Low tax rates to curb evasion

| Updated: October 25, 2017 05:00:49

Low tax rates to curb evasion

There are many rich persons in Bangladesh, but not all of them pay taxes. Either they do not file any tax return or if they file any at all, they do not pay even a small percentage as tax of what they should pay. Many rich people just collect taxpayer identification numbers (TINs) to use where they need but do not pay tax on annual basis against those TINs.
The issue of non-payment of taxes becomes clear when we see much less number of actual annual income tax-payers than the TIN holders. Where have other TIN holders gone? A person who needs a TIN for whatever purpose, we suppose, has taxable income. We do not know why the tax authority is unable to bring all the TIN-holders under the annual tax net.
All the old TIN-holders may not be available for submitting annual income tax returns because some might have died in the meantime; some might have gone out of the taxable income limit, but those cases should be reported to the tax authority. All tangible assets above certain value should be shown in the income tax file, which, if not shown, should be detected and the tax authority should ask for clarification.
The other side of the income tax is that very rich people pay less taxes than others because they spend more money and show less as net income which is taxable. Many rich people from Bangladesh travelling abroad on a regular basis sometimes use executive class while flying and stay in luxury hotels, but when their tax files are seen, they pay just the average taxes as paid by other ordinary income tax-payers.
Many rich people send their wards abroad for studies by paying full cost which stands at, in Bangladesh currency, not less than five million taka per annum for a single ward. But do these rich people pay income taxes in commensurate with the income they spend for educating their wards abroad? Many rich people ride very costly SUVs or Sedan cars, costing 20 million taka to 30 million taka or even more. Do they pay taxes reflecting their life-styles? Many hold parties or host VIP guests regularly, but do they pay a percentage as income tax of the cost they incur for such events?
Bangladesh needs to have a study on rich people's behaviour towards tax payment. Then the tax authority will find out how staggering their tax evasion is. The authority should see that all transport and car owners pay income taxes regularly. It can also detect persons, who feed more than 500 guests in any event, as to whether they have the income tax files at all or not. Bribery and kickbacks are widespread in the country. The tax authority should see how the wards of people with the stigma of corruption spend huge amount of money or own assets.  They should also observe how persons in authority earn and spend money.
The way Bangladesh generates revenue from income tax, savings are taxed more, but the principle of equity requires that expenditures should be taxed more than the savings. Rich people do not bother about savings; sometimes they spend other people's money through debiting bank accounts but still they go on spending. Such spending should be taxed more than savings. The value added taxes on consumption cannot be flat; on some consumable items, the rates should be progressive.
A person's life-style should be reflected in what he submits as tax returns. The other aspect of income tax is, it is city-based rich persons living in urban areas of bigger cities who are coming under tax nets, but there are many rich persons who live in suburban and upazila areas. They should also be brought under income tax net.
Income tax rates also matter. Though these rates in Bangladesh are not higher when compared to the same of other countries, our case is different. Here we are still in the process of bringing more people under the tax net. If potential tax-payers see that tax rates are very high they will find ways to evade the tax. Two years back when Bangladesh raised income tax rate for the so-called ultra rich to 30 per cent from 25 per cent, the decision was not judicious.
Raising tax rates will only drive more ultra or super rich to hiding their assets or spending more money on consumption or transferring the income to their close relatives. A country like Bangladesh cannot expect to receive more income by raising tax rates; rather tax rates should be such that all persons who are eligible for paying taxes should feel comfortable  while paying taxes. Only then Bangladesh will be able to maximise its tax revenue from the income tax source.
If all eligible income tax-payers pay their due shares, the total tax collection from this source will be huge. Relationship between tax-payers and the revenue authority should be easy and friendly. The relationship should not be based on suspicion. Tax rates should not hurt the tax-payers psychologically. The basic principle for income tax here in Bangladesh should be lower tax rates which will bring in more tax payers.
The writer is Professor of Economics University of Dhaka,
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