DESPITE having several sources of revenue and a dual system of tax collection (direct-indirect), the majority of tax revenue is collected through indirect tax, called value-added tax, regulated听by the Value Added Tax and Supplementary Duty Act 2012. The income tax, which is governed by the Income Tax Ordinance of 1984, includes corporate taxes, taxes of听individuals, and foreign income taxes. Since Bangladesh is known to be an import-dependent nation, a portion of its income is derived from the customs tax, which includes taxes on commodities that are imported.
VAT is considered an indirect tax on consumption. This tax is collected through all stages of production and distribution of goods and materials, but it is ultimately borne by the customers. Not all products require VAT to be paid; there are exclusions for paying VAT, as specified in the first schedule of the VAT Act 2012. In this tax structure, while a citizen pays the VAT, it disproportionately places a burden on the individual with lesser income. VAT is not paid by any particular section; rather, it must be paid by citizens with higher incomes, and so do people with lower incomes. This tax is not collected based on people鈥檚 income levels, even when paid generatively. That implies the tax rate is the same for both higher- and lower-income persons, where the poor have to pay a larger portion of their income on essentials. This tax is regressive in nature since it gets imposed on them and听must be paid with each commodity they purchase. A regressive tax is one in which people with low earnings suffer more than high-income earners. Taxes are calculated by the government as a proportion of the value of the asset that a taxpayer buys or possesses. On the other hand, this form of tax is levied on even semi-essential commodities such as fuel, telecommunication services, processed food used for convenience by urban low-income households, and so on, for which VAT cannot be avoided. Direct taxes (such as income tax) account for a small portion of the total; nevertheless, the substantial reliance on indirect taxes exacerbates problems. Most of the time when paying direct tax, wealthier individuals using money power or by relying on influential authority constantly try to avoid paying or evade taxes.
Numerous large businesses and companies avoid VAT enforcement and evade tax by operating in the unorganised sector, such as the jewellery sector, restaurant businesses, telecommunications companies, and insurance companies. Tax evasion has been increasing since 2011, reaching around Tk 965 billion in 2012, then more than tripling to Tk 1.33 trillion by 2015 and Tk 2.26 trillion in 2023. In the past decade, the country鈥檚 tax evasion rate has increased by over two and a half times. In 2012, the amount of tax evasion was Tk 96,503 crore. The VAT Act mandates businesses operating in municipal and city corporations must register for VAT at least 15 days before opening for business. Nonetheless, a large number of retailers operate without registering for VAT, flagrantly disobeying the law. According to statistics, almost 90 per cent of the VAT that retail and wholesale enterprises are entitled to pay is evaded. Even with a minimal 5 per cent VAT rate for retail businesses, only a small portion of the possible VAT revenue is collected each year. British American Tobacco Bangladesh Limited, the country鈥檚 leading tobacco company and single largest taxpayer, evaded TK 379 crore in VAT in the immediate past four fiscal years. According to NBR sources, the company breached laws by selling its items at higher prices than previously declared to the revenue authority without paying the accompanying increased taxes, investigated by LTU-VAT, NBR鈥檚 large taxpayer unit. The NBR reportedly didn鈥檛 receive the revenue collection estimate of around Tk 25,597 crore for the third quarter of the immediate past financial year. Also It is anticipated that the current fiscal policy of imposing commodity taxes will generate an additional Tk 12,000 crore. This sort of random decision听ought to be opposed given that it contradicts the principles of integrity, predictability, and convenience in taxation.
So, when tax evasion is rampant among large businesses, hotels, or companies, it is apparent that the government loses revenue over time. In this context, the government鈥檚 attempt at raising revenue through regressive taxes burdens the poor and low-income demographics. The VAT is an injustice for the poor in Bangladesh, as they have to shoulder the burden of 12.1 per cent of the regressive tax on their income. A recent World Bank study titled 鈥楢id to Pro-poor Domestic Revenue Mobilisation: The World Bank鈥檚 Revenue Mobilisation Programme for Results in Bangladesh鈥� revealed that the burden of VAT is only 5.9 per cent for the rich. The scenario is different in the neighbouring country. A consistent VAT rate of 13 per cent is used in Nepal, which optimises the tax system and lowers administrative burdens. Following Nepal鈥檚 example, Bangladesh can also lower rates, and more income may result from the implementation of a single-rate VAT system. Another great example is the case of Bolivia. Its VAT policy is designed considering the socioeconomic situation of the country. The VAT gap has significantly decreased as a result. Bolivia has made progress with digital monitoring, stronger enforcement, and enhanced tax-collecting systems. Bangladesh should consider Bolivian strategy, which would mean adjusting the VAT rate, upgrading the system, adopting online methods, and eradicating tax evasion. To increase revenue generation, the government should consider Brazil鈥檚 tax refund system. The refund mechanism will decrease the tax burden on low-income people. The tax burden is lessened by paying back a percentage of the VAT they paid, meaning to say, a portion of the VAT that low-income families pay on necessities is refunded to them.
To make Bangladesh鈥檚 VAT system easier to navigate, we must undertake reforms that prioritise the economic realities of the low-income people. More importantly, the tax reforms must shift away from a regressive tax to a tool for alleviating poverty by implementing targeted refund systems, simplifying digital infrastructure, and exempting essential commodities.
听
听Qaenat Rasheed Khan is a teaching assistant and a final-year law student at North South University.