Incidence of Income Taxation in Bangladesh
Incidence of Income Taxation in Bangladesh
Incidence of Income Taxation in Bangladesh
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ABSTRACT: This article reviews the incidence of income taxation in Bangladesh tax
system. The main purpose of the study is to determine how the burden of personal and
corporation income taxes is allocated among taxpayers of different income groups. In
case of personal income taxes it shows that only 13 percent taxpayers paying around
73 percent of tax revenue collected through personal income taxes and interestingly
about 53 percent taxpayers pay only 0.08 percent taxes. In case of corporation income
taxes the study shows similar results. For privately owned unlisted companies only 25
percent of them bears about 84 percent taxes earned through this sector and about 13
percent corporations pay nothing to the exchequer in the form of income taxes.
Among the listed companies only 1.15 percent of them pay about 53.28 percent taxes
and top 40 percent of them pay the entire taxes collected from this sector. The reasons
identified behind such eccentric burden of taxes are, unlimited tax exemptions and tax
holidays, poor tax base, inequality of taxing urban and rural sectors, special privileges
to the public sectors, repeated tax amnesty etc. This study gives some
recommendations, which could act as remedies for a better income tax system in
Bangladesh and would relevant to other developing countries as well.
Key Words: Tax Incidence, tax progressivity, tax base, tax exemptions, tax
holiday, tax amnesty etc.
1. INTRODUCTION
The heavy reliance on indirect taxation has been treated as one of the main obstacles
due to the fact that only a few taxpayers share the burden of taxes. Bangladesh is no
exception which is also trying to reform its tax structure for long time through
structural adjustment and growing demands have been placed on it to suggest towards
a desirable tax system. A huge segment of the population living in acute poverty and
limited number of individual taxpayers and corporations. Thus attaining a broad based
1
The Author is a Tax Official of Bangladesh and currently a doctoral fellow at the Australian National
University and can be contacted at [email protected] . The author is grateful to Prof. Yukinobu
Kitamura of Keio University, Japan for his supervision and to the World Bank for financing the study.
1
and optimal taxation system is a much desirable task for the government. This study
Bangladesh revenue structure has been burdened by taxes from indirect sources for
long time and usually characterized by heavy import and excise duties. To cope with
the challenge due to globalization, government of many such countries has to cut
down such duties and levies. It seems that government might have to collect more
money either through VAT (Value Added Tax) or from direct taxes. In Bangladesh
VAT introduced in 1991 by replacing the sales taxes is still known as the vital reform
in Bangladesh revenue structure. The remaining potential sector is the income taxes
sharing almost all taxes coming through direct sources. In Bangladesh having a
population of about 133 million, the number of registered taxpayers is only 1.25
million2 (which is only 0.94 percent of the total population). Tax base is too narrow
and the tax law is full of exemptions and allowances. Agriculture sector provides
GDP and virtually pays little in the form of income tax. There is always a controversy
whether this sector is extra protected or not and if yes – to continue for how long.
There are many affluent people lying in the category of agricultural income and more
such people avoiding taxes showing their entire income as a means of agriculture.
It is widely known that very few people even among the registered taxpayers pay any
tax in the form of income taxes in Bangladesh. Major share of income taxes come
from the corporate sector and there is always an uneasy feeling having its higher rates.
It has been said that, about 100 foreign investors pay 60 percent of the total revenue to
2
Not all registered taxpayers in Bangladesh pay income taxes due to unlimited exemptions and tax
holidays. Actual taxpayers pay income taxes are only 0.85 million or 0.66 percent of the total
population ( Revenue reforms commission, 2004)
2
the exchequer in Bangladesh. Taxes imposed are usually in progressive rates and
income tax for government employees is deemed paid by the employer that is by the
government, considering the fact that they are underpaid. However, in case of private
sectors, such payments are considered income, which creates additional tax burden for
the employee of the private firms. This is discriminatory and obviously encourages
employees of private firms to avoid or evade taxes. So, in reality very few people
share the burden of income taxes in Bangladesh and thus it is a real problem for the
government to distribute the tax incidence in a fair manner. Thus such a study is very
important for designing the tax structure of Bangladesh in the light of the overall
A variety of information of diverse nature and sources are required for the study. The
study considers a time series tax data on both personal and corporation income taxes
from FY1991-FY20013 for calculating the revenue trend and marginal and average
tax rates over the years and a cross section data of last available fiscal year 1999/2000
to determine the sector wise tax burden. First of all, taxpayer’s information of
different category and revenue yield in each sector is needed. National Board of
Revenue (NBR) annual reports are considered as main indirect source in that aspect.
