Taxation System in Bangladesh

Introduction

In Bangladesh, the principal direct taxes are personal income taxes and corporate income taxes,
and a value-added tax (VAT) of 15% levied on all important consumer goods. The top income tax
rate for individuals is 25%. For the 2004/05 tax year (July 1 2004–June 30 2005) the top corporate
rate was 45%. However, publicly traded companies registered in Bangladesh are charged a lower
rate of 30%. Banks, financial institutions and insurance companies are charged the 45% rate. All
other companies are taxed at the 37.5% rate. Effective 1 July 2002, the VAT rate on computer
hardware and software was reduced to 7.5%, and certain agricultural equipment and electricity
supplied to the agricultural sector was exempted from VAT altogether. VAT on the transfer of
land is also to be abolished. Essential agricultural implements and irrigation pumps had previously
been excluded from certain taxes

Tax (definition)

To tax is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity)
by a state or the functional equivalent of a state such that failure to pay is punishable by law.

Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax,
and may be paid in money or as its labour equivalent (often but not always unpaid labour). A tax
may be defined as a “pecuniary burden laid upon individuals or property owners to support the
government a payment exacted by legislative authority.” A tax “is not a voluntary payment or
donation, but an enforced contribution, exacted pursuant to legislative authority” and is “any
contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost,
duty, custom, excise, subsidy, aid, supply, or other name.”

The legal definition and the economic definition of taxes differ in that economists do not consider
many transfers to governments to be taxes. For example, some transfers to the public sector are
comparable to prices. Examples include tuition at public universities and fees for utilities provided
by local governments. Governments also obtain resources by creating money (printing bills and
minting coins), through voluntary gifts (contributions to public universities and museums),by
imposing penalties (traffic fines), by borrowing, and by confiscating wealth. From the view of
economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the public
sector levied on a basis of predetermined criteria and without reference to specific benefit received.

In modern taxation systems, taxes are levied in money, but in-kind and corvée taxation are
characteristic of traditional or pre-capitalist states and their functional equivalents. The method of
taxation and the government expenditure of taxes raised is often highly debated in politics and
economics. Tax collection is performed by a government agency such as Canada Revenue Agency,
the Internal Revenue Service (IRS) in the United States, or Her Majesty’s Revenue and Customs
(HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or
criminal penalties (such as incarceration) may be imposed on the non-paying entity or individual.
Tax Classifications

Direct tax:

A direct tax is a form of tax is collected directly by the government from the persons who bear the
tax burden. Taxable individuals file tax returns directly to the government. Examples of direct
taxes are corporate taxes, income taxes, and transfer taxes.

Indirect tax:

An indirect tax is a form of tax collected by mediators who transfer the taxes to the government,
and also perform functions associated with filing tax returns. The customers bear the final tax
burden. Examples of indirect taxes are sales tax and value added tax (VAT).

There are other types of taxes, which may either be direct tax or indirect taxes, including capital
gains tax, corporation tax, consumption tax, inheritance tax, property tax, excise duty, retirement
tax, tariffs, wealth tax or net worth tax, toll tax, and poll tax.

Purposes and effects

Money provided by taxation have been used by states and their functional equivalents throughout
history to carry out many functions. Some of these include expenditures on war, the enforcement
of law and public order, protection of property, economic infrastructure (roads, legal tender,
enforcement of contracts, etc.), public works, social engineering, and the operation of government
itself. Governments also use taxes to fund welfare and public services. These services can include
education systems, health care systems, pensions for the elderly, unemployment benefits, and
public transportation. Energy, water and waste management systems are also common public
utilities. Colonial and modernizing states have also used cash taxes to draw or force reluctant
subsistence producers into cash economies.

Governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax
burden among individuals or classes of the population involved in taxable activities, such as
business, or to redistribute resources between individuals or classes in the population. Historically,
the nobility were supported by taxes on the poor; modern social security systems are intended to
support the poor, the disabled, or the retired by taxes on those who are still working. In addition,
taxes are applied to fund foreign aid and military ventures, to influence the macroeconomic
performance of the economy (the government’s strategy for doing this is called its fiscal policy –
see also tax exemption), or to modify patterns of consumption or employment within an economy,
by making some classes of transaction more or less attractive.

A nation’s tax system is often a reflection of its communal values or/and the values of those in
power. To create a system of taxation, a nation must make choices regarding the distribution of
the tax burden—who will pay taxes and how much they will pay—and how the taxes collected
will be spent. In democratic nations where the public elects those in charge of establishing the tax
system, these choices reflect the type of community that the public and/or government wishes to
create. In countries where the public does not have a significant amount of influence over the
system of taxation, that system may be more of a reflection on the values of those in power.

