allegedly are abusing this complexity.
Their dubious roles as middle man help underreporting many
income tax cases. People are likely to go for self assessments are
discouraged by the difficult system. The problem is more acute in a
19

taxpayers who do not file returns on time or on how much tax would
have been due if they had filed. The NBR has yet to anticipate such a
non-filing gap for taxes; howbeit it would not be irrational to assume
that a large portion of prospective returnable numbers is unlikely to
file tax returns. The non-filing gap for the tax revenue is anticipated to
be 1.2 to 1.5 billion USD (Sarker and Kitamura, 2002). It is reported
that the NBR has taken a move to locate 1.2 million taxpayers who
remain unidentified for years despite having the TIN. Currently there
are 2.238 million TIN holders, but only 1.0 million of them file tax
returns every year5. Thus it can be conservatively estimated that TK
200 billion were left in non-filing income tax return that leaded a
grand total of TK 314.4 billion for the fiscal year 2009-10 (see table -2).

3.2 Estimating Underreporting Tax Gap
The NBR primarily can use a stratified random sample audit of tax
return method to estimate the underreporting gap and then project
the audit results to population totals. For doing this, periodic audit
survey studies of individual income tax returns and business returns
may be conducted6. Of the three estimations, this is most difficult to
take a presumption for underreporting tax return. As described above,
underreporting is illegal/legal way of evading tax payments by tax
payers. In this country, there are various legible ways of lowering tax
liability in the forms of exemptions, incentives, rebates and credits. If
illegal ways of evading tax payments are added, the underreporting
figure might be exceeding the virtual payments of taxes. In a recent
conference report (McGee, 2006), it is shown that Bangladesh lie in
lowest ebb among 13 developing countries in Asia where 98.1% of the
sampled respondents reported justifies tax evasion in terms of
underreporting. It is to note that in favor of their justification, they
argued that tax payers supposedly enjoy a little return in exchange of
their payments to the government. Black money transactions made an
underground economy which believed to be stronger or larger than the
economy the state dealt in publicly. Consequently it is conservatively
estimated that the only underreporting amount for income tax would
never be lower than TK 150 billion in a year7. The other sectoral
projections have been made on same ground (see table -2)
Table 2: Non-filing and Underreporting Tax Gap
(Projection In billion Taka)8
Tax sources
Income tax
VAT
Custom
Turnover
Travel
Excise
Others
Total

3.0 Tax Evasion and Avoidance Estimation
3.1 Estimating Non-filing Tax Gap
On filing compliance, the NBR regularly may produce estimates of the
non-filing rate. To do this, the NBR can set non-filing tax return
compliance cell on the basis of information provided in national ID
program of Bangladesh Election Commission and the Bangladesh
Bureau of Statistics (BBS). In compliance with Ministry of Finance and
Bangladesh Bank statistics, the non-filing return rate can also be
developed. Based on family, business (SME but not corporation) and
profession characteristics and reported incomes, it is to tabulate the
individual tax units with a requirement to file a tax return on time. This
non-filing percentage does not reveal the size of the non-filing gap
because it supplies no information on the characteristics of
4. The estimated tax gap figure is rounded up to April 2010.

Taxation
responsible of such dodging in taxes revenues. In addition to this,
corruptions in levy system are another defaulting cause of
underreporting. International borders in this country are inherently
lack customs offices or similar facilities that could effectively control
the movement of any goods carried in private vehicles from one
jurisdiction to another. The respective districts and divisional
authority simply lack the manpower and resources to pursue and
prosecute every case of sales tax evasion arising from purchases
which do not cross borders other than for major purchases (Sarker
and Kitamura, 2002).

Taxation

Non-filing
(%)
200 (64)
100(32)
10 (3)
0.5 (0.1)
0.0(0.0)
2.0(0.6)
2.0(0.6)
314.5

Components
Under reporting
(%)
150(33)
200(44)
100(22)
0.6(0.13)
0.5 (0.10)
2.0(0.43)
2.0(0.43)
455.1

Total
(%)
350 (45)
300(39)
110(14)
1.1(.14)
0.5(.06)
4.0(.52)
4.0(.52)
769.6

5.

In a pre-budget discussion meeting the NBR chairman has given this information (FE
report June 9, 2010).
6. The NBR vows DIFD to launce a new project - The Administration Capacity and Tax
Payers Services (TACTS) to increase tax base.
7. The estimation has been made considering only income tax return recorded in the fiscal
year 2008-09.
8. The projection has been made on the basis of fiscal year 2008-09 and reported
statement in the daily news papers.