Year-wise revenue collection and statistics is important to forecast the revenue trend,
also based on such reports. To analyze the tax incidence in each major fields of
the marginal and average tax rates in different income year. Sector-wise tax collection
3
Fiscal Year (FY) : July to June
3
data has been collated to analyze the revenue trend and their respective contribution
incidence analysis is presented in the second section to briefly outline the method
used in incidence analysis. Section three tries to review the overall revenue system
and tax structure in Bangladesh. Sectoral tax incidences are calculated in section four.
Finally section five provides a brief summary and concluding remarks of the study.
tax incidence is, broadly defined, the study of the effects of tax policies on the
who bears the economic burden of tax. Broadly put, it is the positive analysis of the
impact of taxes on the distribution of welfare within a society (Fullerton and Metcalf,
2002). It begins with the very basic insight that the person who has the legal
obligation to make a tax payment may not be the person whose welfare is reduced by
the presence of the tax. The statutory incidence of tax refers to the distribution of tax
payments based on the legal obligation to remit taxes to the government. It indicates
who is legally responsible for paying the tax. Economists, quite rightly, focus on the
arising from tax. The economic incidence of a tax is the change in the distribution of
private real income produced by a tax. It differs from the statutory incidence because
of changes in behavior and consequent changes in equilibrium prices. This study has
tried to estimate the tax incidence by calculating the degree of progressivity of taxes
4
borne by the different income groups represented as registered taxpayers under
The average and marginal tax rates for different income groups show the degree of
progressiveness of any tax system. Many reasonable alternatives have been proposed
to find out the ratios. Formby, Smith and Skye’s (1986) two methods are used here for
the calculation of the vital ratios for Bangladesh tax structure. The first method says
that the greater the increase in average tax rates as income increases, the more
progressive the system. Algebraically, let T0 and T1 be the tax liability of income
levels I0 and I1, respectively (assumption, I1 is greater than I0). The measurement of
progressiveness, V1, is
Once the analyst has found the economic incidence of the tax as embodied in T1 and
T0, the tax system with the higher value of v1 is said to be more progressive. The
second possibility is to say that one tax system is more progressive than another if its
elasticity of tax revenues with respect to income (i.e., the percentage change in tax
National Board of Revenue (NBR) is the central authority for tax administration in
Bangladesh and collects almost 78 percent of total revenue for the country (NBR
annual report, 2000). Table 1 show that the total internal resource generation due to
5
revenue earnings has been accounted for less than 10 percent of the gross domestic
more than eighty percent towards the total revenue earning of the economy.
Total taxes in Bangladesh are divided into direct and indirect taxes. Direct taxes in
income tax) and taxes on property (wealth tax, gift tax, estate duty, capital gains tax,
urban property tax, house rent, land revenue, registration and non-judicial stamp).
Table 2 shows that the direct taxes in general accounted for less than a fifth of the
total tax revenue of the country in the recent years and the rest is accounted for by
indirect taxes.
6
Table 2: Periodic Averages of Direct and Indirect Taxes in Bangladesh
From (1991/92- 2000/01) and (1975/76-1984/85)
1975/76 to 1980/81 to
1979/803 1984/854
1. Direct Taxes 18.0 19.7
Income Taxes 12.6 13.7
Other direct taxes 5.4 6.0
2. Indirect Taxes 82.0 80.3
Taxes on foreign trade 55.8 56.0
i) Import Duty 37.4 38.9
ii) Export Duty 2.2 1.0
iii) Sales (import) Taxes 15.9 15.5
iv) Other Customs Taxes 0.3 0.6
Taxes on domestic goods 26.2 24.3
and services
i) Taxes on domestic goods 24.2 23.5
ia) Excise Duties 22.2 23.2
ib) Sales(domestic)tax 2.0 0.3
ii) Tax on domestic services 2.0 0.8
Note: 1 and 2 after introduction of VAT; 3 and 4 before introduction of VAT
Source: National Board of Revenue (NBR), Bangladesh Bank (BB) & Ghafur
and Chowdhury (1987) and Chowdhury (1994)
(Note: Periodic data compiled by author for FY 1991/92 – FY 2000/01)
The first half of the Table 2 shows that the share of taxes on domestic goods and
services hovered around a quarter of total tax revenue. Excise taxes declined very
sharply as taken over by VAT since early nineties. Import duty has been declined
throughout the last decade though still maintaining major share of taxes on foreign
7
trade and more than 30 percent of the total tax revenue. VAT at import stage earning
an average of 20 percent tax revenue however the total revenue from VAT is
increasing steadily which seems the only positive sign for the country. The share of
income taxes contributes to the entire direct taxes. The collection from income taxes
is increasing for last few years but still insignificant compared to the total tax revenue.
