Tax Evasion in Bangladesh

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Course Code: ACT 311 Course Name: Taxation Semester: Summer 2010

Course Instructor: Mr. Mohammad Faridul Alam Senior Lecturer Department of Business Administration East West University

Prepared by: Israt Jahan ID: 2007-2-10-156 Section: 2

Date of Submission: August 1, 2010



Bangladesh is a low-income economy of South Asia. With a territory of 147570 square km, it is inhabited by about 150 million people. In FY 2008-09, Bangladesh had a GDP of US$ 89.55 billion. The real GDP growth rate is 5.9 percent and per capita GNI is US$ 690. Bangladesh aspires to become a middle income economy by 2021. One of the main cornerstones of this goal has been to attain self-sufficiency. This requires the maximum mobilization of all available internal revenue while gradually diminishing the dependence on foreign assistance. Consequently, public expenditures have grown rapidly, and taxation has become the main source of finance. Tax is not a voluntary payment or donation but an enforced contribution, exacted pursuant to legislative authority and is any contribution imposed by government whether under the name of VAT, Custom, Excise or other name. However, it is a great challenge for Bangladesh to collect sufficient tax. The total tax revenue in our country is generally low, and tax evasion is widespread. The tax bases are often very narrow, where a small number of firms contribute the greater part of the tax revenue. The informal sector is large and growing. Taxation of international business transactions has become ever more complicated to handle for local tax administrations with limited resources for employing the necessary qualified personnel. Furthermore, capital flight and tax havens contribute to undermining the tax base.

Structure of taxation in Bangladesh The tax structure in Bangladesh consists of both direct (income tax, gift tax, land development tax, non-judicial stamp, registration, immovable property tax, etc) and indirect (customs duty, excise duty, motor vehicle tax, VAT, foreign travel tax, electricity duty, advertisement tax, etc) taxes. Analysis of revenue collection activities in Bangladesh reveals that tax revenue accounts for 80% of government revenue and direct taxes represents only about 19% of total taxes. So, the tax structure in Bangladesh is heavily dependent on indirect taxes. Still less than one percent population out of 130 million people of the country is under the tax net. However, the main tax burden is shouldered by a low percentage of the registered taxpayers. Not more than 4% of taxpayers’ pay almost 40% of the tax revenue while more than 50% of the taxpayers’ are paying less than 1% of the total tax revenue.

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Indirect taxes constitute more than 70% of our taxes. The tax structure in Bangladesh shows the preponderance of indirect taxes over direct taxes that are clear from the following table.

Table 1: Tax structure in Bangladesh (In billion taka) Financial Year Direct Taxes Indirect Taxes 2004-05 2005-06 2006-07 2007-08 2008-09 58.27 (19%) 74.23 (22%) 90.50 (24%) 121.80 (26%) 142.73 (27%) 240.77 (81%) 265.80 (78 %) 281.69 (76%) 352.47 (74%) 382.53 (73%)

In addition, Total 299.64 340.02 372.19 474.36 525.26 Tax-GDP ratio is the lowest in Bangladesh compared to its Asian neighbors. Tax-GDP South

Source: Annual Report, National Board of Revenue

ratio in Bangladesh is given in Table-2. Table 2: Tax-GDP ratio Financial Year 2004-05 2005-06 2006-07 2007-08 2008-09 Tax: GDP ratio 8.60 8.70 8.30 8.89 9.00

Source : Bangladesh Economic Review 2009, Ministry of Finance

The number of taxpayers in Bangladesh is 1.65 million. The indicators of tax-GDP ratio and number of taxpayers in comparison to population show existence of substantial underground economy in Bangladesh.

Tax Evasion Tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions). Besides these, non-disclosure of actual income, non-payment of income tax, underhand agreement with the tax authority, gross abuse of the tax holiday provisions may be mentioned Page 3 of 10

under this category. The provision of payment of a low rate of tax that legalizes any income without a need to declare source has been considered and criticized as a crime-friendly environment. Purchase of property and investments in the capital market may also be done without declaring the source of income. Under-invoicing of dutiable imports also deprives the government from the due revenues. In addition, producers who collect VAT from the consumers may evade tax by under-reporting the amount of sales. Tax Evasion in Bangladesh
Tax evasion in Bangladesh has reached alarming proportions and the immediate victim is government revenue. It also leads to a parallel black economy, which in Bangladesh is said to be to the tune of USD 1.2 - 1.5 billion. Tax evasion has become one of the significant factors,

which cause a significant amount of revenue losses in economy of Bangladesh. Since wealthy people, in general, live in urban area where a small level of evasion can result a huge amount of revenue loss, they mostly use Self Assessed System (SAS) in filing their tax-returns. Rich Bangladeshis who live in urban areas are self-reporting their income and are more quite likely reporting incorrect information to the government, which is mainly made up of–and run by– the people reporting erroneous income data.

