Problem & perspective of pro-poor approach through VAT Domestic Resource Mobilization.

Problem & perspective of pro-poor approach through VAT

www.equitybd.org

Domestic Resource Mobilization

Objective of this presentation

A general overview of existing Tax system & Practice in Bangladesh

Present a brief discussion on VAT and Impact

Make recommendation on pro poor strategies in view of domestic resource mobilization

1 www.equitybd.orgProblem & perspective in pro-poor approach through VAT


Bangladesh is a low-income economy of South Asia

In FY 2011-12, Bangladesh had a GDP of US$ 114.34 billion.

The real GDP growth rate is 5.9 percent and per capita GDP is US$ 782.

In recent years, Bangladesh has achieved significant gain in human development.

Bangladesh aspires to become a middle income economy by 2021 according govt. declared “Vision-2021”

Bangladesh: Our economy and GDP



- Achieving Vision-2021 required an investment at least 30-35 % GDP (6th FYP) where revenue mobilization as one of the major part of domestic resource.

- But the performance is still less satisfactory as compared to other countries at a similar stage of economic

development.

- The existing weak tax structure and its performance are based on the following characteristics;



Direct tax payers are few

The population of our country is near about 150 million where direct registered tax payer is only 02 million. Even theses people don’t paying their tax regularly and in accordance with real tax assessment. According to the information of NBR (National Board of Revenue) only 0.8 million people are paying their tax regular basis.

Government heavily relies on indirect tax:

The total tax and revenue mobilization performance is very much dependent on indirect taxes. The contribution of indirect tax in total revenue mobilization is 82% in 91-92 fiscal years and it is still observing as very slow pace (Stag at 75% in 2012) during last years despite bringing changes in taxation policy and system.



Type of Taxpayer in Income Tax Structure

Type of Taxpayer No of Taxpayer %

Corporate 61,998 2.98%

Other Tax payer 7,78,750 37.53%

Minimum Tax payer 3,90,964 18.83%

Only Tax File Holder 8,43,548 40.66%

Total Tax Payer 20,75260 100%

Source: NBR annual report 2011



Sector wise Tax performance in Revenue mobilization



Fiscal Year % of total revenue % of VAT in total revenueDirect or Income

Tax Indirect Tax

2000-2001 19.40% 80.56% 31.56%2004-2005 19.49% 80.51% 35.00%2008-2009 27.17 % 72.83% 38.36%2009-2010 28.09% 71.90% 39.50%2010-2011 29.49% 70.51% 38.23%2011-2012 24.42% 75.58% 37.30%Source: NBR AR 2011

Tax is near zero in agriculture sector

The another potential and prime tax source is our agriculture sector which provides a contribution of 22 percent of GDP along with retaining 75% population and 65% of total employment but virtually pays little in the form of direct or income tax. Because…..

- Since the independence this sector is getting extra protection in view of self sufficiency and poverty reduction approach.

- But concern is that, many rich people lying in the agricultural sector and making income and avoiding taxes showing their entire income as a means of agriculture.

- It is also widely evident that some people even among the registered taxpayers paying no tax showing fake

engagement of their activities with agriculture that’s a major cause of less

revenue from earning from this sector. 7 www.equitybd.orgProblem & perspective in pro-poor approach through VAT


Culture of tax exemption loosing government revenues - The major policy objectives behind the tax exemption in Bangladesh are to accelerate the process of industrialization, increasing exports and Foreign Direct Investment (FDI) and to ensure social security (in case of employment creation and poverty reduction).

- In FY 2000-2005 total number of tax exemption cases were 1531 and the estimated loss of revenue was about 3.5 billion US$ that was estimated as about 9.6 percent of total income-tax earning during that period.

Inequality of Taxing Urban and Rural Sectors

- Tax is being collected in urban areas based on presentdifferent type of business activities, amenities that imposed huge tax by the govt. comparing rural area.



Weak Tax-GDP Ratio among developing countries

Tax-GDP RatioCountries Tax: GDP ratioMaldives 20.5 %

India 17.7 %Sri Lanka 15.3 %Pakistan 14.6 %

Nepal 10.9 %Bangladesh 10.52 %

Developed countries Average Tax-GDP 30- 40%



- The Government of Bangladesh has initiated some administrative and policy reforms in her existing tax system and

administration in 1991. Introducing VAT was a major milestone.

- The objectives behind introducing VAT in Bangladesh were to;

- Bring transparency in the taxation system

- Prohibit cascading taxation at different stages of production

- Consolidate the tax administration

- Activate the overall economy by mobilizing more internal resources; and

- Bring a consistency in the tax-GDP ratio



VAT and its major field of exercise by NBR a. VAT is imposed on goods and services at import stage, manufacturing,

wholesale and retails levels; b. A uniform and standard VAT rate of 15% is applicable for both goods and

services c. Standard 15% of VAT is applicable for all business or industrial units with

an annual turnover of BDT 02 million and above; d. Turnover tax at the rate of 2.5% percent is applicable where annual

turnover is less than BDT 02 million; e. VAT is applicable to all domestic products, sales and services @ 2.5% at

retail level. f. VAT is payable at the time of supply of goods and services; g. VAT is exempt on Export-sales on goods and services



VAT Act 2012: Targeted to grabbing and grapple of all

- Prepared to fulfillment of IMF condition- The new VAT act 2012 empowered to impose VAT on all sort of product,

services and supplies including immovable property, lease, grants, license, permit, right, facility and import of services in order to consume in the country

- The draft law proposed scrapping the existing package VAT that result to increasing the calculated & quantity of VAT on the same products than previous.