The later half of the Table 2 is adopted from the study of Ghafur and Chowdhury
(1987) and Chowdhury (1994). The scenario is more alike with nineties in sharing
indirect taxes for the tax revenue. However share of direct taxes has averaged a little
improvement but not attained expected consistency as needed. Thus to combat with
seems now to overhaul the tax structure and to concentrate more on widening the tax
50
40
30
20
10
0
1999/2000
2000-01
1991/92
1992/93
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
Figure 1 depicts a pictorial sketch analyzing a time series data for major taxes in
Bangladesh. It shows that income tax first started increasing in early nineties but
sharply declined in the middle and still trying to get its way back. A major reform of
8
tax administration in the history of Bangladesh happened that time and a democratic
government took over the paddle of the economy after a long military rule. No study
has been done to measure the effect of democratic environment on the revenue
administration and governance for Bangladesh; however it could be inferred that the
sudden increase was due to the result of a transition towards good governance and
Bangladesh shows that indirect taxes contribute the lion’s share in the overall revenue
earnings and in fact, it accounts for more than sixty percent of the total revenue
receipts. In other words, indirect taxes are still the primary source of generating
In the interest of industrialization and investment, tax holiday has been continuing in
the tax regime of Bangladesh since her liberation in 1971. There are forceful
arguments for and against continuing this facility. At present more than 2000
industries are enjoying tax holiday. The existing tax law permits, extension unit of an
industry to be entitled to tax holiday. Such facilities of granting tax holiday have been
vehicle for perpetual tax holiday. As observed, the present income tax act is full of
rebates and exemptions (Hussain, 1999). It is now needed to minimize and to come
straight to a threshold of income, which is taxable. The present scheme of granting tax
holiday has not been a very good experience. In FY 1999-2000, total number of tax
holiday cases were 1531 and the estimated loss of revenue was about 250 crore taka
(1 crore is 10 million) that was estimated as about 9.6 percent of total income-tax
earning of that year. The benefits of the tax holiday are being enjoyed mainly by the
garment industries. Their growth has enhanced due to external factors. Even if the
9
incentive of tax holiday were not given, the garment industry would have grown up
and the state would have earned quite a substantial amount of revenue from the
industry. Thus the revenue foregone does not appear to be fiscally efficient (Waresi,
1998). However this has not been able to foster industrial growth in different regions
of the country. Such a perpetuating provision for tax holiday creates distortion in
taxation mechanism and against the norms of equity and neutrality. It is thus
important to restrict such unbound opportunities for the sake of better future of the
country. Under the present arrangement any income accruing from poultry, fishery,
livestock etc. is exempted from income taxes until June 30, 2005. This provision is
being abused indiscriminately. A lot of black money is being laundered into the
market through this mechanism. One potential remedy should be to allow an initial
support to this sector then bringing back them under the purview of taxation.
Taxpayers in Bangladesh can be categorized into three main groups. Table 3 shows
the scenario in detail. The elite group consists of corporate taxpayers those are about
3.02 percent of the total taxpayers. The next group consists of wage earners or
salaried taxpayers and shares about 18.81 percent. The largest and the last group
consists taxpayers of remaining all others and mainly those who have income from
10
4.2 Shares of Income Taxes
Corporate sector though has a poor number of taxpayers paying almost two third of
of 65.48 percent of total taxes from direct sources. Again about 60 percent of the
Bangladesh. Figure 2 shows the continuing trend of income tax collection from the
80
70
60
% of Taxes
50
40
30
20
10
0
ge
1
0
/9
/9
/9
/9
/9
/9
/9
/9
/9
/0
ra
98
99
90
91
92
93
94
95
96
97
ve
19
19
19
19
19
19
19
19
19
19
The nature and extent of tax incidence due to personal and corporation income taxes
are different. In case of personal income taxes, the burden is unevenly distributed
among the registered taxpayers. In reality a major portion of taxes is paid by a small
group of people with higher marginal rates. A number of registered taxpayers always
remain in lower income groups for either due to mainly more available tax incentives
or tax exemptions and share a little burden of taxes often at lower marginal rates. In
case of Bangladesh, such taxpayers are small and medium traders and manufacturers.
