Write up on TAX

Mohammed Tajul Islam,

Chief Rating Ofcer, Credit Rating Agency of Bangladesh Ltd
1. In context of Bangladesh, on which sector the government
needs to focus more - corporate taxation or individual
taxation !o "ou thin# Bangladesh needs to harmoni$e
corporate income tax with individual income tax
First of all, I am not a ta e!ert" #o$e%er, as a &nancial !rofessional I $ould li'e to
address your (uestions on Ta to!ics"
Taes matter" )eo!le tal' a*out them, com!lain a*out them, and try to dodge them
$hen they can" Businesses also react to taes, *oth in ho$ they organi+e their
acti%ities and, !erha!s, in $here they carry them out" #o$ !eo!le and *usinesses
react in turn a,ects the le%el and structure of taation" The *ig (uestion in front of
us to resol%e is ho$ $e could *est design and de%elo! ta !olicies to achie%e our
!olicy o*jecti%es, gi%en the com!le economic and !olitical en%ironments $e face"
-o single ta structure can !ossi*ly meet the re(uirements of e%ery country" The
*est system for any country should *e determined ta'ing into account its economic
structure, its ca!acity to administer taes, its !u*lic ser%ice needs, and many other
factors" -onetheless, one $ay to get an idea of $hat matters in ta !olicy is to loo'
at $hat taes eist around the $orld"
The main !ur!ose of taation is to generate sufcient re%enue to &nance !u*lic
sector acti%ities in a non.in/ationary $ay" A country0s choice on ho$ to structure its
ta system de!ends u!on many factors, such as the le%el of de%elo!ment, the need
and desire for increased !u*lic ser%ices, and the ca!acity to le%y taes e,ecti%ely"
Ta !olicy choices also de!end on a country0s !reference as to such !u*lic !olicy
goals as attaining a desired distri*ution of income and $ealth and increasing the
rate of national economic gro$th"
1o far my understanding, all the go%ernment in the !ast committed to
im!lementing ta reform in an incremental $ay to achie%e the o*jecti%es of2
sim!licity, e(uity, and *roadening of the *ase3 im!ro%ed com!liance3 gro$th and
com!etiti%eness" But most im!ortantly, the challenges they face is to meet the
re%enue demands of the Budget $hile maintaining macro.economic and social
sta*ility"
-o one li'es taes" )eo!le do not li'e to !ay them" 4o%ernments do not li'e to
im!ose them" But taes are necessary *oth to &nance desired !u*lic s!ending in a
non.in/ationary $ay and also to ensure that the *urden of !aying for such s!ending
is fairly distri*uted" 5hile necessary, taes im!ose real costs on society" 4ood ta
!olicy see's to minimi+e those costs" Ta !olicy is not just a*out economics" Ta
!olicy also re/ects !olitical factors, including concerns a*out fairness" Taes
in/uence the *efore.ta distri*ution of income *y changing economic incenti%es"
They also in/uence the after.ta distri*ution of income through, for eam!le,
!rogressi%e income taation"
Regardless of $hat a !articular country may want to do $ith its ta system, or $hat
it should do $ith res!ect to taation from one !ers!ecti%e or another, it is al$ays
constrained *y $hat it can do" Ta !olicy choices are in/uenced *y a country0s
economic structure and its administrati%e ca!acity" These factors reduce the ta
!olicy o!tions a%aila*le" 6fciency, e(uity and administrati%e feasi*ility are 'ey
criteria in designing and e%aluating ta systems"
-o$ come to your (uestion, in contet of Bangladesh, in my %ie$, go%ernment
needs to focus on *oth . cor!orate taation and indi%idual taation, *ecause they
are not mutually eclusi%e area" O*%iously, there is a sco!e to harmoni+e cor!orate
income ta $ith indi%idual income ta"
%. !o "ou thin# that the corporate tax rate in Bangladesh is high
and is detrimental to the growth of the private sector
Many em!irical study results suggest that !ri%ate in%estment is determined in the
short.run *y !u*lic in%estment, in/ation, real interest rate, o!enness, real echange
rate and a regime of constitutional rule, $hile real out!ut, in/ation, eternal de*t,
real interest rate, o!enness and real echange rate signi&cantly in/uenced !ri%ate
in%estment res!onse in the long.run" 6m!irical e%idence in most studies indicates
that !ri%ate sector.led gro$th has a stronger !ositi%e im!act on gro$th than !u*lic
in%estment"
5ithout any study, it is hardly !ossi*le to comment that cor!orate ta rate in
Bangladesh is high or lo$" There is no dou*t that gro$th in real out!ut or aggregate
demand conditions is the engine of !ri%ate sector in%estment gro$th in Bangladesh"
Im!ro%ing the !roducti%ity of sectors such as agriculture and manufacturing *y
!ro%iding more efcient and ad%anced technologies 7ICT8 as in!ut su*sidies could
go a long $ay to increase !ri%ate in%estment le%els and gro$th in out!ut" The
signi&cant !ositi%e im!act of !u*lic in%estment on !ri%ate in%estment in the short.
