Confusingly low tax-to-GDP ratio | The star of the day

While official data depicts the burgeoning growth of Bangladesh’s economy, tax collection relative to gross domestic product (GDP), a measure of the size of the economy, shows an almost opposite trend.

Tax collection as a percentage of GDP remained stuck at around 7.6%, the lowest in South Asia and one of the lowest in the world. This prompts economists to question the disconnect since tax revenues are expected to rise as the economy expands.

“It shows a big disconnect,” said Selim Raihan, executive director of the South Asian Network on Economic Modeling.

“It shows that there is no relationship between GDP growth and revenue collection although the tax to GDP ratio is increasing in other countries due to the growth of the economy. In the case of the Bangladesh is a puzzle.”

Over the past decade, GDP has grown by 6.5% per year on average. The average annual growth in tax collection was 11%.

As a result, Bangladesh continues to languish at the bottom of South Asian countries in terms of the tax-to-GDP ratio.

Among the least developed countries expected to graduate to developing country status in the next four years, Bangladesh has the lowest rate of tax collection as a percentage of GDP, according to World Bank data.

According to Raihan, also an economics professor at the University of Dhaka, Bangladesh’s tax-to-GDP ratio is also the lowest among lower-middle-income countries, and the ratio has been declining over the past decade.

“Does this mean that the additional GDP growth has remained outside the tax net? Does this mean that the economy has become more informal? Is tax evasion encouraged? It’s a puzzle,” he said.

The new law on value added tax, which came into force several years ago, suffers from distortions while a large number of people are exempt from paying the tax.

For example, the clothing and textile sector, which provides guaranteed income, only benefits from half the corporate tax rate applied to unlisted companies.

Citing a previous study he co-authored, Prof Raihan says tax exemptions are costing Bangladesh 2% of its GDP.

“We also had serious problems in the execution of the laws. There are also a large number of people who do not want reforms. It seems that there is a link between a part of the taxpayers and the tax officials against reforms.

However, this may not be the only case.

Economists actually doubt GDP growth estimates because the growth numbers don’t match up with real data such as revenue collection, debt, export-import and credit growth.

“The growth that is shown does not correspond to reality because an overestimation appears if GDP is compared with other data,” said Zahid Hussain, former chief economist at the World Bank’s Dhaka office.

Moreover, the tax base is small relative to the size of the economy. Collection efficiency is also low. There are many loopholes in tax policies, he added.

“As a result, small fish escape the tax net, which is also not strong enough to catch large fish.”

In Bangladesh, there are many tax benefits under different names: holidays, exemptions and waivers. Thus, Bangladesh loses a huge amount of taxes due to the prevalence of tax breaks.

“The fact is that the money is really coming out of taxpayers’ pockets. But it’s not going into the state coffers. The money is going into the pockets of various intermediaries [tax lawyers, dishonest revenue officials] in the system,” Hussain said.

Thus, if the loss of income was taken into account, the tax-to-GDP ratio would have increased.

“No country can become an upper-middle-income country with such a low tax-to-GDP ratio,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

“The tax-to-GDP ratio should be 16-17%.”

He says the failure to increase tax collection affects the whole of fiscal management.

People’s out-of-pocket expenses are increasing due to lack of public investment in the health sector and many families are going bankrupt due to increased medical expenses. Similarly, Bangladesh cannot guarantee quality education for insufficient investment.

“We have to borrow to build infrastructure and that lending is growing at a higher rate,” Mansur said. “There is no room for comfort if we cannot invest from our own sources and have to operate by borrowing.”

During a program in Dhaka on Saturday, Debapriya Bhattacharya, a senior fellow at the Center for Policy Dialogue, said Bangladesh is a country of 16.50 million people and 74 million people have ID numbers. tax. Among them, only 23 lakh file tax returns.

“Why hasn’t the number of taxpayers increased? If GDP per capita has increased, then why aren’t people paying taxes? he asked.

Mansur, also a former economist for the International Monetary Fund, proposes reforming the tax system.

“It seems that the political will for reforms is weak. But without increasing revenue collection, it is not possible to meet the expectations of the people and the government. Politicians need to realize this.”

An increase in revenue collection is also required to become a developed nation.

“Our economic growth will slow down if we cannot invest in physical and social infrastructure. Income distribution will be more skewed if we cannot increase tax collection, because tax policy is a tool to ensure a better distribution of income “, added Mansur.

Sallie R. Loera