A lot of investment remains untaxed due to tax amnesty is a problem too for
11
Bangladesh. Substantial amount of taxpayers having business income remain in losses
those are subject to set off for several years also remain outside actual tax net. In that
sense, the wage earners seems rightly taxed as such taxes are withheld by employer
It is widely proved that to expand and clean the tax base, it is important to reduce the
tax exemptions as much as possible. It makes a group of taxpayers always better off
while the burden of tax usually shifts to someone else. As stated the question arises
whether the agriculture sector in Bangladesh will remain untaxed or not. Simply, in a
country having its sixty percent population engaged in this sector, if kept untaxed for
eternity will be undoubtedly impede broadening of the much desired tax base. Since
the land distribution is widely unequal, one way might be to bring the top landowners
under the tax net with major tax exemptions under some presumptive tax rates. Other
way could be to reconsider their income as per their statement or estimating their
income based on landownership and market rates. Table 4 shows the result of an
classification.
As of FY 1999-2000
Income Number of % of total Collection of Payment of
Classification Individual taxpayers in Tax Revenue Taxes by
(in Taka) Taxpayers each category (Million each group
Taka) in %
0-75,000 371,172 53.42 4.10 0.08
75,001-125,000 233,910 33.67 1,403.30 27.31
125,001-250,000 60,463 8.71 1,606.60 31.27
Above 250,000 29,177 4.20 2,124.60 41.34
Total 694,722 100.00 5,138.60 100.00
Source: NBR Annual Report 1999-2000
It shows that about 73 percent of personal income taxes shared by only 13 percent
taxpayers. Interestingly, about 46.58 percent taxpayers pay almost 99.92 percent of
12
taxes. It depicts the peculiarity of Bangladesh tax structure where about 53.42 percent
of registered taxpayers share very insignificant (only 0.08 percent) tax liability.
This study considers the tax rates and tax liability for personal income taxes in
Bangladesh from 1992 to 2002. Tax liability for different income slabs are calculated
with respective average and marginal tax rates in each year. For the simplicity and
homogeneity of the analysis taxpayers are kept within six broad categories of income
financial years tax rates and statutes were similar hence shows same tax liabilities and
effective tax rates. Average tax rates show the actual trend of progressiveness of each
year and also represent as the effective tax rates for respective income slabs. Marginal
tax rates on the other hand are calculated with a comparison of tax-exempted limit for
the respective financial years. It shows the real increase of tax burden for a unit of
very much influences the tax reforms and fiscal policies. The analyses cover tax
parties in Bangladesh show rather slow reforms and found very insignificant changes
The following table will show the results of the analysis considering the tax measures
taken by revenue department and came through the finance acts from FY 1992 to FY
2002.