The resource collected from the public through taxation is always greater than the amount which
can be used by the government. The difference is called compliance cost, and includes for example
the labour cost and other expenses incurred in complying with tax laws and rules. The collection
of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay
directly for alcoholism rehabilitation centres, is called hypothecation. This practice is often
disliked by finance ministers, since it reduces their freedom of action. Some economic theorists
consider the concept to be intellectually dishonest since (in reality) money is fungible.
Furthermore, it often happens that taxes or excises initially levied to fund some specific
government programs are then later diverted to the government general fund. In some cases, such
taxes are collected in fundamentally inefficient ways, for example highway tolls.

Some economists, especially neo-classical economists, argue that all taxation creates market
distortion and results in economic inefficiency. They have therefore sought to identify the kind of
tax system that would minimize this distortion. Also, one of every government’s most fundamental
duties is to administer possession and use of land in the geographic area over which it is sovereign,
and it is considered economically efficient for government to recover for public purposes the
additional value it creates by providing this unique service.

Since governments also resolve commercial disputes, especially in countries with common law,
similar arguments are sometimes used to justify a sales tax or value added tax. Others (e.g.
libertarians) argue that most or all forms of taxes are immoral due to their involuntary (and
therefore eventually coercive/violent) nature. The most extreme anti-tax view is anarcho-
capitalism, in which the provision of all social services should be voluntarily bought by the
person(s) using them.

The Four “R”s

Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and
Representation.

The main purpose is revenue: taxes raise money to spend on armies, roads, schools and hospitals,
and on more indirect government functions like market regulation or legal systems.

A second is redistribution. Normally, this means transferring wealth from the richer sections of
society to poorer sections.

A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed,
for example, to discourage smoking, and a carbon tax discourages use of carbon-based fuels.

A fourth, consequential effect of taxation in its historical setting has been representation. The
American revolutionary slogan “no taxation without representation” implied this: rulers tax
citizens, and citizens demand accountability from their rulers as the other part of this bargain.
Studies have shown that direct taxation (such as income taxes) generates the greatest degree of
accountability and better governance, while indirect taxation tends to have smaller effects.

Tax incidence

Law establishes from whom a tax is collected. In many countries, taxes are imposed on business
(such as corporate taxes or portions of payroll taxes). However, who ultimately pays the tax (the
tax “burden”) is determined by the marketplace as taxes become embedded into production costs.
Depending on how quantities supplied and demanded vary with price (the “elasticities” of supply
and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the
buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will
be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer. And
contrariwise for the cases where those elasticities are high. If the seller is a competitive firm, the
tax burden flows back to the factors of production depending on the elasticities thereof; this
includes workers (in the form of lower wages), capital investors (in the form of loss to
shareholders), landowners (in the form of lower rents) and entrepreneurs (in the form of lower
wages of superintendence).

To illustrate this relationship, suppose the market price of a product is $1.00, and that a $0.50 tax
is imposed on the product that, by law, is to be collected from the seller. If the product has an
elastic demand, a greater portion of the tax will be absorbed by the seller. This is because goods
with elastic demand cause a large decline in quantity demanded for a small increase in price.
Therefore in order to stabilise sales, the seller absorbs more of the additional tax burden. For
example, the seller might drop the price of the product to $0.70 so that, after adding in the tax, the
buyer pays a total of $1.20, or $0.20 more than he did before the $0.50 tax was imposed. In this
example, the buyer has paid $0.20 of the $0.50 tax (in the form of a post-tax price) and the seller
has paid the remaining $0.30 (in the form of a lower pre-tax price).

Types Of Taxes
Paying Taxes

Taxes are monies paid by citizens and residents to federal, state, and local governments. The
money collected from these taxes help fund for services provided by the government. It is the one
of the main sources of government revenue. Types of taxes include income tax, sales tax, and
property tax.

Income Tax

These are paid on a federal level and in some cases to state or local governments as well. “Taxable
income” is essentially money obtained through wages, self-employment, and tips and from things
like sale of property. The large majority of people pay their income taxes by having the money
withheld from their paychecks. The proportion of income tax an individual is required to pay will
vary according to earnings. Income tax rates are generally lower for those who make less money.
However, any individual who earns an income, live in the United States and satisfies certain
criteria is needed to file a tax return and also pay any taxes that they owe.