run indicates an im!ortant com!lementary role !layed *y the go%ernment in
*oosting !ri%ate sector initiati%es" As a matter of !olicy, it is essential for the
go%ernment to continue to earmar' and !rioritise !u*lic !rojects, !articularly
in%estment in infrastructure and human ca!ital, $hich ha%e the !otential to
com!lement and further *oost !ri%ate sector in%estment !erformance" Further,
go%ernment should ensure efcient deli%ery of ser%ices and increased !roducti%ity
of !u*lic in%estment"
The idea that taes a,ect economic gro$th has *ecome !olitically contentious and
the su*ject of much de*ate in the !ress and among ad%ocacy grou!s" That is in !art
*ecause there are com!eting theories a*out $hat dri%es economic gro$th" 1ome
su*scri*e to 9eynesian, demand.side factors, others -eo.classical, su!!ly.side
factors, $hile yet others su*scri*e to some miture of the t$o or something entirely
uni(ue" The facts, historical and geogra!hical %ariation in 'ey !arameters for
eam!le, should shed light on the de*ate" #o$e%er, the economy is sufciently
com!le that %irtually any theory can &nd some su!!ort in the data"
1o $hat does the academic literature say a*out the em!irical relationshi! *et$een
taes and economic gro$th: 5hile there are a %ariety of methods and data sources,
the results consistently !oint to signi&cant negati%e e,ects of taes on economic
gro$th e%en after controlling for %arious other factors such as go%ernment
s!ending, *usiness cycle conditions, and monetary !olicy"
Fe$ results su!!ort the -eo.classical %ie$ that income and $ealth must &rst *e
!roduced and then consumed, meaning that taes on the factors of !roduction, i"e",
ca!ital and la*or, are !articularly disru!ti%e of $ealth creation" Cor!orate and
shareholder taes reduce the incenti%e to in%est and to *uild ca!ital" Less
in%estment means fe$er !roducti%e $or'ers and corres!ondingly lo$er $ages"
Taes on income and $ages reduce the incenti%e to $or'" )rogressi%e income taes,
$here higher income is taed at higher rates, reduce the returns to education, since
high incomes are associated $ith high le%els of education, and so reduce the
incenti%e to *uild human ca!ital" )rogressi%e taation also reduces in%estment, ris'
ta'ing, and entre!reneurial acti%ity since a dis!ro!ortionately large share of these
acti%ities is done *y high income earners" In any case, the lesson from the studies
conducted is that long.term economic gro$th is to a signi&cant degree a function of
ta !olicy" Our current economic doldrums are the result of many factors, *ut ha%ing
the high cor!orate rate in the industriali+ed $orld does not hel!" -or does the
!ros!ect of higher taes on shareholders and $or'ers" If $e intend to s!ur
in%estment, $e should lo$er taes on the earnings of ca!ital" If $e intend to
increase em!loyment, $e should lo$er taes on $or'ers and the *usinesses that
hire them"
&. Wh" do man" companies tr" evading pa"ment of corporate
taxes What can 'e done to address this
There are %arious reasons for ta e%asion and ta a%oidance" In order to de%elo! methods
and instruments for &ghting ta e%asion and a%oidance, it is %ery much im!ortant to
esta*lish a *road understanding of the di,erent reasons underlying these !ro*lems" These
reasons can *e di%ided in t$o categories" The &rst category com!rises factors that
negati%ely a,ect ta!ayers; com!liance $ith ta legislation" These factors can *e su*sumed
either contri*uting to a lo$ $illingness to !ay taes 7lo$ ta morale8 or to high costs to
com!ly $ith ta la$s" The second category contains reasons for the lo$ a*ility of ta
administration and &scal courts to enforce ta lia*ilities" These factors can *e summari+ed
as resulting from insufciencies in the administration and collection of taes as $ell as $ea'
ca!acity in auditing and monitoring ta !ayments $hich limit the !ossi*ility to detect and
!rosecute %iolators"
1im!li&ed Income Ta system2 The !resent income ta system is too com!licated to
understand" Chartered accountants, ta la$yers and related !rofessionals often allegedly
are a*using this com!leity" Their du*ious roles as middle man hel! underre!orting many
income ta cases" )eo!le are li'ely to go for self assessments are discouraged *y the
difcult system" The !ro*lem is more acute in a !oor economy li'e ours $ith high illiteracy
and !oor record 'ee!ing and accounting ha*its" The demands !laced on administration.