13
Table 5: Incidences of Personal Income Tax in Bangladesh Tax System (1992-
2002)
Year Tax Income (slabs) Statutory Minimum Average Marginal Tax Liability
Exemption (Figures denotes Tax Alternative Tax Rate (%) Tax Rate (%) for
Limit Total Income) Tk. Rates Tax Payable For 100,200, For 100,200, Income
(Taka) (Taka) 300,400,500, 300,400,500, 1,000,000
1,000(, 000) 1,000(,000) (Taka)
Tk Income Tk Income
On first 40,000 0 11.00 18.33
40,000 On Next 20,000 15 15.50 20.00
1992 On Next 150,000 20 No such 18.50 24.50 230,500
(5)* On Next 300,000 25 Rule 20.13 25.00
{510,000}♣ On Balance Income 30 21.10 25.00 NA
23.05 25.00
7.50 15.00
50,000 On first 50,000 0 13.75 20.00 225,000
1993 On Next 50,000 15 No such 16.67 22.50
(4) On Next 150,000 20 Rule 18.75 25.00 ↓
{250,000} On Balance Income 25 20.00 25.00 (2.39%)♠
22.50 25.00
6.75 15.00
55,000 On first 55,000 0 12.63 18.50 220,750
1994 On Next 75,000 15 No such 15.25 20.50
& (4) On Next 160,000 20 Rule 17.69 25.00 ↓
1995 {290,000} On Balance Income 25 19.15 25.00 (1.89 %)
22.08 25.00
6.00 15.00
60,000 On first 60,000 0 12.13 18.25 220,750
1996 On Next 75,000 15 No such 14.83 20.25
(4) On Next 160,000 20 Rule 17.38 25.00 ≡
{510,000} On Balance Income 25 18.90 25.00
21.95 25.00
On first 60,000 0 4.00 10.00
60,000 On Next 40,000 10 10.75 17.50 216,500
1997 On Next 50,000 15 13.83 20.00
& (5) On Next 150,000 20 1,000 16.63 25.00 ↓
1998 {300,000} On Balance Income 25 18.30 25.00 (1.93%)
21.65 25.00
2.50 10.00
75,000 On first 75,000 0 9.25 16.00 215,000
1999 On Next 50,000 10 1,000 12.17 18.00
(4) On Next 125,000 18 16.25 28.50 ↓
{250,000} On Balance Income 25 18.00 25.00 (0.69%)
21.50 25.00
0 0
2000 100,000 On first 100,000 0 7.00 14.00 207,000
& On Next 50,000 10 1,000 10.67 18.00
2001 (4) On Next 150,000 18 14.25 25.00 ↓
{300,000} On Balance Income 25 16.40 25.00 (3.72%)
20.70 25.00
On first 75,000 0 2.50 10.00
75,000 On next 150,000 10 6.25 10.00 181,250
2002 On next 150,000 15 1,200 8.75 13.75
(5) On next 250,000 20 10.63 16.25 ↓
{625,000} On Balance Income 25 12.50 20.00 (12.44%)
18.13 23.75
Note: * The Figures within Parenthesis ( ) shows the number of tiers of Income Tax Structure for
Individual Income, ♣ within Parenthesis {}shows the highest income slab, ♠ shows the decrease ( ↓ )
or increase ( ↑ ) with preceding year, ≡ no change; FY=Financial Year (July - June) and Assessment
Year is Next to Income Year, NA = Not Available
Source: NBR Annual Reports (Note: Author’s compilation of official data)
The analysis depicts that the marginal rate of taxes increases sharply at progressive
rate for the lower to middle income groups and for the top income earners it become
14
flat at proportionate rate although average rate of taxes is always in progress. It
implies those with higher incomes not only should pay more but should pay a larger
fraction of their income in taxes (Rosen, 1995). Figure 3 shows the periodic average
of both the vital ratios for different income groups for FY 1992 – FY 2002.
30
25
(Tax Rate %)
20
15
10
5
0
1 2 3 4 5 6
Income Group
ART(Pavg) MRT(Pavg)
Note: ART (Pavg) = Average Rate of Tax (Periodic Average), MRT (Pavg)= Marginal Rate of
Tax (Periodic Average); Income Groups 1,2,3,4,5 and 6 for total income 100,200,300,400,500
and 1,000(,000)Tk (Note: Official Data Compiled by Author)
Source: The Income Tax Manual, Part-1, pp 266-294
There remains a controversy, where the corporation tax rate exceeds the highest
personal income tax rates by a substantial amount. That usually happens in many
countries including in Bangladesh. This study shows that this is almost ten percent
higher in case of corporation income for the last ten years. One of the main reasons
without affecting the lower income groups. Controversy also remains who actually
pays the corporation income tax - its incidence; as we shall see; many economists
believe that the tax is actually borne largely by consumers and workers, not by the
owners of the corporation. Indeed, one of the reasons why the tax remained so
controversial is this widespread debate about who bears the tax. In case of
15
Bangladesh, this study has found a steady effort by the revenue authority to soften the
tax burden for this sector however that does not meet with the expectation.
Unlike personal income taxes, corporate incomes are taxed under flat rates for
different types of corporations. This study tries to summarize the tax rates from FY
1999 to FY 2002. The existing trend shows that the rates are declining very slowly
and almost stagnated during FY1997- FY2001. Table 6 shows the trend of corporate
tax rates for the three groups over the years. Corporations are categorized into three
groups. The first and major group consists of publicly traded companies or companies
listed to the stock markets. Considering its capital inflows and impact on shareholders
16
The second group consists of other non-listed corporations and liable to pay tax at the
rate of 35 percent. Banks, insurance company and financial institutions are included
into third category and usually pays higher tax rate of 40 percent. Listed companies
usually enjoy some extra privileges and in case of Bangladesh such companies are
paying dividend to the shareholders so regularly rather retain their earning for tax
purposes. As a result, not only the shareholders are deprived, the general investors are
also discouraged from investing in capital market. It seems government might has to
use some tax instruments to cope with such problem. It is really necessary to reduce
the corporate tax rates to level for improved tax compliance and also to promote
investment and industrialization. The challenge is thus now to obtain an optimal rate
of taxes for the corporate sector that might not be hindering the countries economic
growth.
