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    An Evaluation of The Tax System in Bangladesh

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    An Evaluation of The Tax System in Bangladesh

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    An Evaluation of the Tax System in Bangladesh (1)

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    An Evaluation of The Tax System in Bangladesh

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    An Evaluation of the Tax System in Bangladesh

    CHARACTERISTICS OF TAX IN BANGLADESH

    The characteristics of a tax may be studied under the following heads:

     Tax is levied by the government as per Sec 83 of the Constitution of Bangladesh.


     Payment of taxes is non-penal and compulsory; hence, refusal to pay a tax is a punishable
    offence.
     An element of sacrifice is there in the payment of a tax as they pay the taxes in order to
    ensure public interest.
     The aim of tax collection is to finance the government expenditure to ensure public interest
    and welfare.
     Tax is not the cost of the benefit conferred by the government on the public. The benefit
    received from the country is not directly the return of tax.
     It is one of the prime sources of revenue for the government.
     Tax is not any fine or penalty.
     Tax can only be imposed by the government of a country.

    THE TAX BASE IN BANGLADESH

    A tax base is a total amount of assets or income that can be taxed by a taxing authority, usually by the
    government. It is used to calculate tax liabilities. This can be in different forms, including income or
    property. A tax base is defined as the total value of assets, properties, or income in a certain area or
    jurisdiction. To calculate the total tax liability, the tax base must be multiplied by the tax rate, i.e., (Tax
    Liability = Tax Base x Tax Rate). The rate of tax imposed varies depending on the type of tax and the tax
    base total. Income tax, gift tax, and estate tax are each calculated using a different tax rate schedule.

    Personal Income Tax Slabs for Individual Taxpayers (2023-2024):

    1. For Male and Female Under 65 Years of Age:

    - Up to BDT 3,50,000 : 0% (Tax-exempt)

    - BDT 3,50,001 – 6,00,000 : 10%

    - BDT 6,00,001 – 12,00,000 : 15%

    - BDT 12,00,001 – 30,00,000 : 20%

    - Above BDT 30,00,000 : 25%


    2. For Female and Senior Citizens (65 Years and Above):

    - Up to BDT 4,00,000 : 0% (Tax-exempt)

    - BDT 4,00,001 – 6,00,000 : 10%

    - BDT 6,00,001 – 12,00,000 : 15%

    - BDT 12,00,001 – 30,00,000 : 20%

    - Above BDT 30,00,000 : 25%

    3. For Disabled Individuals:

    - Up to BDT 4,75,000 : 0% (Tax-exempt)

    - BDT 4,75,001 – 6,00,000 : 10%

    - BDT 6,00,001 – 12,00,000 : 15%

    - BDT 12,00,001 – 30,00,000 : 20%

    - Above BDT 30,00,000 : 25%

    4. For Freedom Fighters (Gazetted):

    - Up to BDT 5,00,000 : 0% (Tax-exempt)

    - BDT 5,00,001 – 6,00,000 : 10%

    - BDT 6,00,001 – 12,00,000 : 15%

    - BDT 12,00,001 – 30,00,000 : 20%

    - Above BDT 30,00,000 : 25%

    Corporate Tax Rates (2023-2024):

    1. Publicly Traded Companies : 20%

    2. Non-publicly Traded Companies: 27.5%


    3. Banks, Insurance, Financial Institutions:

    - Publicly Traded : 37.5%

    - Non-publicly Traded : 40%

    4. Mobile Phone Operators : 45%

    5. Other Businesses/Industries : Varies by sector

    CHARACTERISTICS OF A GOOD TAX SYSTEM

    Tax has a very important role in the economic development of a country. As a major source of
    government revenue, tax ensures the availability of resources for the various development programs
    undertaken by the government. A good tax system is one which has predominantly good taxes and
    which fulfills most of the canons of taxation and yields sufficient revenue yet causes minimum aggregate
    sacrifice to the people and minimum obstruction to incentives for production. When a satisfactory
    balance is struck between these two objectives, it is an ideal tax system. In order to be treated as a good
    tax system, it should be featured with following characteristics:

     Tax should be levied based on fundamental principles of taxation like the principle of least
    sacrifice, cost, and benefit and above all ability to pay.
     Taxes should follow the most important canons, i.e., it should be equitable, convenient to
    pay, certain, economical, productive, and elastic.
     Tax system should be balanced containing both direct and indirect nature of taxes so that it
    can maximize government revenue.
     The tax authority should be supported by sufficient simple laws and rules, skilled manpower
    and efficient administrative tools and techniques.
     Tax system should have positive effect on production and distribution without causing any
    adverse effect upon ability and willingness to work, save and invest.
     The tax system should be so framed as to ensure that the productive resources of the
    economy are optimally allocated and utilized. For this purpose, it is essential that the tax
    system should be economically neutral.
     A good tax system has least collection cost to collect maximum amount of taxes.
     The tax system should provide no scope for the evasion of tax by the taxpayer.