Factors Contributing Tax Evasion
The reasons of tax evasion are numerous and include complex tax laws, lack of social security, coordination deficits among different government agencies and financial institution, inefficiency and corruption. Complex Tax Laws

The current Bangladeshi Income Tax Ordinance dates back to 1984 and since then it has undergone numerous changes that the laws, now need to be rewritten. Many tax provisions are loosely worded, leaving room for a wide exercise of discretion by the tax officials and therefore scope for corruption. The present taxation system lacks simplicity and transparency and provides too many loopholes to evade taxes. Inefficiencies in Administration It was observed that the tax filing and payment procedures were by and large tedious and cumbersome and many rulings were made arbitrarily by the tax authorities, which forces Page 4 of 10

taxpayers to take recourse to appeal to courts at a further cost of time and money. For example, in United States, the taxpayer submits his tax forms. If there is any discrepancy, the taxpayer will receive a letter from the tax authority. But in our country, the taxpayer has to appear or he has to hire a tax lawyer which is another burden. For that, people in our country are not motivated to pay tax. Coordination deficits among different government agencies and financial institutions: Coordination deficits among NBR, law enforcing forces, intelligence agencies, and financial institutions has made it difficult to collect information of the taxpayers. Therefore, taxpayers get the opportunity of misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability. Cultural Problem and Ethical Standards: Tax evasion is a cultural problem in Bangladesh. We want to get rich overnight by hook or by crook. In the process, we don't mind trampling the rights and interests of others, defrauding the government or cheating the customers. We are ready to do it as long as our bank account keeps going up. People and corporate firms use various measures to evade tax using loopholes of the current tax system. A major change in the society cannot be forcibly brought about by the government. It will have to come from within the society.

Corruption by tax officials Corrupt tax officials cooperate with the tax payers who intend to evade taxes. 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 our country. There are instances where people want to pay taxes, but are discouraged by the officials. It is also true that there are officers who would like to collect tax fairly but the environment forces them to act in illegal way. It is because of both evasion and corruption. No history of exemplary punishments According to the existing laws in Bangladesh, anyone guilty of tax evasion is subject to fines or imprisonment. The penalties for tax evasion are a fine of up to $100,000 and up to five years in prison. However, many loopholes in law enable the tax evaders to avoid the punishment to evade the tax. Page 5 of 10

Lack of intelligence units and equipments We do not have a functioning Financial Intelligence Unit (FIU) that can collect information, the capability to analyze the same, and identify specific cases and trend of tax evasion and other financial crimes. Moreover, our investigative agencies are not well equipped in knowledge and procedures to investigate tax evasion, corporate corruptions and file cases.

Tackling Tax Evasion
Comprehensive and concerted efforts are needed to tackle tax evasion in Bangladesh. Level of evasion depends on a number of factors one of them being fiscal equation. People's tendency to evade income tax declines when the return for due payment of taxes is not obvious. Evasion also depends on the efficiency of the tax administration. Corruption by the tax officials often renders control of evasion difficult. Tax administrations resort to various means for plugging in scope of evasion and increasing the level of enforcement. In order to curb tax evasion, it is necessary to take the following steps:

Simplify Tax Laws and Procedures: To bring the legislation in line with current practices and requirements thus making it more effective, the following measures to be undertaken:  Simplicity and clarity should be the guiding principle;  A self-assessment system should be introduced and the post assessment audit procedure strengthened;
 Tax rebates and exemptions should be minimized;

 Tax holidays and exemptions for industrial undertakings should have a limited lifespan.