Incidence of corporation taxes shows the similar nature as the distribution of personal
higher than other sectors in the direct tax revenue. In FY 1999-2000 the ratios were
62.77 percent and 37.23 percent respectively. Again the burden of corporation taxes is
shared among the different sub-sectors. Table 7 shows the tax burden shared by
different groups of privately limited companies (including both industrial and non-
17
Table 7: Types of Taxpayers on the basis of Corporate Income Taxes
(For Private Limited Companies)
(as of FY 1999-2000)
Cate Income Income Tax Cases for Taxpayer Tax Payment
gory Classification Corporations (Pvt. Ltd only) in each Revenue of Taxes
(in Taka) Industrial Non- Total category (Million by each
Company Industrial % Taka) group in
Company %
1 Loss Cases 1,009 1,366 2,375 13.06 0.00 0.00
2 1 – 100,000 3,090 3,929 7,019 38.59 125.90 3.28
3 100,001 – 854 1,483 2,337 12.85 179.70 4.68
250,000
4 250,001 – 864 987 1,851 10.18 319.30 8.32
500,000
5 500,001 – 744 977 1,721 9.46 448.90 11.71
1000,000
6 Above 1,560 1,326 2,886 15.86 2762.20 72.01
1,000,000
Total 8,121 10,068 18,189 100.00 3836.00 100.00
Source: NBR Annual Reports, 1999-2000
The analysis depicts that in case of Bangladesh about 15.86 percent of taxpayers
under privately owned companies are paying the major share of 72.01 percent taxes.
The top 25 percent of them pays almost 84 percent however about 52 percent
taxpayers paying only 3.25 percent. Interestingly it shows that about 13 percent
taxpayers paying no taxes for the government and showing negative income and
revealed as loss cases. About 60 percent of such losses incurring companies are non-
industrial. This seems really a major concern for the government that how those
corporations can be brought into the ambit of taxation. This study has tried to find out
the causes and loopholes to do away with the prevailing scenario. It shows that such
corporations those are in transition enjoying some extra protection in the form of tax
incentives and exemptions repeatedly that make them better off not to pay any single
including the standard deductions followed by reduced tax rates might be a potential
option for the government (Slemrod and Bakija, 1998). Table 8 shows similar results
18
regarding tax payment scenario by listed companies in Bangladesh for FY 1999/2000.
The analysis shows that about 1.15 percent corporations paying about 53.28 percent
taxes. About 60 percent corporations paying only 3.44 percent and thus rest 40
percent corporations are heavily burdened to pay the remaining 96.56 percent taxes.
Attaining an optimal income tax system is a difficult and unenviable task, but
nevertheless critical for revenue generation required for accelerating growth and to
improve the quality of life of the citizens. A long-term sustainable solution to enhance
transparency, promote growth, improve tax compliance and thus to increase tax to
Bangladesh’s direct taxes have been heavily skewed against salary-earners and
corporate sector. Small business, services and farm incomes manage to slip through
19
the tax net effortlessly. This study unveils the present scenario of tax incidence among
Bangladesh tax system. The findings and policy recommendations presented here
could be important to carry on future tax reforms and to make Bangladesh tax
In case of personal income taxes this study has found a number of problems in
This study has analyzed the tax liability and degree of progressiveness of different
levels of income for personal income taxes since FY 1992 – FY 2002. It seems that
both the rates are decreasing over the years for the lower and middle-income earners
but remain static for the higher income groups. The results of periodic average of the
two indicators also resemble the same. The sudden shifting of income exemption limit
for FY 2000 and FY 2001 were very unusual that entirely escaped the lower income
people that might lead them to be out of the purview of taxation. Both the rates found
zero at the initial level of income, which will be thought to be far above the average
tax exempted level even in neighboring south Asian countries. The effect in the
context of Bangladesh is twofold. First, it will obviously work against broadening the
much-desired income tax net. Second, it might lead to shift the tax liability only to a
FY 1999 it seems there were always a common effort to reduce the average tax rates
for especially the lower income people but for the middle and high-income earners it
affected too slowly. However for marginal rate of taxes it remains very proportional
for the middle and high-income earners. An effort has only been made in FY 2002 to
20
reconsider the tax-exempted limit as earlier that might help the government to keep
those taxpayers within the ambit of taxation. It is thus recommended to soften the tax
burden among all the taxpayers in such a manner that might reduce the average tax
The tax-to-GDP ratio in Bangladesh is the lowest among the developing countries. An
accelerated economic development. The low per capita income and the existing
fact the present income-tax base is one of the lowest even among the developing
countries. In terms of population only 0.54 percent of the population were within the
tax net in 1999 and the ratio was only 0.25 percent in 1977 (Hussain, 1999; Taxation
Inquiry Commission Report, 1979). In the year 2002 the ratio has only raised into
0.94 percent (Budget Speech, 2002). It denotes how slowly the tax net is widening.