16

The Cost and Management, July-August, 2010

.3 Estimating underpayment tax gap
The underpayment gap is the loss in revenue from taxpayers who
have filed timely returns, but have not fully paid their reported tax on
time. The NBR tabulates the underpayment gap annually and
monthly from tax return and payment data on its files (see tables- 3).
Table -3a: Underpayment Tax Gap (2006-07)
In crores Taka
Target

collection

Gap (-) %

Import duty

8279

8154.76

-1.50

VAT (import)

6252

6311.17

+0.90

SD (import)

1231

1196.63

-2.79

Excise

185

183.49

-0.816

VAT (local)

7425

7471.13

+0.621

SD (local)

4864

4846.09

-0.368

must be settled quickly. The existing tax structure should be tailored
to the attainable efficiency in tax administration. While preparing
annual budget, this point deserved special attention to keep
government expenditure within tax collection efficiency of tax
officials. Otherwise, arbitrary targets to collect tax revenue when
imposed make them running wildly to fulfill the target which
ultimately destroys theirs and tax payers’ confidence in tax
administration.

5.7 Penalty and Reward: Appropriate design of a penalty rate
structure also appears to be anti-evasive and anti-avoidance. The rate
of penalty should be progressively higher with the amount of tax
evaded and must also reflect the current market conditions. At
present, the provision of penalty in the statute books is one sided. The
tax payers only to be penalized for an act of omission or default but
there is no corresponding provision to penalize dishonest, inefficient
or unjust tax officials (Chowdhury, R.A., 2008). Moreover, there is no
reward for them who pays taxes regularly and on time. Highest tax
payers or tax payers above a specified bracket are proposed to be
awarded with a tax card providing civilian VIP status in all state
programs and public facilities.

In fine we conclude by quoting the great words of Jean Baptiste
Colbert (1619-1683), French Economist and Minister of Finance under
King Louis XIV in this regard: ‘The art of taxation consists in so
plucking the goose as to obtain the largest possible amounts of
feathers with the smallest possible amount of hissing’. r

5.8 Standardization of public utility price: The policy of taxation
and user charges for services provided by nationalized state
enterprises, i.e., PDB, WASA, DESA, GAS etc., should be well formulated.
The latter when based on standard marginal pricing would collect
more revenue and would generate less resistance by the tax payers.
The result may be low income tax rate and lesser tax evasion.

--- (2010). Annual Budget 2010-2011, Ministry of Finance, GOB Part I and Part II, 10 June.

The idea of the tax arrangement should be to develop a sycophancy
liaison in which the tax controls work in cycle to create an ambiance
wherein individuals and firms are aware of appreciative to pay
assessment, find that they can afford to pay assessed liability, and feel
justified in paying it by their fellow peer groups’ observance. Great
care must be taken in drafting the tax laws, since some of the
opportunities for tax evasion and avoidance arise from the poor
drafting thereof. Moreover, once the laws are passed, prompt rules,
regulations or circulars must be issued by the authorities requiring
minimum compliance costs. Administrative producers for the
resolution of disputes and controversies must be made clear and

9186.95
2339.24
20856.78
238.26
10943.10
6172.55
4.55
17358.46
13889.34
415.06
0.13
415.19
14304.53
52519.77

-1.84
-2.20
-2.18
+0.53
+1.78
-8.26
-9.00
-2.05
+2.59
+0.46
-87.0
-0.67
+2.49
-0.91

6

6

0.00

4.0 Issues of Assessing Tax Gap in Bangladesh

Income tax

8924

8721.24

-2.27

Travel

311

326.91

+5.11

Other

2

1.9

-5.00

Total (grand)

37479

37219.32

-0.700

There are both technical and conceptual issues in determining the
correct measure of the tax gap. Some of the more crucial issues are
adjustments for failure to detect underreporting on individual
income tax returns, underreporting of income through flow-through
entities, measurement of over-reporting of individual tax liability,
fairness of data, conceptual issues in measuring the corporate tax
gap, and special problems in estimating the portion of the tax gap
due to sophisticated tax avoidance techniques.