Social Security and Medicare taxes

These types of taxes are usually withheld from your paycheck. Social security benefits are
provided for retired workers and their families, for disabled workers and their families and also for
certain family members of deceased workers. Medicare (healthcare) taxes provides for medical
services (this applies for people aged 65 and above). In the large majority of cases, a will qualify
for Social Security retirement benefits and Medicare benefits after having served a period of 10
years (or 40 quarters) over the course of your life. However, in the case of disability benefits for
you or your family it is likely that you will require less than 10 years of work depending on your
earnings.

Sales Taxes

Sales taxes are more or less state or local taxes and usually added to the buying cost of certain
things. These taxes will be based on the cost of items and help fund for services provided by state
and local government, such as roads, police, and firefighters.

Property taxes

These are also state and local taxes that are charged on your home and land. In most situations,
these property taxes contribute to funding of local public schools and other services in the area
person.

This is a concept summary. It aims to show how different types of taxes are categorized, and to
highlight the strong and weak points of each type.

Government is supported by resources drawn from the economy. In return, government protects
the economy from foreign and domestic enemies, undertakes large-scale infrastructure works of
general benefit, and enforces the rights, obligations and bargains necessary for economic activity
in a civil society. In modern industrial society, a tax either claims a portion of the flow of value
in economic transactions between people, or takes a part of someone’s accumulated stock of
economic value.

Bangladesh Income Tax Rates

Bangladesh personal income tax rates for assessment year 2010 – 2011 is progressive up to 25%.

Bangladesh Income Tax Rates for individuals other than female taxpayers, senior taxpayers
of 65 years and above and retarded taxpayers – Assessment Year 2010 – 2011

First BDT 1,65,000 Nil

Next BDT 2,75,000 10%
Next BDT 3,25,000 15%
Next BDT 3,75,000 20%
Rest Amount 25%

Minimum tax for any individual assessee is Tk. 2,000

Non-resident Individual: 25% (other than non-resident Bangladeshi)
On Dividend income: 20%

Income tax is one of the main sources of revenue in Bangladesh. It is a progressive tax system.
Bangladesh Income tax is imposed on the basis of ability to pay. The more a taxpayer earns the
more tax he should pay. This is the basic principle of charging income tax in Bangladesh. The tax
system aims at ensuring equity and social justice. Tax rates in Bangladesh also differs between
male and female individuals.

Time to submit income tax return: Unless the date is extended, by the 30th day of September next
following the income year.

Consumption tax

A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the
money spent on consumption. Consumption taxes are usually indirect, such as a value added tax.
However it can also be structured as a form of personal taxation, as a sales tax, or as an income
tax that deducts investments and savings. A direct consumption tax may be called an expenditure
tax, a cash-flow tax, or a consumed-income tax, and can be flat or progressive.
Types

Value-added tax (VAT)

This tax applies to the market value added to a product or material at each stage of its manufacture
or distribution. If a retailer buys a shirt for $20 and sells it for $30, this tax would apply to the $10
difference between the two amounts. A simple VAT is regressive in that lower-income consumers
generally consume a higher fraction of their income than others, and the VAT does not apply to
income that is saved/invested. VATs often exclude certain goods, with the intent of creating some
degree of progressivity. It is widely used in countries within the European Union.

Sales tax

This tax typically applies to the sale of goods, and less often, to the sales of services. The tax is
applied at the point of sale. Like VAT, simple sales taxes hit lower-income consumers harder than
others, leading to exemptions for basic items such as food.

Excise tax

This tax is a sales tax that applies to a specific class of goods, typically alcohol, gasoline, or
tourism. The tax rate varies according to the type of good and quantity purchased, and is typically
unaffected by who purchases it.

Personal consumption tax

This tax applies to the difference between an individual’s income and increase/decrease savings.
Like the other consumption taxes, simple personal consumption taxes are regressive. However,
because this tax applies on an individual basis, it can be made as progressive as a progressive
personal income tax. Just as income tax rates increase with personal income, consumption tax rates
increase with personal consumption.
Value Added Tax (VAT)

Value Added Tax (VAT) a percentage tax on the value added of a commodity or service as each
constituent stage of its production and distribution is completed. VAT may be classified in three
ways: (i) on the basis of coverage of stages – throughout the production and distribution stages, or
confined to limited stages – manufacturing plus wholesale, or wholesale plus retail; (ii) on the
basis of the method of calculation – tax credit method, subtraction method, and addition method;
and (iii) on the basis of tax treatment of final-product capital goods such as machinery, equipment,
and supplies – the consumption form, the income form, and the product variety. Thus the three
broad types of VAT are the gross national product (GNP) type, income type and consumption type.
A consumption type VAT is an indirect tax. An income type or a GNP type VAT might be
considered as a direct tax but a commodity tax cannot be considered so. Consumption type VAT
is also considered as an alternative form of ‘sales tax’.