played pivotal role in the process. Use of modern computer technology in tax system
and taxpayer services seems very important in endeavoring better income tax
administration. As stated earlier, the tax base is admittedly very low measured in
responsible for the low base, there is also a legal and conceptual limitation of the term
‘income’ which contributes to the diminution of the tax base (Taxation Enquiry
Commission Report 1979, p. 79). Survey of potential taxpayers is one of the most
effective tools in the developing countries to expand the tax base which could be
relevant for countries like Bangladesh (Sarker and Kitamura, 2002). To be successful
21
in such task a coordinated action plan is needed including different sectors of
There is a common belief that the tax structure in Bangladesh is biased against the
poorer class, especially in the rural areas. On the other hand, there is also the view
often expressed by a section of the community, particularly in the urban sector, that
the present tax structure weighs heavily against the business and entrepreneur class. It
is due to the fact that the effective tax rate is higher in the urban sector than in the
rural sector because of the difference in the nature of tax and the intensity at which
such tax is imposed on the two sectors, and the structure of consumption and income
between urban and rural sectors. The commission’s report presented the relative tax
burden of the two sectors from direct taxes. The average burden of direct taxes on
urban sector was 0.31 percent as against 0.14 percent in the rural sector. It shows that
the effective tax rate in the urban sector was 2.21 times higher than that of the rural
sector in 1979. Over the years the situation remains the same and in fact still the
extreme majority of taxpayers are urban people. This happens because the urban
sector is more monetized and the government has more control over the urban sector.
Such an inequality should be resolved and taken into account in future tax reforms.
employer that is government. However, if a private employer pays income tax for its
employees, such payments are considered income, which creates additional tax
burden for the employee of the private firm. This seems discriminatory, that
create social inequality and distortion in the tax system of the country with negative
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impact on her tax-GDP ratio and hindering the expansion of tax base as well. Since
governments of the developing countries solely run the development activities, the
bureaucrats hold extra power that enhance abuse of power and lead them to
corruption. The recent corruption index published by the UNDP (2002) resembles the
same for Bangladesh. When such public servants are kept outside the purview of
taxation it works as some sort of incentive for them to become corrupted. The
problem obviously lies unresolved due to the existing poor salary structure of the
government employees that usually not frequently adjusted with the current higher
inflation rate. Improving existing salary structure as a means to protect corruption has
been adopted by many other developing countries as China and India (The Economist,
May 2002). Government of Bangladesh might have to coincide with the standard as to
expect good governance and transparency among civil servants. In that case
Exemptions, deductions, and allowances play an important role in the tax system in
providing incentives for saving and capital formation in the private sector. They also
meet other socio-economic needs of the community. Nevertheless, they erode the tax
base, which often necessitates the application of high marginal rates of tax. This in
turn dampens the spirit of work and enterprise among the people, and also encourages
evasion of tax and thereby undermines public morality. In view of this, the study
recommends a broad-based tax system with lower rate schedule but having only fewer
exemptions and deductions, rather than a system having a narrow base with steep
marginal rates.
