The tax-to-GDP ratio is a ratio of an economy's tax revenue relative to its gross domestic product (GDP) or the market value of goods and services a country produces. The higher the GDP, the more tax a nation should collect. It is a cardinal aim to increase the tax-to-GDP ratio to address deficiencies in the budgets.
The tax-to-GDP ratio is also used in conjunction with other metrics to measure how much a government controls its economic resources. Tax revenue is income collected by governments through taxation. It includes revenues from income taxes, product sales tax, payroll taxes, and other items. Tax revenue in underdeveloped and developing countries is typically insufficient to fund state operations.
Tax-GDP ratio is a crucial determinant in assessing the vibrancy of the government to meet the various socio-economic needs of a country to ensure both growth and equity in the distribution of income. A higher tax-GDP ratio with a narrow tax net imposes a burden on the honest tax payer; tax evasion may be rampant and the revenue target may not be achieved.
Tax gap refers to the difference between taxes receivable and taxes collected. Generally speaking, the tax gap is the gap between the amount that should be levied and the amount actually levied. In Bangladesh, the account of tax gap seems to be the same as the amount of tax evasion, but there is a certain difference, the two cannot be replaced with each other. To elaborate:
- Actual tax revenue includes the tax overdue payment and fine, so the calculated tax gap is smaller than the required gap.
- In macro-economic models and statistics, there is generally no underground economy. If the underground economy is taken into account, taxes should be increased.
- The taxpayer declares the project that should be declared, but he does not have the funds to pay taxes. This tax has passed the examination and approval of the taxation authority and does not belong to tax evasion. With this factor in mind, the gap should be reduced.
- If the taxation authority does not levy taxes, the fault of the reduction in tax revenues should be borne by the taxation authorities, which means that the taxpayer has not violated the law. With this in mind, the gap should be reduced.
From the above, it is clear that tax gap cannot explain only the tax evasion and tax non-compliance. However, tax gap can be used to carry out horizontal comparisons between countries (regions) to reflect on the tax evasion and tax non-compliance.
Bangladesh's tax-GDP ratio is one of the lowest in the South Asian region. Close studies show that high tax rates, multiple tax rates, complexity of tax laws, corruption among tax payers and collectors and inefficiency of tax authorities are the main causes of high tax evasion in Bangladesh. As many as two-thirds of the eligible tax payers evade taxes. Tax evasion occurs when individuals deliberately do not comply with their tax obligation, cuts in tax rates.
Simplifications of tax laws, removing loopholes in the tax system and proper processing of information available under the annual information return are viewed as the best tools for improving tax compliance. There is also a need to educate the people and their elected representatives about the tax law and create taxpayer-friendly environment.
The size of the informal economy remains large despite structural transformation from agriculture towards more formal industry and services. For instance, over 85 per cent of total employment is informal employment in Bangladesh. Income generated by the operators in the sector, in many cases, is not officially captured in the tax net of the National Board of Revenue (NBR). Informal sector forms a greater percentage of tax defaulters, increasing cases of tax evasions. The revenue potential from the informal sector comes with significant administrative costs due to a large number of informal firms and entrepreneurs and the difficulties in monitoring them. Also, many firms often prefer to remain informal to avoid the regulatory complexities that come with formalisation. The state-owned enterprises (SoEs) in Bangladesh, the public sector entities and projects do not pay tax in proper amount and on time. There has been a huge amount of tax dues returnable to NBR.
An important way to study the tax gap is to examine the size of the tax gap in a country by analysing the size of the underground economy and its influencing factors. The size of the underground economy is directly related to the institutional infrastructure. The institutional infrastructure of a country mainly includes the intensity of government regulations, the establishment and implementation of laws, the degree of judicial independence, the size of effective tax rates, the effective provision of public goods and services, and the effective protection of property rights. It is generally believed that the higher the level of government regulations, the greater the size of its underground economy and the greater the tax gap. When government's over-regulation occurs, an alternative relationship emerges between the underground economy and the official economy. Some, however, believe that higher tax rates can raise higher tax revenues, and the government can provide higher levels of public services accordingly, thereby attracting more companies and individuals out of the underground economy, resulting in a healthy balance of "high tax rates, high taxes, high public services, and small-scale underground economy".
It is argued that a sustainable and efficient tax system must be based on perceived fairness and goodwill response to taxation. If taxpayers can perceive that their interests and preferences are reflected in political procedures and political decisions, taxpayers will continue to stay in the official economy and fulfill their tax obligations. Tax revenues will increase while the tax gap will narrow.
The government should have the ability to transform gradually increasing tax revenues into higher levels of public goods and services. It has a duty to make it transparent to the taxpayers how tax revenues are used for doing this.
The national taxation system should be closely linked with the national goal of promoting economic growth. Promoting economic growth is one of key the strategic goals that the government has promised to taxpayers.
Muhammad Abdul Mazid is former Secretary to the government and former Chairman, NBR.