%ery !oorly sta,ed $ith !oor !ay and inade(uate logistics su!!ort ha%e !ro*a*ly resulted in
greater dishonest !ractices than $ould ha%e *een the case other$ise" #o$e%er, the current
&scal !olicy has !ro!osed to introduce e.ta &ling, e.ta calculator on -BR $e* etc"
A!!ro!riate design of a !enalty rate structure also a!!ears to *e anti.e%asi%e and anti.
a%oidance" At !resent, the !ro%ision of !enalty in the statute *oo's is one sided" The ta
!ayers only to *e !enali+ed for an act of omission or default *ut there is no corres!onding
!ro%ision to !enali+e dishonest, inefcient or unjust ta ofcials"
(. What measures can )B* ta#e to arrest transfer pricing in order
to increase corporate taxes
<ey recently, The -ational Board of Re%enue -BR8 issued the much.tal'ed.
a*out Transfer )ricing 7T)8 rules to hel! chec' ta a%oidance *y multinational
com!anies 7M-Cs8"The T) rule $as issued *y the -BR under a !ro%ision
incor!orated in the Finance Act =>?= to hel! !lug the conduits of
unauthori+ed out/o$ of money" The -BR issued the rule along $ith a
!rescri*ed form for the multinationals to furnish details of their international
transactions $ith the ta returns"
A T) cell $ould handle ta &les of the ta!ayers in%ol%ed in international
transactions" T) cell ofcials $ill determine the !rice and send a re!ort to the
circle ofce to com!lete assessment on the *asis of decision *y the T) ofcial
concerned" According to the T) rule, the M-Cs@ international transactions $ill
*e Amonitored and assessed carefullyA *y an e!ert grou! of tamen" The
Be!uty Commissioner of Taes 7BCT8 may im!ose a !enalty e(ui%alent to a
maimum ?"> !er cent of the %alue of each international transaction in case
of failure to 'ee!, maintain or furnish information, documents or records to
him or com!ly $ith the notice" The BCT can im!ose a !enalty u! to T' >"C
million for failure in furnishing re!ort *y chartered accountants 7CA8"
Transfer !ricing is a !ro&t allocation method used to attri*ute a multinational
cor!oration@s net !ro&t 7or loss8 *efore ta to countries $here it does
*usiness" Transfer !ricing results in the setting of !rices among di%isions
$ithin an enter!rise" In !rinci!le a transfer !rice should match either $hat
the seller $ould charge an inde!endent, arm@s length customer, or $hat the
*uyer $ould !ay an inde!endent, arm@s length su!!lier" 5hile unrealistic
transfer !rices do not a,ect the o%erall enter!rise directly, they *ecome a
concern $hen they are misused to lo$er !ro&ts in a di%ision of an enter!rise
that is located in a country that le%ies high taes and raise !ro&ts in a
country that is a ta ha%en that le%ies no or lo$ taes" Transfer !ricing is the
major tool for cor!orate ta a%oidance"
+. What,s "our opinion on government,s decision to give 1-. tax
re'ate to companies that were consistent in declaring
dividends in last three "ears