In April 1979, the Taxation Enquiry Commission (TEC) officially took up the issue of introducing
VAT in Bangladesh as an alternate to sales tax. Until 1982, sales tax was being collected under
the Sales Tax Act 1951, which was replaced by the Sales Tax Ordinance 1982 with effect from 1
July 1982. The World Bank played the pioneering role in introduction of VAT in Bangladesh. A
World Bank Mission visited Bangladesh for preparing an agenda for tax reform in Bangladesh in
December 1986. The mission submitted its final report on 15 October 1989. The report
recommended the introduction of a manufacturing-cum-import stage VAT at a single standard rate
within three years. Thereafter, a Bangladesh Tax Mission visited India, Indonesia, the Philippines
and Thailand during 13 November – 04 December 1989. The Mission submitted its report in
January 1990. The government discussed the issues relating to introduction of VAT with all related
private and public agencies including the various leading Chambers of Commerce and Industry
from time to time. The government prepared the Value Added Tax Act 1990 (Draft) in June 1990.

Final version of the Value Added Tax Act was promulgated 31 May 1991 as a Presidential
Ordinance with eight sections (relating to registration under VAT system and the appointment and
powers of VAT authorities). It was made effective from 2 June 1991. The Value Added Tax Bill
1991 was introduced in the Parliament on 1 July 1991 and the Parliament passed it on 9 July 1991.
With the Presidential assent to the bill on the next day it came into effect as The Value Added Tax
Act 1991. The VAT Act 1991 replaced the Business Turnover Tax Ordinance 1982 and the Sales
Tax Ordinance 1982 with effect from 1 July 1991. It imposed VAT @ 15% on importer or supplier
(producer) of taxable goods and provider of taxable services having annual turnover of Tk 1.5
million or more. It imposed Turnover Tax (TT) @ 2% (currently 4%) on supplier of taxable goods
and provider of taxable services having annual turnover of less than Tk 1.5 million (Tk 2 million
at present). The new law imposed VAT at zero-rate on export sales of any goods and services,
brought excise duties on most goods under the VAT net, and imposed Supplementary Duty (SD)
@ 10% to 85% on goods and services which are luxurious and non-essential and are socially
undesirable.

The objectives behind introducing VAT in Bangladesh were to (a) bring transparency in the
taxation system; (b) prohibit cascading taxation at different stages of production; (c) consolidate
the tax administration; (d) activate the overall economy by mobilising more internal resources; and
(e) bring a consistency in the tax-GDP ratio.
VAT introduced in Bangladesh in its initial form was a sort of consumption tax (by allowing
purchase of capital goods as input), which extended its coverage up to the level of import,
production or manufacture and service-rendering but not to export (which is zero-rated), wholesale
or retail level. Since the financial year 1996-97, VAT in Bangladesh has become a broad-based
consumption expenditure tax by covering the wholesale and retail levels. VAT is imposed on the
following goods and services: all goods imported in Bangladesh except those mentioned in the
First Schedule of the VAT Act; all goods supplied except those mentioned in the First Schedule
of the VAT Act; and all services provided in Bangladesh except those mentioned in the Second
Schedule of the VAT Act.

The standard tax rate for VAT has been fixed all along at 15% (for taxable goods and services).
The adoption of truncated value-bases caused multiplicity of practical tax rates, but VAT rate is a
single, flat or uniform one. The rate of turnover tax (TT) is also uniform at 4% (2% up to 11 June
1997). But the rates of supplementary duty (SD) are multiple. At the beginning (FY 1991-92),
there were five different rates which ranged from 10% to 85%. Next rates were eleven in number
and ranged from 5% to 350%. For FY 2000-01, there are 31 different rates that ranged from 2.5%
as on coffee to 350% as on cigarettes.

The computation of actual value-addition requires detailed recording of payments for

goods/services bought, which is not properly done in Bangladesh. To ease the administrative steps
for taxation of services, in specified cases, a ‘truncated value-base’ was fixed with the option of
waiving ‘input tax credit’. Under the VAT system, tax points depend on the stage of production
and distribution. For goods imported by any importer, VAT is to be paid at the time of paying
import duty under the Customs Act 1969.