    Above all, the tax system should abide by the principle of maximum social advantage so that the society
    is benefited to the maximum effect possible. Maximizing social advantage or least aggregate sacrifice is
    not the task of one tax, but from all the taxes.
    Based on the characteristics of a good tax system, the following are the problems that exist in
    Bangladesh’s tax system:

     Narrow Tax Base:


    o Low Taxpayer Coverage: Less than 1% of the population pays income tax.
    o High Dependence on Indirect Taxes: VAT and other indirect taxes are regressive.
     Inefficient Tax Administration:
    o Complex and Outdated Laws: Confusing tax laws increase compliance costs.
    o Corruption and Weak Governance: Rampant tax evasion due to weak enforcement.
     High Compliance Costs:
    o Cumbersome Filing Procedures: Lengthy processes discourage tax payments.
    o Inadequate Use of Technology: Over-reliance on manual processes increases costs.
     Low Tax-to-GDP Ratio:
    o Insufficient Revenue Generation: Tax-to-GDP ratio is around 9–10%, far below global
    standards.
    o Reliance on Foreign Aid: Low domestic revenue results in dependence on foreign
    funding.
     Tax Evasion and Avoidance:
    o Weak Enforcement: Loopholes and poor enforcement allow for tax evasion.
    o Informal Economy: Large informal sector remains untaxed.
     Inequitable Tax Structure:
    o Regressive Taxation: Over-reliance on indirect taxes burdens lower-income groups.
    o Lack of Progressive Income Tax: Insufficient progressivity in the income tax structure.
     Lack of Economic Neutrality:
    o Distortion of Resource Allocation: High tariffs and sector-specific taxes affect investment
    decisions.
     High Administrative Costs:
    o Inefficient Revenue Collection: High costs due to inefficient administration and
    corruption.
     Limited Taxpayer Education and Awareness:
    o Lack of Knowledge: Insufficient taxpayer education leads to low compliance.
    Loopholes in Bangladesh's Tax System and Solutions:

     Widespread Tax Evasion:


    o Issue: Many individuals and businesses avoid paying taxes due to weak enforcement and
    oversight.

    Solution:

    o Strengthen tax enforcement agencies with better training, modern tools, and legal
    powers.
    o Introduce stricter penalties for tax evasion and create incentives for voluntary
    compliance.
    o Use technology for real-time tracking of financial transactions and better audit systems.

     Weak Tax Identification System:


    o Issue: Lack of a comprehensive tax identification system allows many to remain outside
    the tax net.

    Solution:

    o Implement a universal Taxpayer Identification Number (TIN) system linked to national


    databases.
    o Conduct a nationwide survey and integrate informal sector businesses into the tax
    system.

     Over-reliance on Indirect Taxes:


    o Issue: Heavy reliance on indirect taxes like VAT, which burden low-income groups.

    Solution:

    o Reform the system to collect more from direct taxes like income and corporate tax.
    o Create a more progressive tax structure to ensure higher-income individuals pay more.

     Inefficient and Complex Tax Laws:


    o Issue: Complicated and outdated tax laws create opportunities for legal tax avoidance.

    Solution:

    o Simplify and update tax laws to reduce ambiguities and loopholes.


    o Consolidate tax legislation for better transparency and easier compliance.

     Corruption within Tax Administration:


    o Issue: Corruption leads to bribery and underreporting of taxes.

    Solution:

    o Implement digital tax filing and automated processes to limit corruption.


    o Establish anti-corruption units within the tax administration and protect whistleblowers.

     Underground/Informal Economy:
    o Issue: A significant portion of the economy operates informally and remains untaxed.

    Solution:

    o Introduce incentives and simplified tax schemes for small and informal businesses.
    o Provide tax education programs for businesses in the informal sector.

     Abuse of Tax Incentives and Exemptions:


    o Issue: Tax holidays and exemptions are often abused by large corporations.

    Solution:

    o Review tax exemptions and incentives to ensure they serve development goals.
    o Limit the duration of tax holidays and enforce strict renewal conditions.

     Transfer Pricing Manipulation:


    o Issue: Multinational companies manipulate prices to shift profits to lower-tax
    jurisdictions.

    Solution:

    o Strengthen transfer pricing regulations and enforcement.


    o Build capacity within tax authorities to monitor multinational companies effectively.

     Weak Penalty System for Non-compliance:


    o Issue: Existing penalties for non-compliance are too low or poorly enforced.
    Solution:

    o Introduce tougher penalties and make enforcement a priority.


    o Conduct periodic compliance drives and audits.

     Lack of Data Sharing Between Agencies:


    o Issue: Poor coordination between agencies allows underreporting of income and assets.

    Solution:

    o Establish data-sharing agreements between financial institutions, customs, and tax


    authorities.
    o Use technology for real-time data exchange.

     High Cost of Tax Collection:


    o Issue: Inefficiencies lead to higher costs of tax collection.

    Solution:

    o Modernize tax collection through automation and digital payments.


    o Train tax administrators in modern techniques and streamline compliance processes.

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