- VAT proposed 15% on all product & services in general and @ 4% percent on annual turnover is less than BDT 06 million;

- Empowered Tax men to seize the asset, inquiry any where anytime and force the tax payer to attend physically. This enforcement might undermine human rights situation as weak governance.

- Allow appointment of private companies to process returns and data management and collection.

- Will come into action by 2015




Domestic Resource MobilizationConditions of IMF Government has

implementedImpact in livelihood

1. Withdraw interest rate (13% ceiling) from commercial bank.

2. Follow the contraction Monetary policy

1. Implemented and the banks already increased interest rate.

2. Increase cash reserve rate in Bangladesh bank for other commercial banks.

1. As a result, loan for investment will be decreased.

2. Interest rate will be increased due to huge demand.

3. Increase of short term loan that will create imports and market liberalization.

4. SME sector will be hampered due to more supervision and monitoring cost.

3. Impose condition of VAT expansion.

1. Government has made declared draft law publicly. It will be approved in ongoing parliament.

1. VAT will be increased and collected from poor and marginalized people during any purchases of daily goods and services.

4. Increase monitoring in BPC, BCIC and BPDB in order to reducing subsidy from power, fertilizer and patrol through price adjustment.

1. Government already increased the price of electricity and decreased the subsidy from power and petroleum sector.

1. Price is increased of power and petroleum. As a result increased the cost of daily necessaries due to transportation and production cost and made hardship of poor people.



VAT exercise in different countries

- Bangladesh 15%- Singapore 05%- Thailand 07%- Indonesia, Myanmar,

Lebanon, Vietnam and South Korea 10%

- New Zealand 12%- Nepal 13%

All these countries keep essential goods out of VAT considering the poor, but the situation is completely different here in Bangladesh.

Impact of VAT in developing countries - The evidence shows that the VAT has increased the price

“once- for- all” if more revenues are desired by the government.

- Apart from this price could be raised through imposing VAT due to many cases in the poor and developing countries.

- Weak market mechanism that creating uncertainties in the minds of the businessmen and the consumers and they anticipate of inevitable price increase.

- Less control of regulatory authority on pricing policy- Corruption in both govt. official & business level; and - Even vested political interest are playing to these

issues.





Incident of VAT on House Hold in South Africa

Annual HH income level (‘000)

Total Vat paid

VAT paid as % of total tax

VAT paid as % of annual income

R18 1799 86 10

R30 2910 54 10

R75 6141 25 08

R140 10241 18 07Source “One size fits all" Christian aid report 2009



Source: Institute of Fiscal Study-UK



Country Performance of Tax-GDP ratio (%) in Sub Saharan Africa (Target 18% of GDP)

1993 2008Ethiopia 8.3 10.4Ghana 16.9 19.9Kenya 19.3 19.7Malawi 15.6 16.9Mozambique 18.2 14.5Nigeria 2.3 3.9Senegal 12.3 20.9Source: “One size fits all" Christian aid report 2009

Impact of VAT in developing countries So, VAT could be a regressive nature if…

- The VAT imposed with an uniform rate among the rich and poor at the consumption level.

- A uniform VAT ignores equity, or more specifically, income distributional issues, which are particularly relevant for developing countries like Bangladesh.

- Because low performance of income tax make limit the asset transfer to the poor and high performing VAT is creating income inequality between rich and poor in developing countries

- Bangladesh people are not experienced yet the VAT impact that imposing in the different essential services especially in case of health, water and education etc except the retail level consumption.



Is Self-finance possible through domestic resource mobilization?

Economic recession in EU and other developed countries is a major cause of reducing AID in developing countries.

Bangladesh is receiving Aid (Actually loan) less than 1% of GDP which could be adjust in our development finance easily. Because……..

- Satisfactory growth of Remittance

- Growing Export Earnings

- Prepare effective planning and priority setting in our development finance program.



what will be the pro poor strategies for domestic resource mobilization?

Increase direct tax and tax net

Withdrawal VAT imposition on essential commodities also withdraw new enhanced VAT law

Decrease revenue expenditure to channel more and more finance indevelopment finance

Impose punishment tax on the black money

Effective and appropriate utilization of national resources

Develop national consensus and mass mobilization



?

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Problem & perspective in pro-poor approach through VAT

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Problem & perspective of pro-poor approach through VAT Domestic Resource Mobilization.

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