For goods produced or manufactured or imported, purchased, acquired, or otherwise collected by

any registered persons in the course of business operation or expansion, VAT is to be paid at the
time of one of the following activities whichever occurs first: (a) when the goods are delivered or
supplied; (b) when an invoice relating to the supply of goods is given; (c) when any goods are used
personally or given for use to another person; and (d) when the price is received in part or full. For
services rendered by any registered persons in the course of business operation or expansion, VAT
is to be paid at the time of one of the following activities whichever occurs first: (a) when the
services are rendered; (b) when an invoice relating to the rendering of service is given; and (c)
when the price is received in part or full. For goods or class of goods for which the national board
of revenue has ordered through the official Gazette notification to use stamp or banderole or special
sign or mark having security system of specified value on package or carrier or container of the
goods, VAT is to be considered as paid equivalent to the value of the stamp or banderole or special
sign or mark used.

For services rendered by construction firms, indenting firms, travel agencies, motor garages and
workshops, and dockyards and other services determined by the official Gazette notification, VAT
is to be paid as withholding tax and VAT is collected, deducted and deposited by the receiver of
the services or the persons paying the price or commission as the case may be. For any other goods
and class of goods or services, VAT is to be paid at the time as indicated in the NBR rule.
Taxation remains a poor tool of government revenue collection in Bangladesh. Taxes to GDP
(gross domestic ratio) ratios are usually not high in South Asia. But in case of Bangladesh the
figure is alarmingly low – only a little higher than 9%, while the average for South Asian countries
is 11%, the developing countries more than 15%, the industrialised countries 30%, and high
income countries 24%. The introduction of VAT contributed significantly to raise the tax revenue
collection in Bangladesh. The joint contribution of sales tax and excise duty to in the increase of
total tax was Tk 696.9 million (28.8% of total increase) in 1979-80 and Tk 3.9 billion (44.8% of
total increase) in 1989-90. In absolute volume, the annual increase in revenue from VAT and
excise duty is more than the previous annual increase in revenue from sales tax and excise duty.
However, in relative term, the share of sales tax and excise duty in total tax in the 1980s was almost
similar to the share of VAT and excise duties in that under the VAT regime. The share of VAT as
a per cent of different indicators (internal trade tax, external trade tax, indirect tax, total tax, total
GDP and non-agricultural GDP) has usually an increasing trend and the shares are significant. On
an average, around 75% of total tax come from indirect taxes, and more than a half of the indirect
taxes is collected in the form of VAT. The scope of VAT mainly covers the ‘non-agricultural
sector’ but with a standard tax rate of 15% the share of VAT as a percent of ‘non-agricultural GDP’
is only 3% to 4%.

VAT was introduced in Bangladesh as a consumption tax and allowed the full deduction of
‘machinery’ as an input from the ‘output value’ (sale proceeds of taxable goods and services) to
compute the tax-base (i.e., value added). Although the initial coverage was up to import and
production stages, the VAT-net is now expanded to wholesale and retail stages. Initially, the
number of VAT taxable services were 25 (under 21 Heading numbers), but now the number is
theoretically unlimited, although for practical purposes this number is kept limited to 70 services
under 57 heading numbers for which the scope is defined. Goods other than primary unprocessed
agricultural products and food items listed in the First Schedule of the VAT Act (live animals or
poultry, human or animal hair, parts of animal body or animal products, parts of plant, green or
dried vegetables, fruits, unprocessed spices, food items, oil seeds, natural gums or like products,
wood, uncarded wool or cotton, and raw jute, etc) are subject to VAT. Thus almost the whole
economy falls under the VAT-net and as a consumption tax, VAT is supposed to streamline the
economic activities with corrective measures by applying supplementary duty.
Tax revenue Summary of Bangladesh

Bangladesh’s tax revenue income in the immediately past fiscal year ending in June fell short of
target by around 1.19 percent as the world economic recession constricted imports growth,
chopping off big slice of earnings from customs duties, officials said on Monday.

According to provisional statistics of the country’s National Board of Revenue (NBR), the board
collected 523.71 billion taka ( about 7.48 billion US dollars) in tax revenues in the last 2008- 09
fiscal year (July 2008-June 2009).

Bangladesh’s total revenue collection target in the 2008-09 fiscal year was earlier set at 693.82
billion taka, of which the government set a tax revenue target of 545 billion taka.

Later on in May this year, the tax revenue target was reduced to 530 billion taka following a
sluggish trend in earnings of import duties amid a volatile global economic situation.

