In an interview with The Business Standard, Dr Muhammad Abdul Mazid, former president of the NBR, discussed the three areas the government can improve to increase revenues and improve tax management.
TBS: Do you think there should be separate bodies to collect direct taxes (like income tax) and indirect taxes (like VAT and customs duties)?
Dr Muhammad Abdul Mazid: If you compare Bangladesh with many other countries including India, you will see that there are two different bodies for direct tax and indirect tax. Indeed, direct and indirect taxes are very different.
The entire population, whether poor or rich, pays indirect taxes. If you buy a product or service, you will have to pay taxes. But only those with regular income pay income tax. Direct tax revenues tend to be higher. The more we earn, the more taxes we will pay.
Many countries like India empower their finance ministries to handle direct taxes, as they are also responsible for creating the country’s budget. The problem of indirect taxes is closely linked to trade, that is, to the price of imports and exports.
In addition, in many other countries, the Ministry of Commerce is generally responsible for managing indirect taxes. The Ministry of Commerce is also responsible for setting certain prices as it actively assesses the markets.
In Bangladesh, there is a huge lack of coordination between the NBR and the tariff commission. Consequently, the BNR does not realize the taxes it sets.
Our Department of Commerce has a tariff commission. The task of the tariff commission is to give recommendations to the Ministry of Commerce on the products on which it should impose duties.
The commission usually holds public hearings for this purpose. However, since the BNR reports to the Ministry of Finance, it does not take into account the recommendations of the tariff commission in terms of prices or customs duties.
When I was president of the NBR, I met the president of the Bangladesh Trade and Tariff Commission. I told him that we [NBR] want to set the tariff on the basis of the recommendations of the tariff commission.
Yet the NBR still does not listen to the tariff commission because if the NBR does, it could lose the freedom to change tariffs as it sees fit. There is not yet a legal framework for the application of the recommendations of the tariff commission. Such a system is not in place.
There is no coordination between the tariff commission and the BNR. This is a huge problem.
It should be the responsibility of the Ministry of Commerce to raise and lower the price and other things like tariffs, as it also formulates import and export policies.
In fact, the tariff that the NBR imposes is entirely based on import and export policy. So we have one agency that makes the policy while the other collects the fees and collects the revenues. If the Ministry of Commerce had been able to set indirect taxes, the tax collection system would have been fairer.
Another thing that we have to note is that every year before the national budget, the BNR takes the suggestions from different professional bodies. However, these trade bodies actually report to the Ministry of Commerce and not the Ministry of Finance.
These trade bodies are meeting with the NBR to pressure the NBR to reduce tariffs. If the trade bodies put pressure on the Ministry of Commerce instead, there would be fair play. And that would undoubtedly increase income.
NBR never admits they sat down with them [trade bodies] to discuss tariffs and other things. Instead, they label it as a “pre-budget discussion” although it rarely serves its real purpose.
I believe that if the power to set indirect taxes rests with the Department of Commerce, our revenues will increase. In addition, the system will be more favorable to businesses and the economy.
TBS: Why has universal self-assessment not taken off in Bangladesh?
Dr Mazid: Universal Self-Assessment has been introduced in many countries around the world. The system was introduced in Bangladesh so that taxpayers can easily declare their income on their own. We must honor our taxpayers. We have to honor what taxpayers give.
But we have seen in the past that in the name of carrying out checks, taxpayers are summoned. The tax administration has the power to summon a certain percentage of taxpayers at will.
The problem arises when several days later the same taxpayers are called several times. This means that you haven’t really given them the freedom to self-assess.
However, it is also true that some taxpayers abuse the self-assessment system when filing their taxes. And if for this reason, the officials of the NBR summon them, it is quite justified.
But these summons must be done in moderation instead of questioning the same taxpayers over and over again. The BNR will have to develop a system where taxpayers will have no choice but to declare their taxes honestly.
The NBR is also understaffed. He is too busy scrutinizing ordinary taxpayers instead of looking for new taxpayers and new avenues for tax collection. In other words, the BNR deploys its staff on issues that can be dealt with later.
TBS: Some see allowing tax evaders to launder black money to be a problem. What do you think about it? What should we do?
Dr Mazid: The economy operates on the basis of ethics. If you let a man who made money illegally get away with paying a small amount of tax or penalty, you end up making him happy.
New taxpayers will think it is better not to give tax. They will think that the government will also give them a chance and not raise any questions. Then they will think that there is nothing wrong with not paying tax at all!
The position of the NBR is hypocritical. On the one hand, NBR is very friendly to those who evade tax. On the other hand, they say people should pay their taxes.
It cannot be supported. The government should adopt a carrot and stick policy. The government should let tax evaders know that if you cheat, you will be punished. You will be asked questions about your heritage. However, we continue to please them.
Now, I’m not saying we should stop laundering black money altogether. Rather, we should phase it out over time. No country in the world has allowed black money laundering to continue for years; it is generally limited to a few months.
In other countries, governments collect undisclosed money and warn tax evaders that if they repeat such actions, they will face serious penalties. If you don’t send them a strong message, they’ll take you lightly and you won’t be able to collect taxes effectively.