This ty!e of !ro%ision is an incenti%e for dee!ening the ca!ital mar'et, no
dou*t of it" Bi%idend could *e in the form of cash or *onus" In general, $hen
a com!any declare cash di%idend, it is assumed that rein%estment
o!!ortunity is less attracti%e com!ared to !ay di%idend in cash" In case of
cash di%idend, enter!rise %alue goes do$n, if other things remain constant"
On the contrary, if rein%estment o!!ortunity is more attracti%e then the &rm
!refers to declare *onus di%idend, so there is no cash out there*y enter!rise
%alue may go u!" Again, declaration of *onus share may reduce the future
6)1 due to increase of outstanding share" 1o it is a com!le decision and
strategy for a &rm to decide on Bi%idend 1trategy $hich not only de!ends on
ta regime"
/. Along with present tax advantage for listing, what additional
measures can )B* ta#e to motivate companies for listing
5hy cor!orate $ill go for listing" In general, cor!orate go for listing to e!and its
*usiness acti%ities as $ell as achie%e o!timal ca!ital structure and access to
&nance" In an en%ironment, $here e%ery*ody !ays ta at actual, !referential ta
treatment 7ta eem!tion, reduced ta rate8 may gi%e a huge incenti%e for the
cor!orate to go for listing" But in reality, tendency of cor!orate house is to a%oid
and e%ade taes" A!!ro!riate design of a !enalty rate structure needs to *e anti.
e%asi%e and anti.a%oidance" The rate of !enalty should *e !rogressi%ely higher $ith
the amount of ta e%aded and must also re/ect the current mar'et conditions"
From the cor!orate ta!ayer0s !oint of %ie$, $hich are the incenti%es $hich are
most im!ortant and $hich need to *e touched u!on in order to dee!en the ta
*ase: The ans$er is there are se%eral" If you loo' at our incenti%e structure, $hich I
assume !ro&t.oriented incenti%es" If $e could shift from !ro&t.lin'ed incenti%es to
in%estment.lin'ed in%estments" 1o, that $ill *roaden the *ase (uite a *it, the *ase
on the minimum alternate ta 7MAT8 may include gross assets" Also $e could loo' at
the $ay ta is a%oided" 1o, $ithout really im!inging u!on good ta!ayers, $e ha%e
to identify those areas $here $e need to eamine ta a%oidance %ery carefully" It
should not *ecome a re%enue raising method *ut it should *e a method to minimi+e
ta a%oidance *ut that also has to *e gi%en attention to"
From my understanding, I may $rong, ta ad%antage does not !lay signi&cance role
in determining *y the cor!orate to go for listing" Rather trans!arency, disclosure,
com!liance !lays %ery im!ortant detrimental factors for listing" If $e could e!and
cor!orate net $hether listed or non listed, and minimi+e ta a%oidance, cor!orate
$ill automatically get incenti%e to go for listing"
0. !o "ou agree with this "ear,s decision to reduce tax of non-
listed companies from &0.+. to &+. while tax rate for listed
entities remaining the same at %0.+.