Director (Research and Statistics) of the NBR, Sachindra Nath Sarker, said the fall in import duties
was due mainly to decline in customs and supplementary duties, triggered by a big prices erosion
of imported goods in the global market in context of financial tsunami.

The provisional statistics of the NBR, however, showed tax revenue earnings of the country was
10.41 percent higher than the collections in the previous 2007-08 fiscal year (July 2007-June
2008).

The South Asian country’s tax revenue income in the previous 2007-08 fiscal year stood at 474.35
billion taka, with nearly 27 percent growth over that of the 2006-07 fiscal year.

“We missed a large sum of customs and supplementary duties because of price fall of imported
items,” a senior official in the customs department under the NBR said, requesting to be unnamed.
He said the NBR data showed the country’s tax revenue earnings growth steadily decelerated from
19.80 percent in the first quarter of 2008-09 fiscal year to 13.24 percent in the first half and 12.21
percent in the first nine months.

However, of three major revenue wings including income tax, customs and value added tax (VAT),
the official said earnings from the customs department, which accounts for more than 40 percent
of the NBR’s annual tax revenue collections, was 5.19 billion taka less than the revised target of
213.22 billion taka in last 2008- 09 fiscal year.

Apart from this, the provisional data showed earnings from VAT also fell short of target with
around 4.55 billion taka in the last 2008-09 fiscal year, largely because of shortfall of
supplementary duty collection.

The official of customs department said if the sliding trend in tax revenue collections continue, the
government will face problem managing finance for its current 2009-10 fiscal year’s budget.

Bangladesh Parliament last month passed 1.14 trillion taka ( about 16.5 billion US dollars) national
budget for the current 2009-10 fiscal year began from July 1.

The budget set a revenue earning target of around total 794.60 billion taka for current fiscal year.
Of total, the tax revenue collection target for the country’s revenue board has been set at 610 billion
taka. (1 US dollar equals about 70 taka)

Tax Expenditure

In recent years, analysis of tax expenditures has received much attention in the literature of public
policy, particularly in the developing and transition economies. This policy note attempts to
introduce the concept and size of tax expenditures in the context of Bangladesh with special

references to experiences of India and Pakistan. It shows that the amount of tax expenditures in
Bangladesh is 2.52 per cent of GDP in FY05, in which expenditures in the direct taxes and indirect
taxes are 0.28 per cent and 2.24 per cent, respectively. The note identifies that tax expenditure
accounting is necessary to establish an efficient and effective tax system as well as fiscal
accountability and transparency in the country, since tax expenditures are viewed as part of
government expenditures. Thus, a detailed assessment of tax expenditures including an appropriate
definition and a methodology for measuring ‘tax expenditures’ is essential along with restructuring
the existing tax expenditure measures in Bangladesh.

Existing Tax Expenditure Measures in Bangladesh

The tax system of Bangladesh includes several tax expenditure measures under the broad headings
of direct taxes and indirect taxes. These provisions, introduced with the enactment of the tax law,
have been subject to changes from time to time. The major policy objectives behind the tax
expenditure measures in Bangladesh are to accelerate the process of industrialization, to attract
foreign currency through increasing exports and foreign direct investment (FDI) and to ensure
social security and welfare of low and modest income groups. Tax expenditure measures exist in
sectors such as Public Services, Agriculture, Labour and Employment Affairs, Transport and
Communication and Social Security and Welfare, etc.

Tax Expenditure Measures under Direct Taxes

Various tax expenditure measures exist for corporate and personal income taxpayers under the
existing income tax law. These are summarized below.

Corporate Income Tax

Tax holiday facility is allowed to newly set-up industrial undertakings, physical infrastructure
facilities and tourism industry subject to certain specified conditions in order to promote
industrialization and employment generation. Exemptions and deductions are applicable to
incomes from firms in Export Processing Zone (EPZ), 50 per cent of income for export earnings,
power generation companies, computer software businesses, agriculture-related industry, micro
credit for NGOs, local government, welfare activities, etc. In particular, concessionary rate is
allowed at the rate 20 per cent for those who do not enjoy tax holiday or accelerated depreciation,
15 per cent for textile and jute industries and 25 per cent for local authority, etc.
Accelerated depreciation is allowed at the rate 100 per cent for new firms.

Personal Income Tax

Exemptions and deductions are admissible to individual incomes from agriculture-

related activities, income of foreign technicians in EPZs, remuneration of diplomats and
foreign employees of an embassy, income of an indigenous person of Hill Tracts region as
individuals, income from specified savings instruments, etc. In addition, 15 per cent tax rebate is
allowed on investment in provident fund, Deposit Pension Scheme (DPS), insurance, shares,
bonds, etc.

