Increasing tax revenue — the debate over corporate rate

Increasing tax revenue — the debate over corporate rate

The tax authorities will not necessarily receive more from a high rate of corporate income tax. The higher the tax rate, the higher the revenue - this proposition seems true only in theory.

When a high rate of tax is imposed, businessmen attempt to hide the genuine profit. Many receipts and expenditures remain unrecorded and unreported, while expenditures are inflated. At the end, profit before tax will be shown at a lower rate.

Tax authorities receive tax in percentage term on a business entity's net profit. When net profit or the amount before tax goes down, it is not possible to get more tax by fixing a higher rate of corporate income tax.

Tax authorities depend on audit reports to know about the net profit of businesses. But the auditors may be in collusion with the owners of businesses. Also, the auditors cannot check/recheck every transaction of a business or a company.

The procurements and expenditures are overseen by the management bodies of the businesses. But all businesses, which have corporate structure, do not have proper management bodies or boards. The corporate businesses in Bangladesh are mostly family-managed ones which are run without any oversight from outside.

The National Board of Revenue (NBR) depends on the audited reports of businesses for the purpose of tax collection. There are allegations that many such reports are manipulated through the collusion between the owners and the auditors. Hence, levying corporate income tax at a high rate for collecting more tax is unlikely to work in Bangladesh. Rather, instituting proper corporate governance in the corporate businesses may give a better result in this regard. However, until private limited companies go public by selling a portion of the owners' equity to the people, proper corporate governance can hardly be instituted in them.

When a corporate business goes public by offering an IPO (initial public offering), it comes under the oversight of an independent watchdog — the Bangladesh Securities and Exchange Commission (BSEC). The management boards of the listed companies are constituted after choosing representatives from the stakeholders, including the ones from the minority shareholders. That type of management boards are in a better position to check the fake and false transactions in the publicly traded companies.

If the authorities want to fetch more tax from the corporate businesses operating in the economy, they should encourage more businesses to go public. Instead of solely depending on the high rate of corporate tax, the tax authorities should adopt policies that would incentivise more and more private corporate businesses to go public. In this context, one can argue for a lower corporate income tax for the listed companies. A tax difference of 15 per cent in place of the existing 10 per cent will interest more and more fundamentally strong companies to go for listing with the bourses.

No country allows its private businesses to grow too big just to serve family interests. Many countries have framed laws stipulating that a business must go public after crossing a threshold in value. If businesses go public, more people will be able to own them and also tax authorities will receive more tax from the transparent businesses these entities will be doing.

In many countries, the corporate income tax rate is much lower than the same in Bangladesh. The Asian average in this respect is 20 per cent, whereas Bangladesh's average is 35 per cent. Many advanced and big economies also have lower corporate income tax rates. China has it at 21 per cent, the US recently took it down to 21 per cent. For the USA, the recent passage of the act lowering the same to 21 per cent from 35 per cent was revolutionary. India has also planned to bring it down to 24 per cent within a few years. UK has also planned to bring down this tax below 20 per cent. Almost the whole world is in a race to bring this tax down. Will Bangladesh take note of this race?

For the tax authorities, what matters is the total tax revenue from the corporate income tax - not necessarily the tax rate. If a lower tax rate can generate more revenue, the authorities should go for it. Besides, a lower corporate income tax rate can serve the economy in two ways: (a) it increases the capacity of dividend distribution by the listed companies, which in another way helps the stock investors and (b) it encourages the fundamentally-strong companies to go public.

Abu Ahmed is Professor of Economics, University of Dhaka. [email protected]

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