Nation’s tax-GDP ratio lowest in South Asia 

Jasim Uddin | Published: 00:42, Apr 04,2021


The tax-to-GDP ratio in Bangladesh is still one of the lowest in the world 50 years after the country’s independence although it has meanwhile seen significant achievements on many economic fronts.

Bangladesh’s tax-to-gross domestic product ratio has been hovering around 9 per cent for years, with the lowest at 7.9 per cent in the past 2020 fiscal year due to a negative revenue collection growth due to the COVID-19 pandemic fallout.

In FY2019 the ratio declined to 8.9 per cent from 9.4 per cent a year ago.              

Economists and other experts said that although the country’s tax collection had grown significantly over the years since independence, it failed to keep pace with the GDP growth, keeping the ratio one of the lowest in the world and the lowest in South Asia.

Tax collection at a lower-than-potential level creates finance constraints for a country compelling it to limit investments in infrastructure, health, education and social protection, they said.

It will be impossible for the government to achieve its development aspirations, including sustainable development goals by 2030, and to become a developed country by 2041 with the current level of tax-GDP ratio, they commented.

The tax revenue should be between 14 and 18 per cent of the GDP so that the nation can finance its development needs, they viewed.

They identified low tax compliance, narrow tax base, high tax exemption, inefficient tax administration and lack of reform, automation and political will as reasons behind such a gloomy picture.

According to the latest World Bank data, the world average tax-to-GDP ratio was 15.34 per cent while the South Asian average was 12.1 per cent in 2019.

Indian media reports said that the country’s tax-GDP ratio fell to 9.88 per cent in FY2020 from 10.97 per cent in FY2019 due to the coronavirus pandemic.

Similarly, Pakistan’s tax-GDP ratio fell to 9.6 per cent in FY2020 from 10.1 per cent in FY2019.

The WB data showed Nepal’s tax-GDP ratio at18.6 per cent and Sri Lanka’s at 11.6 per cent in 2019.

Bhutan’s ratio stood at 16 per cent in 2018.

The data for Nepal, Sri Lanka and Bhutan for the FY2020 are not available.

Bangladesh’s ratio is also lower than many African countries, including Kenya with 15.87 per cent and Uganda with 12.3 per cent.

In 2019, the average tax-GDP ratio among the developed countries was 35 per cent, according to the Organisation for Economic Cooperation and Development.

The world’s highest tax-GDP ratio was 46.34 per cent in Denmark, followed by 45.40 per cent in France in 2019.

The government of Bangladesh in the Eighth Five Year Plan (2020–2025) has set a target to raise the tax-GDP ratio to 12.3 per cent by 2025.

The country’s weak tax performance has become a major development constraint, the FYP document stated.

Growing revenue shortages are making it increasingly difficult to finance crucial public expenditure needs in infrastructure, health, education, water resources and social protection, it said.

The government failed to lift the tax-GDP ratio to the targeted 14.1 per cent under the Seventh Five year Plan (2015–2020).

According to the National Board of Revenue that collects more than 97 per cent of the country’s tax revenue, the tax-to-GDP ratio was 3.34 per cent in FY1973 with Tk 166.30 crore tax revenue and Tk 4,985.30 crore GDP.

The NBR tax revenue grew over the years and reached Tk 218,408.94 crore in FY20 while the size of the country’s economy became Tk 27,96,378 crore in the year.

The country’s economy grew by, on average, 6.5 per cent in the past decade, with the highest 8.15 per cent growth in FY2019, while the per capita GDP more than doubled to $1,970 in FY2020 from $860 in FY2011, according to the Bangladesh Bureau of Statistics.

The nation’s per capita income also doubled over the past eight years to $2,064 in FY2020 from $1,054 in FY2013, the BBS data showed.

The country’s per capita income was only $330 in FY1995.

According to the NBR data, the tax revenue as the share of GDP crossed the 6 per cent mark in FY1976 but again dropped below 5 per cent in FY1980.

The ratio again went above 6 per cent in FY 1992 with the introduction of value added tax in the country and soon became 7 per cent. It crossed the 8 per cent mark for the first time in FY 2003.

The country achieved the 9 per cent tax-to-GDP ratio in FY2011 and the ratio has been hovering around the figure till now, the NBR data showed.

Policy Research Institute executive director Ahsan H Mansur noted that the country could not further raise the tax-GDP ratio although it had had many achievements over the years.

‘As a result, we also could not increase the expenditure in health, education, infrastructure and other sectors,’ he observed.

‘The government will face severe fund crises in future to finance its development programmes to achieve the SDGs and to become a developed country by 2041,’ he said, adding that the tax-GDP ratio should be raised to at least 18 per cent in order to have the required funds.

Domestic resource mobilisation will be a key after Bangladesh graduates from the least developed country status in 2026, he said.

He blamed the outdated tax administration and management, lack of required reforms in laws and procedures and of political will, absence of automation and inefficiency in the tax administration for the low performance in the sector.

The lion’s share of the nation’s wealth, mostly accumulated illegally by an undue nexus among politicians, businesses and bureaucrats in the past two decades, has remained untaxed causing low tax-GDP ratios, he further observed.

Tax policy formulation and enforcement, both of which are now carried out by the national revenue board, should be separated in order to avoid conflict of interests, he suggested.

Former NBR chairman Nasiruddin Ahmed told New Age that a flawed tax policy and tax administration was the reason for the poor tax-to-GDP ratio in the country.

The national revenue board has failed to properly implement the VAT and Supplementary Duty Act 2012 while it is yet to modernise and automate the income tax regime, he said.

The existence of high tax exemption culture has also reduced the potential revenue collection, he said, adding that exemptions are provided based on lobbying and the nexus among politicians, businesses and tax officials without any proper analysis.

The low level of tax compliance and the narrow tax base are other problems as people are reluctant to pay tax while there are allegations of harassment by tax officials.

Only around 24 lakh people, out of the around 50 lakh registered TIN holders, file tax returns, he said, adding that it means slightly over 1 per cent people pay income tax.

The tax–GDP gap, the difference between actual tax collection levels and potential levels, is very high in Bangladesh, which prevents the country from mobilising potential taxes, he added.

According to a 2018 report of the United Nations Economic and Social Commission for Asia and the Pacific, the tax–GDP gap in Bangladesh was 7.5 per cent, the highest among the 17 Asia-Pacific countries.

It means, said Nasiruddin Ahmed, the country can realise at least another Tk 2.10 lakh crore in revenue considering its current GDP size by narrowing the gap.

He said that the ratio should be immediately raised to at least 14 per cent to meet the finance requirement for development following the LDC graduation.

Centre for Policy Dialogue senior research fellow Towfiqul Islam Khan said that there was no coherence between the tax-GDP ratio and the country’s overall economic development.

He identified a number of reasons, including the failure to bring potential taxpayers under the tax net, the failure to implement reform measures, the adoption of ad hoc tax policy with high tax exemption granted without cost-benefit analysis, the lack of good governance and the lack of motivation and automation coupled with the inefficiency of the tax administration, for the poor performance in revenue mobilisation.

The country needs a comprehensive plan to raise the tax-GDP ratio to cope with the post-LDC situation where revenue earnings from customs duty and foreign aid would shrink and foreign loans would become costlier, he said.

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