These tabulations are accurate measure of the underpayment gap
because NBR knows both the amounts reported on timely returns
and the amounts paid on time. Interest and penalties associated with
delayed payments are not counted as part of the tax gap because
they are not part of tax liability. They are included, however, in data on
revenues from NBR enforcement activities.
Table- 3b: Underpayment Tax Gap (2007-08)
(In crores Taka)
Import duty
VAT (import)
SD (import)
Subtotal
Excise
VAT (local)
SD (local)
Turnover tax
Subtotal
Income tax
Travel
Other
Subtotal
Total direct taxes
Total (grand)

Target
9300
8240
1845
19385
213
8767
6125
6
15111
11005
467
2
469
11474
45970

Gap (-)
Collection
9619.19
8474.66
1752.86
19846.71
212.79
9090.35
6016.41
4.61
15324.16
11579.65
448.82
1.59
450.41
12030.06
47200.93

%
+3.43
+2.85
-5.01
+2.38
-0.10
+3.69
-1.77
-23.17
+1.41
+5.22
-3.89
-20.50
-3.96
+4.85
+2.68

Table -3c: Underpayment Tax Gap (2008-09)

Import duty

(In crores Taka)
Target
9570

Collection
9330.59

Gap (-)
%
-2.50

The Cost and Management, July-August, 2010

4.1 Tax Evasion and Avoidance: It would not be not be irrational to
expect that underreporting of net income of businesses which are
organized as flow through entities may contribute significantly to
underreporting of individual income tax by their owners (Rahman
and Yasmin, 2008). Yet individual income tax returns are
systematically examined for extracting the underlying income of flow
through business houses in which the audited individuals owned
shares (Annual Budget, 2010). Moreover, traditional examining
techniques that focus on examining one taxpayer at a time may fail
to detect tax evasion from transactions between houses. In effect, all
parties may be reporting gross income correctly, but nonetheless tax
gets evaded by shifts in income and deductions between entities.
While use of these techniques holds the promise of better detection
of abusive avoidance schemes, the preliminary evidence it has found
of avoidance that occurs through income shifting among taxpayers
and tax-indifferent entities suggests another source of
noncompliance that current tax gap studies may fail to detect.
Nonetheless, the preliminary research in this area has yet to bring
into being any prediction of the magnitude of the difficulty.
4.2 Possible Overstatement of Tax Liability
If an auditor finds a taxpayer has made an error in the government’s
favor, the return will be corrected and NBR will repay any amount the
taxpayer overpaid as a result of over-reporting tax liability
(Chowdhury, R.A. 2008). In anticipating the tax gap, as noted, NBR
adjusts for an estimate of the amount of underreported income that
examiners fail to detect. There is no corresponding adjustment,
however, for unclaimed offsets to income or to tax that NBR fails to
detect. While NBR willingly refunds taxes that have been incorrectly
paid, one might suspect that NBR examiners are not over-zealous in
searching for and finding unclaimed tax benefits. Simple
computational errors and misinterpretations of the law will typically
17

Income Tax Laws

poor economy like ours with high illiteracy and poor record keeping
and accounting habits. The demands placed on administration- very
poorly staffed with poor pay and inadequate logistics support have
probably resulted in greater dishonest practices than would have
been the case otherwise (Baree, M. A., 1989; Sarker and Kitamura,
2006; Rahman and Yasmin, 2008). However, the current fiscal policy
has proposed to introduce e-tax filing11, e-tax calculator on NBR web
etc.

6.0 Concluding Remarks

9360
2392
21322
237
10751
6729
5
17722
13538
417
1
418
13956
53000

Turnover tax

Taxation

5.9 Updating Anti-evasion Provisions in the ITO, 1984: Income Tax
Ordinance 1984 was equipped supposedly adequate legible
provisions to tackle concurrent tax underreporting-evasion and
avoidance, and penal provision for purported taxpayers. Section 19
deals with unexplained investment, Section 115 for detecting
concealment, Section 123-124 deal with imposing penalty for tax
evasion and chapter XXI for offences and prosecution. Special
provisions are incorporated in Section 93, 104 and 106 for escaped
income assessment or non-filing tax return; and Sections 117-119
empower NBR officials to raid, search, seize and retain the
concealments of bullion or valuables required to be disclosed under
the ITO, 1984. But long standing these provisions cannot be befitting
of all time or age. For example, new cyber tax laws to book
transactions through e-banking, e-commerce, and web-capital
market etc. is a demand of time. The ITO 1984 offers a variety of
exemptions and incentives and their continuation and misuse erode
the tax base.