Efficient administration Simplicity is an important element in any successful administrative reform. The administration must be provided with simple and hence potentially enforceable laws to administer. In order to attain this goal, the current structure of the administration needs to be completely overhauled. The following will help this process: Page 6 of 10

 The system of recruitment, training, remuneration and promotion must be reexamined in order to be able to employ and retain capable employees;  The administration structure should be divided between assessment/audit, and tax collection;  The tax authority should be provided with increased logistical support;  The internal audit checks must be strengthened;  The pace of computerization and the creation of databanks must be quickened; and  Revenue officers should be provided with incentives that will encourage the efficient collection of taxes (for example, revenue officers in Japan receive, on the average, a higher salary). Computerization of the communication and filing system The age old system of filing tax returns in tax offices needs to be replaced by a computerized filing system. The method of maintaining records, accounts keeping and references should also be modernized. To achieve this target, a program should be initiated for training in computer usage and hardware and software should be procured. This goal can be achieved with the help of simple bilateral or multilateral financial aid and technical assistance. Development of National Statistical Activities A sound and comprehensive statistical system with an adequate organizational structure and network is an essential function that can be used in the country’s tax administration planning and development process. Currently the institutional structure of the national statistical system of Bangladesh comprises the National Statistical Council as the apex body while the Bangladesh Bureau of Statistics (BBS) is tasked, mainly with the collection, collation and dissemination of official statistics. Currently, a small sub-division of the BBS is working with NBR to research and develop tax related data. This must be strengthened to meet the various current and future needs, and such an organization should, ideally, be under the auspices of the Ministry of Finance. It must include the tax departments, banking and insurance sectors, SEC, etc. At this moment, there is an urgent need to formulate a database of taxpayers with all their relevant tax information such as income, wealth, business and corporations and above all their standard of living. The various parties will also have to establish a good method of cooperation in order to ensure that the information is such a database is quickly and accurately updated. Such a database will play important role in countering tax evasion. Page 7 of 10

Timely data dissemination will also be an essential part of the data generation process of the Statistics and Research (S&R) wing. Tax Ombudsman One possible reform effort that could begin to address the difficulties that taxpayers face in dealing with the tax authorities and to reduce the corruption of tax people is a tax ombudsman, whose function would be to represent taxpayers in the administration and investigate taxpayer complaints. Pakistan, for example, has successfully established the office of Tax Ombudsman. Greater transparency, supervising and inspection Tax rates, forms, procedures for filing tax returns, possible modes of payment and all other relevant information should be published on the web site as well as in print media and handbooks, for wide dissemination of information for public knowledge and transparency. This is also necessary to safeguard the interest of the taxpayers from the clutches of the unscrupulous section of the tax advisers. In Bangladesh the rate of tax evasion is very high. It is also very high among taxpayers of the higher bracket. What is needed is close supervision and inspection of the tax officers at all levels. The Inspection section in the department has been failing to fulfill its mandate. Both the Customs and Tax administration would greatly benefit from greater transparency, which can best be provided by a variety of on-line services. Tax farming Tax farming is another means of reducing tax evasion. It is also a well established means of collecting revenue even in the face of difficult determining how much actually needs to be collected. Government leases out the collection system to a private entity for a set figure. They ten set about collecting the revenue and absorbing the risk of attempts at evasion by the tax-payers. For developing countries, tax farming is considered to be a potentially viable solution for solving the problem of tax evasion once and for all. Others

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 Government can consider extending the financial benefits on the basis of Income taxes given by the individuals-such as fixing the amount of loan by the banks and financial institutions on the amount of taxes, etc.  The penal provisions for tax evasion should be increased, and the tax authority’s ability to initiate investigations and prosecution should be enhanced;  Increase taxpayer education and motivation;  Review banking and accounting practices;  Let the tax of the individuals be disclosed or publicly known. So that culture develop to compare the taxes, not the income or the wealth,  In assessment of the professional income, the help of the professional bodies can be taken. It will be more accurate and rational than the so called of the so called Inspectors, who thrive on their twisted assessment; etc.  Enhancement of VAT and income tax nets, and progressive reduction of dependence on import duties;

Conclusion Tax regimes all around the world are constantly looking for ways and means to improve their tax revenue collections. Since tax revenue forms the major portion of the total revenue in countries like Bangladesh, the efficiency and productivity of the tax administrative system is very important in meeting revenue targets. The different organs of fiscal affairs policy and administration are so intricately related that there needs to be an improvement of the entire systems in order to obtain a sustainable revenue trend that can meet increasing demands. It is high time that all stakeholders must comprehend the gravity of the situation and extent their full support to uproot the tax evasion in Bangladesh. Therefore, what is now needed is an emphasis on selected issues that are inherent and impede structural reform and the development of fiscal affairs. TAs for fiscal affairs in developing countries is crucial for the implementation of a better revenue system, and international organizations and donor agencies are giving such matters a high priority.

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1. Nikhil Chandra Shil, Mohammad Zakaria Masud, Mohammad Faridul Alam (2009); Bangladesh Income Tax: Theory and Practice, Published by Shams Publications. 2. 3. 4.

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