Tax Expenditure Measures in Indirect Taxes

Under the various acts of indirect taxes, exemptions and deductions are given in the area ofcustoms
duty, supplementary duty and Value-Added Tax (VAT).

Customs and Supplementary Duty

Exemptions are granted to local industrial units of a few specific sectors, viz. EPZ
enterprises,power generation companies, poultry and dairy farms, etc. Concessionary rates are
applicable toagro-processing, textile and leather industry, educational institutions, hospitals,
privilegedpersons, etc. Incentives are also given to those sectors, which are complying with the
international and bilateral agreements and conventions.

Value–Added Tax

Goods and services exempted from VAT include food and agricultural products, animal
products,poultry sector, agriculture inputs, basic services for living, social welfare services, culture
relatedservices, finance and financial activities related services, transport services, personal
services, etc.

Tax Rebate for investment

Rate of Tax Rebate:

Amount of allowable investment is either actual investment in a year or up to 25% of total

income or Tk. 10,00,000/- whichever is less. Tax rebate amounts to 10% of allowable
investment.

Types of investment qualified for the tax rebate are:

– Life insurance premium

– Contribution to deferred annuity
– Contribution to Provident Fund to which Provident Fund Act, 1925 applies
– Self contribution and employer’s contribution to Recognized Provident Fund
– Contribution to Super Annuation Fund
– Investment in approved debenture or debenture stock, Stocks or Shares
– Contribution to deposit pension scheme
– Contribution to Benevolent Fund and Group Insurance premium
– Contribution to Zakat Fund (Zakat: Islamic Tax)
– Donation to charitable hospital approved by National Board of Revenue
– Donation to philanthropic or educational institution approved by the Government
– Donation to socioeconomic or cultural development institution established in Bangladesh by Aga
Khan Development Network

– Donation upto five lac to (1) Shishu Swasthya Foundation Hospital Mirpur, Shishu Hospital,
Jessore and Hospital for Sick Children, Satkhira run by Shishu Swasthya Foundation, Dhaka, (2)
Diganta Memorial Cancer Hospital, Dhaka, (3) The ENT and Head-Neck Cancer Foundation of
Bangladesh, Dhaka; and (4) Jatiya Protibandhi Unnayan Foundation, Mirpur, Dhaka;
– Asiatic Society of Bangladesh;
– Muktijudha Jadughar;

Tax Withholding Functions

In Bangladesh withholding taxes are usually termed as Tax deduction and collected at source.
Under this system both private and public limited companies or any other organization specified
by law are legally authorized and bound to withhold taxes at some point of making payment and
deposit the same to the Government Exchequer. The taxpayer receives a certificate from the
withholding authority and gets credits of tax against assessed tax on the basis of such certificate.

Major Areas for Final Settlement of Tax Liability in Bangladesh

Tax deducted at source for the following cases is treated as final discharge of tax liabilities. No
additional tax is charged or refund is allowed in the following cases:

– Supply or contract work

– Band rolls of hand made cigarettes
– Import of goods
– Transfer of properties
– Export of manpower
– Real Estate Business
– Export value of garments
– Local shipping business
– Royalty, technical know-how fee
– Insurance agent commission.
– Auction purchase
– Payment on account of survey by surveyor of a general insurance company
– Clearing & forwarding agency commission.
– Transaction by a member of a Stock Exchange.
– Courier business
– Export cash subsidy

Tax Holiday

Tax holiday is allowed for certain industrial undertaking, tourist industry and physical
infrastructure facility established between 1st July 2008 to 30th June 2011 in fulfillment of
certain conditions.

Who is entitled to a Tax Holiday?

Tax holiday is allowed to industries subject to the relevant rules and procedures set by the National
Board of Revenue (NBR) for the following period according to the location of the establishment.

In Dhaka and chittagong Divisions (excluding 3 hill districts): 5 years. In other divisions (including
3 hill districts of chittagong Division): 7 years.

The period of such tax holiday will be calculated from the month of commencement of commercial
production. The eligibility of tax holiday to be determined by the NBR and the time of the
commencement of commercial production is certified by the respective sponsoring agencies. The
industrial establishment should be registered under the companies Act. 1994.

Tax holiday facility can be availed by industries coming into commercial production within 30
June 2000 A.D.