VAT (import)
SD (import)
Subtotal
Excise
VAT (local)
SD (local)
Turnover tax
Subtotal
Income tax
Travel
Other
Subtotal
Total direct taxes
Total (grand)

Taxation
be adjusted, but it is less likely that examiners will search hard for
potential deductions and other tax benefits that the taxpayer
overlooks. Clearly, this is an area where further research may be in order,
especially as the tax rules continues to be cluttered with new and more
multifarious incentives involving prickly options and choices.
4.3 Aptness of Data
For years, NBR anticipations have suffered from being based on
outdated sample data, extrapolated by the growth in overall tax
liability (Sarker and Kitamura, 2006). The changeover of 2006-07 to
2009-10 tax return data represents a major improvement in the
timeliness of the data on which the underpayment tax gap estimates
are based. But 2006-07 and onward database will rapidly become
outdated as well, as tax laws continue to evolve and as the age
composition of the country’s population, the composition of the
workforce, and the distribution of employment by industries and
occupations change. Short of constructing a random set of SME and
large firm taxpayers to audit and issues to examine in a new
corporate tax gap study, the most practical way to obtain more
updated estimates in a reasonable time frame at reasonable cost is to
use recent operational audit data to develop the new estimates.
For individual income taxes, the objective would be to update the
estimates on a regular basis. Ways need to be found to reduce the
annual cost of NBR if the program is to be sustained. To develop
timely estimates of individual income tax reporting compliance and
frequent updates of audit selection formulas, the NBR needs
comprehensive plan to perform random audits of smaller samples of
individual tax returns under the tax audit program every year. NBR
will combine results of these audits to develop tax gap estimates
over rolling three-year periods, with a new year’s worth of audits
added and one old year dropped every year.
Another possibility would be to include data from operational audits,
using econometric methods to adjust for the non-randomness of
operational data (Feinstein, J. S. 1981). Data from these operational
audits could supplement data from the random tax audits to perform
annually. The random audits would serve as a check on the method
of extrapolating from the operational sample to the population and
allow for identification of emerging issues that tax audits based on
past estimates of probable noncompliance might fail to detect. Use
of a blend of random and operational tax audits could effectively
expand the sample size and enable NBR to produce more compliance
estimates for more segments of the taxpaying population.
4.4 Estimating the Tax Gap in tricky Transactions
Tax gap comes from companies and wealthy individual taxpayers while
they use highly-paid tax lawyers and chartered accountants to work
out obscure design to reduce tax liability to a small fraction of their
economic income (Mahmud, et. al., 2009). The existence of large
‘underground economy’ is responsible for low tax base in Bangladesh9.
Tax shelter and tax haven: The tricky transactions involve shifting of
income between taxpayers and tax-indifferent entities through
composite chains of interrelated entities are of this type. The use of
offshore bank accounts in tax haven countries to hide unreported
income, which can later be accessed through credit cards to finance
personal consumption at home. For transactions that are clearly
outside the tax law, the only question for tax gap measurement is the
ability of NBR to find and identify them.
9 The Financial Express reports (June 20, 2010) citing the NBR chairman statement.

