South Asia, in general, and almost all members of SAARC countries in particular have a common legacy of perceptions and practices of taxation. Having common laws and regulations, mostly carried forward from the British colonial days, these countries are moving towards modernisation, reforms and reshaping the mindset of the both tax payers and collectors. Recently, an empirical study on Tax Policy and Enterprise Development in South Asia was conducted by the Centre for Policy Dialogue (CPD) in collaboration with Governance Institutes Network International (GINI) of Pakistan. This study aims to analyse the perception of South Asian business enterprises, SMEs in particular, regarding tax policy and its impact on their development.
The study observed a rampant lack of awareness regarding tax filing procedures, multiplicity of taxation policies and bureaucratic structure of tax departments in each country. Administrative misconduct was also found to spread across the region with officials being corrupt in their dealings and often indulging in rent seeking practices. This leads to high tax compliance costs in South Asia, which keeps businesses and tax payers away from becoming tax compliant. The growth of enterprises is stunted by this lack of tax compliance as it restricts their prospect of accessing credit through formal lending institutions.
Among the aspects of tax policy that were studied, tax concessions, exemption and value-added tax were found to impact enterprise development more strongly as compared to property tax which is often an insignificant part of overall land acquisition cost. With regard to tax policy itself, tax rates and number of taxes should be reduced, and revenues should be augmented through stronger enforcement and punitive measures against tax-dodgers. Tax concessions and exemptions should be reviewed to exclude the existing sector and scale biases, and regularly evaluated for their impact on relevant sector's growth and productivity. VAT should be reformed to make it suitable for marginalised sectors, and tax refunds should be claimable to dismiss double taxation. A final and most important proposition is for states to create tax awareness with specific emphasis on the necessity of tax-compliance for enterprise growth, self assessment of applicable tax policies and procedures of filing returns.
Interestingly, the study observed commonalities in the election manifesto of the political parties in the region on tax reforms. A regional comparison shows that promises are there to: (1) provide a non-adversarial and conductive tax environment, (2) rationalise and simplify tax regime to make it more efficient and transparent, (3) overhaul the dispute resolution mechanisms, (4) provide tax incentives for investments in research and development geared towards indigenisation of technology and innovation, protecting the interest of small and medium retailers, (5) reduce tax rates, (6) improve the process of self-assessment and audit compliance, (7) reform the tax system to improve tax--GDP ratio (which remains very low in some member countries), (8) bring informal economy into tax net through improved documentation process and rationalise the tax base to broaden the tax system, (9) reduce tax evasion by facilitating tax payers' compliance and where possible, rationalise tax rates, (10) rationalise VAT, GST or Sales tax by ensuring standard rates for all items and broadening the scope of sales tax, (11) simplify tax administration, especially for small business, (12) reduce tax rates over a period of time to ensure regional equity and to encourage foreign investment, (15) reform the tax system to facilitate capital accumulation, investment, entrepreneurship, employment, growth and international competitiveness.
The study noted the following common reasons for low tax performances across the region:
(1) Lack of tax awareness: The level of awareness and understanding among the tax payers of tax policies and administrative procedures is extremely low
(2) High compliance cost: Almost all tax payers face medium to high compliance costs with their respective tax regimes. This discourages registration, ultimately hampering entrepreneur profitability and competitiveness.
(3) Varied concessions/exemptions: There is a paradox in the nature of tax exemptions. In most cases, SMEs that can supply input materials to exporters are unregistered or are exempt from VAT. This means exporters cannot claim input credits from them and so have no incentive to buy from them. At the same time, exemption thresholds may encourage tax avoidance as firms prefer not to expand business but to establish new business to remain under the exemption threshold.
The study came up with a few common recommendations, such as educating the tax payers through tax guides, workshops and seminars on tax system; making tax regimes non discriminatory, bringing in transparency; improving the services of tax department through fully automated e-return system etc.
The following are some of specific suggestions:
Valuation
• Tax officials may find out location-specific real transaction value of various real estate properties at a regular interval and update regularly
• Digitisation of land records and ensuring its online availability
Administrative Capacity
• Competency of human resources in the tax administration and incentives for collection of taxes to improve administrative capacity.
Record keeping
• Digital mapping of all lands, mentioning the last transaction value and linking the NID (National Identification) of the land owners to improve record keeping.
Dr Muhammad Abdul Mazid, former
Secretary and Chairman of the National
Board of revenue, is Chairman,
Chittagong Stock Exchange and
Senior Vice Chairman of South
Asian Federation of Exchanges.
[email protected]