Tax avoidance

Tax avoidance is the legal utilization of the tax regime to one’s own advantage, to reduce the
amount of tax that is payable by means that are within the law. By contrast, tax evasion is the
general term for efforts not to pay taxes by illegal means. The term tax mitigation is a synonym
for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax
avoidance. Latterly the term has also been used in the tax regulations of some jurisdictions to
distinguish tax avoidance foreseen by the legislators from tax avoidance which exploits loopholes
in the law.

Some of those attempting not to pay tax believe that they have discovered interpretations of the
law that show that they are not subject to being taxed: these individuals and groups are sometimes
called tax protesters. An unsuccessful tax protestor has been attempting openly to evade tax, while
a successful one avoids tax. Tax resistance is the declared refusal to pay a tax for conscientious
reasons (because the resister does not want to support the government or some of its activities).
Tax resisters typically do not take the position that the tax laws are themselves illegal or do not
apply to them (as tax protesters do) and they are more concerned with not paying for particular
government policies that they oppose.

Public opinion on tax avoidance

Tax avoidance may be considered to be the dodging of one’s duties to society, or alternatively the
right of every citizen to structure one’s affairs in a manner allowed by law, to pay no more tax than
what is required. Attitudes vary from approval through neutrality to outright hostility. Attitudes
may vary depending on the steps taken in the avoidance scheme, or the perceived unfairness of the
tax being avoided.

In the judiciary, different judges have taken different attitudes. As a generalization, for example,
judges in the United Kingdom before the 1970s regarded tax avoidance with neutrality; but
nowadays they regard it with increasing hostility.

Taxes and economic growth

The formula for economic development and curing poverty is well known: Security of property
rights, low taxes, reasonably free trade and stable and readily convertible currency — the economic
policy that has been demonstrated to be highly successful in moving countries from third world to
first world

In the past century there has been an enormous improvement in human well being, almost all of it
from economic development, almost none of it from redistribution. The most extreme exercises in
redistribution created gigantic suffering, and resulted in the murder of about a hundred million
people.

The question then is: Are taxes dangerously high in the advanced countries as well? Are taxes so
high that cutting taxes will, in few years, increase the returns to the government? This is derided
as “voodoo economics”, yet it is fairly obvious that ruinous taxation is a major part of why the
third world is third world. Is then taxation also keeping the first world much poorer than it would
otherwise be? For the United States, I defined “high taxes” as the federal government taking more
than 18.1% of GDP, for during the Reagan Revolution, the archetype of “voodoo economics” the
largest portion of GDP taken by the federal government was slightly more than 18%. Alternatively,
I defined “a high taxes period” as any period where the federal government took substantially and
persistently more than 18% of GDP.

I graph the natural log of GDP, rather than the actual GDP, so that you can read the growth rate
directly from the slope of the graph: For example in 1983, first year of the Reagan tax cuts, log of
GDP is 10.052, and in 1989, last year of the Reagan presidency, log of GDP is 10.250, so the log
increased 0.198 in six years, 0.198/6= 0.033, so during those years GDP growth was 3.3% a year.

Average growth during high tax periods was 1.08%, average growth during normal times was
2.45%. Every high tax period was a long period of economic stagnation, malaise, or decline or else
contained a long period of decline. Such events were rare during normal tax periods.

The graph suggests that taxes are well and truly on the wrong side of the Laffer curve — that
increasing taxes will lead to decreased revenue after a fairly short period — at least if federal taxes
seize more than 18.1% of GDP

Of course, this depends on who you tax, which the data I had available do not reveal. I suspect that
if you tax the poor good and hard with heavy taxes on petrol, beer, and cigarettes, like those
wonderfully redistributive welfare states in europe, you can collect a lot more than 18.1% of GDP
without the economy going down the drain, for such taxes will cause the poor to work harder,
while progressive taxes are likely to cause the rich to go underground, or retire to house on a hill
overlooking the Coral Sea, unless, like certain progressive European countries, you have a few
little loopholes here and there so that you can get the political credit for soaking the rich, without
actually soaking them so much as to sink the economy.
Growth for the first three high tax periods was negative – possibly because they were trying to
soak the rich, unlike Clinton, possibly because they did not have the internet boom increasing their
revenues and boosting growth, unlike Clinton, possibly because Clinton “ended welfare as we
know it”, whereas the early high tax periods were great society taxes. We really need statistics
giving a breakdown on who is paying taxes to distinguish between these possibilities. We also
need statistics giving hints as to who is goofing off and going underground. In third world countries
it is largely the poor who go underground, which is consistent with the conjecture that it was
“ending welfare as we know it” that made the difference, but the Reagan experience suggests that
what smacks down the economy is high taxes on the rich, who have the option of fleeing or retiring.