18

Legal vagueness: Often these consist of a series of separate
transactions, all of them within the letter of the tax law, that reduce tax
liability, but produce no expectation of pretax economic gain. Tax
result depends on definitions of legal terms which are usually vague.
For example, vagueness of the distinction between “business
expenses” and “personal expenses” is of much concern for taxpayers
and tax authorities. More generally, any term of tax law, has a vague
penumbra, and is a potential source of tax avoidance (Pasternak and
Rico, 2008). These transactions create issues for tax gap measurement
because it is not always clear what ‘‘true’’ tax liability should be, even
when the terms of the transaction are transparent. Individual tax
liability may be legally avoided by creation of a separate legal entity to
which one’s property is donated. The separate legal entity is often a
trust, or foundation. Assets are transferred to the welfare foundation
or trust so that gains may be released, or income earned, within this
legal entity rather than earned by the original owner, back to an
individual, then for a creator of trust to avoid tax liability.
PSI agencies and dodging of customs duty: Customs duties are the
important sources of tax revenue in the developing countries like
Bangladesh. It is often alleged that tax lawyers and chartered
accountants help taxpayers including firms and companies in evading
taxes. In the same vein, the C& F agents help in evasion of customs
duties. The importers contend to evade customs duty by underinvoicing and misstatement of quantity and product-description.
Under-pricing is used for reduced tax base to avoid advalorem import
duty. Prevalent misstatement of quantity is often used to avoid
specific duty (Chowdhury, F.L., 2006). Production description is
changed match an H.S. Code commensurate with a lower rate of duty.
Pre-shipment Agencies (PSI) like SGS, COTECNA etc. are employed to
prevent evasion of customs duty through under-invoicing and
misstatement. However, in the recent times, allegations have been
lodged that PSI agencies have actively cooperated with the importers
in evading customs duties. Authority in Bangladesh has found
COTENCA guilty of complicity with the importers for evasion of
customs duties on a huge scale (Alam, D. 1999).
Underground trafficking: An importation or exportation of illegal
products through unauthorized way. This act is resorted to for total
evasion of taxable revenues as well as for importation of contraband
items. A purported trafficker does not have to pay any customs duty
since the products are not routed through an authorized or notified
customs port and therefore, not subjected to declaration and
payment of duties and taxes (Chowdhury, F.L., 2006).
Elusive VAT and Turnover taxes: VAT is the most talking and latest
issue of the time of modern taxation age. This indirect form of
taxation basically inherits an extended form of turnover or sales
taxes. An ultimate consumer who bears the real burden of this
taxation has little scope to evade but producers or distributors who
collect VAT from the consumers may evade tax by under-reporting
the amount of sales (Islam, R. 1999). In Bangladesh broad-based
consumption tax at the overwhelming majority of consumer
products are being collected combining both forms–VAT and
turnover taxes. Since the first introduction of VAT in Bangladesh, it has
grown not only to exceeding its teenage but also at stage of
exceeding other contributory sectors of tax revenues to
government10. But the dark side of this taxation is its most
vulnerability of being underreported (Islam, R.1999). Low ethical
ground of the VAT collectors, producers and distributors, is mainly
10

In 2009-10 fiscal year, VAT was targeted almost 34% of total budgeted taxes revenue.

The Cost and Management, July-August, 2010

Income Tax Laws

References
Alam, D. (1999). Introduction of PSI System in Bangladesh: Facts and Findings. Desh
Prokashon, Dhaka.
Allingham, M.G. and Sandmo, A. (1972). “Income Tax Evasion: A Theoretical Analysis”,
Journal of Public Economics, Vol. 1, pp.323-38.

Baree, M. A. (1992). “Law and Practice of Bangladesh Income Tax”, UPL, Dhaka
Chowdhury, F.L (2006). “Evasion of Customs Duty in Bangladesh”, Desh Prokashon, Dhaka
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University, Australia.
Chowdhury, R.A. (2008). “The Tax Ombudsman: A new concept for Bangladesh”, The
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Feinstein, Jonathan S. (1991). ‘‘An Econometric Analysis of Income Tax Evasion and Its
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Islam, R. (1999). “Structure, Administration of VAT in Bangladesh with special reference to
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McGee, Robert W. (2006). “Ethics and Tax Evasion in Asia, AIB South East Regional
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Rashid, Mamun (2007). “Combating Financial Crimes in Bangladesh”, The Daily Star
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Rahman, AKM Matiur and Yasmin, Sabera (2008). “Estimating Revenue Losses Evolve From
Tax Evasions in Bangladesh”, AIUB Bus Eco Working Papers Series;http://
orp.aiub.edu/FileZone/OtherFiles/orpadmin-8...BUS-ECON-2008-19.pdf
Rahman, H.S. and Shilpi F.J. (1996). “A Macroeconomic Model of the Bangladesh Economy:
Model, Estimation, Validation and Policy Simulation”, Bangladesh Institute of
Development Studies, Research Monograph No. 17, at www.bids-bd.org.
Sarker, Tapan K. and Kitamura, Yokinobu (2002). “Technical Assistance in Fiscal Policy and
Tax Administration in Developing Countries: the State nature in
Bangladesh”, Asia-Pacific Tax Bulletin (September).
Pasternak M., and Rico C., (2008). Tax Interpretation, Planning and Avoidance: Some
Linguistic Analysis, Akron Tax Journal, 33.at
http://www.uakron.edu/law/lawreview/taxjournal/atj23/docs/paternak08.pdf.

**

11 E-tax filing has already been implemented on a pilot basis in a specified tax zone.

20

The Cost and Management, July-August, 2010

The Cost and Management, November-December, 2009

15

16

Income tax withheld is the final
discharge of tax liability u/s 82C.

The Cost and Management, September-October, 2009

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