I $ill not comment on any &gure" 5hy: Because the a*o%e !ercentages are not
merely a !ercent, rather it in%ol%es su*stantial *ac'ground estimation and changes
in the !ercentages im!act on the $hole *udgetary system of the country" 5ithout
analy+ing *udgetary allocation, there is no !oint of agree or disagree" #o$e%er, I
could say, still there are incenti%es for ca!ital mar'et !layers"
1. !o "ou support tax exemption facilit" for 23* activities What
t"pes of 23* expenses do "ou thin# should get 'ene4t of tax
exemptions
It is a million dollar (uestion" There are strong argument and dis.argument for and
against ta eem!tion facility for C1R acti%ities"
Cor!orate 1ocial Res!onsi*ility 7C1R8 acti%ities in Bangladesh are not through a
statutory !ro%ision" 5hile many cor!orate houses ha%e *een traditionally engaged
in doing C1R acti%ities %oluntarily, *ut it is of my o!inion that the C1R !ro%isions
should *e !ut formal to set out clear frame$or' and !rocesses to ensure strict
com!liance, *efore !ro!osing ta eem!tion on C1R acti%ities" Com!anies Act need
to *e !rescri*ed acti%ities to$ards $hich C1R e!enditure should *e incurred,
including eradicating etreme hunger and !o%erty, !romoting education, ensuring
en%ironmental sustaina*ility, social *usiness !rojects, reducing child mortality and
im!ro%ing maternal health, etc"
Being a !rofessional, the &rst thing that comes to fore is $hat is the im!act of C1R
contri*utions from a ta deducti*ility !oint of %ie$" The dilemma is if any
e!enditure on C1R is considered *y the taman as not e!ended $holly or
eclusi%ely for the !ur!oses of the *usiness, on the *ac'dro! that the C1R rules
ecludes Dacti%ities underta'en in !ursuance of the normal course of *usiness of the
com!anyE, $ill this contri*ution *e considered as !ermissi*le C1R s!ending" 5hile
$elcoming the mo%e in s!iritFno one $ants to *e seen to *e o!enly critici+ing
anything to do $ith C1RFe!erts ha%e already !ointed out the !ro*lems that could
arise from de&ning $hat C1R acti%ities are and aren0t"
It could also im!act the go%ernment0s ta re%enue" The !otential dent to the
go%ernment0s ta re%enue could therefore *e high, if the go%ernment does grant
income ta eem!tions to C1R s!ending"
5. !o "ou thin# audit companies are ethical and competent
enough to ensure fair auditing
Auditors !lays gate 'ee!er role in any &nancial and ca!ital mar'et" There is a
mi o!inion *et$een !oor and standard regarding the (uality of audit" Gou
cannot generali+e ethical and com!etence of auditors in a single scale" It is
hardly !ossi*le to de%elo! a %i*rant and healthy ca!ital mar'et as $ell as
e,ecti%e ta collection system $ithout international *est !ractice audit"
4o%ernment, Regulators, Audit Firms and 1ta'eholders are $or'ing on the
issue %ery seriously, and I am o!timistic that in near future (uality of &nancial
re!orting $ill *e signi&cantly enhanced" In the era of glo*ali+ation, $e don0t
ha%e any alternate o!tion"
1-. What are the 6aws in )B*,s tax collection polic" What
can 'e done to improve those
From my !oint of %ie$, $e need to dee!en the country0s ta *ase, $hether there is sco!e to
*ring do$n headline ta rates and focus on e!anding and dee!ening the ta *ase"
The num*er of ta!ayers has gone u! o%er the last ?H years" -o$, -BR are at another
threshold $here it $ould say there is !ossi*ility to increase the num*er of ta!ayers
Iconsidera*lyJ" The focus has to *e on *ringing in ne$ ta!ayers, rather than !utting
hea%ier *urden on !ayers $ho are already contri*uting (uite a lot" #o$ do you do that: 5e
need to orient the ta administration more to$ards customers, $hich is the idea that has
*een ado!ted *y many moderni+ing ta administrations" 1o, $e ha%e to ha%e customer
focus in the ta administration, to *egin $ith"
1im!li&ed Income Ta system2 The !resent income ta system is too com!licated to
understand" Chartered accountants, ta la$yers and related !rofessionals often allegedly
are a*using this com!leity" Their du*ious roles as middle man hel! underre!orting many
income ta cases" )eo!le are li'ely to go for self assessments are discouraged *y the
difcult system" The !ro*lem is more acute in a !oor economy li'e ours $ith high illiteracy
and !oor record 'ee!ing and accounting ha*its" The demands !laced on administration.
%ery !oorly sta,ed $ith !oor !ay and inade(uate logistics su!!ort ha%e !ro*a*ly resulted in
greater dishonest !ractices than $ould ha%e *een the case other$ise" #o$e%er, the current
&scal !olicy has !ro!osed to introduce e.ta &ling, e.ta calculator on -BR $e* etc"
A!!ro!riate design of a !enalty rate structure also a!!ears to *e anti.e%asi%e and anti.
a%oidance" At !resent, the !ro%ision of !enalty in the statute *oo's is one sided" The ta
!ayers only to *e !enali+ed for an act of omission or default *ut there is no corres!onding
!ro%ision to !enali+e dishonest, inefcient or unjust ta ofcials"