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Tax Amnesty
Tax amnesties usually raise funds that revenue collectors would otherwise have found
‘untaxed income’ in Bangladesh (Budget Speech, 2002). Thus one of the goals of the
sectors. In the context of Bangladesh repeated opportunities have been provided for
tax amnesty on ‘untaxed income’ but failed to generate desired response from the
public due to absence of proper direction of tax policy. The recent finance act again
until June 2005. It might have some positive effect by enhancing private investment
and through resolving unemployment to little extent. But such practice when goes
regulation. Therefore, it seems to make sense that the more the taxes and regulation,
other things being equal, the larger the underground economy is likely to be (Brooks,
2001). Lying with the principle government might be so cautious not to provide such
scope for longer time rather should simplifying laws and regulations as to do away
Agriculture is still the largest sector in most developing countries. Thus taxation of
the agricultural sector has historically served as an important policy instrument in the
process of development for many countries .The incentive and distributional use of
efficient use of the land, accomplish changes in the land tenure, promote new
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from agriculture to non-agriculture employment (Bird, 1974). Agricultural taxation is
thus the chosen instrument charged with the vital task of transferring surplus food,
labor and capital to the non-agriculture sector, as well as with reallocating resources
within agriculture to increase the transferable surplus. Taxes on agriculture are also
needed to restrain a rise in rural food consumption which would increase urban food
prices and hence the rate of inflation. The current tax burden on agricultural income in
Bangladesh has been estimated as 0.25 percent (Taxation Inquiry Commission, 1979).
However over time the situation remains the same. Though the majority of the rural
farmers who can and, on equity ground, should pay taxes. It is also found that the
effective rate of taxes is more progressive in the urban sector than in the rural sector
because of the character of the dominant tax in each sector – a proportional land tax in
agriculture and a progressive income tax in the urban sector. It seems the dominance
of land tax in the agricultural sector and income tax in the urban sector needs to be
overcome as quickly as possible so that the tax burden is equitably shared by the rural
and urban sectors. This study reveals that agriculture should be taxed on the basis of
potential income preferably as a kind of presumptive tax. The recent taxation reform
commission has recommended the same for the context of India (Kelkar Tax
the Japanese tax system. This follows a tax filing standard for the farmers designed to
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Where, Taxable Income = (Gross Revenue – Necessary expenses)
In determining the standard, taxes could be based on both land area and/or revenue
earned through agriculture. There might have some problem in its implementation
however if such revenue could be handed back to the district level or local
It is always necessary to reduce the corporate tax rate to a tolerable level for improved
tax compliance and also to promote investment and industrialization. The average
effective corporate tax rate in Bangladesh is still so high. The rate was about 40
percent in 1992 and reduced to percent in 1995 and continued until FY 2001.
Recently in FY 2000, corporate tax rate for listed companies has been declined to 30
percent, for non-listed companies’ percent and for the banks and financial institutions
the rate is unchanged at 40 percent. Since corporations pay taxes in flat rates no
question arises due to its degree of progressiveness. Rather it urges the distribution of
tax burden among different corporate taxpayers or types of corporations. The analysis
in chapter five shows detail scenario of the above. It depicts that in case of private
limited companies, only 25 percent of them paying about 84 percent taxes from this
sector, 52 percent of them paying only 3.25 percent and interestingly about 13 percent
of them paying nothing in the form of taxes. The analysis shows that about 60 percent
The results obtained resemble more or less same scenario for the listed companies
who are actually the main sector of corporate taxpayers. It shows that only 1.15
percent of corporations (shared by only 0.82 percent taxpayers) paying about 53.28
percent taxes in this sector and about 54.70 percent corporations (shared by 59.26
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percent taxpayers) paying very insignificant amount of taxes (only 2.46 percent).
Unlimited tax exemptions and incentives are vital reasons for such eccentric
way by which corporations showing their low level of income. Since majority of the
challenge for the government to reduce the existing level of corporate tax rate further.
Cleaning the tax base by reducing the tax exemptions might be important policy
In the interest of industrialization and investment, tax holiday has been continuing in
the tax regime of Bangladesh since her liberation. The number of industries enjoying
tax holidays is above two thousand and the existing provision gives incentives for the
said industries a perpetual tax holiday for the extension unit of an industrial
undertaking. It is said that the current facility of granting tax holiday to extension unit
has been grossly abused. In many cases such tax holiday facility was availed for an
artificially created extension unit without really setting up a new unit, by merely
showing transfer of machineries of the existing unit to the said artificial unit. In some
extension units under tax holiday, where they divert their income of the taxable unit
vehicle for perpetual tax holiday. Since entire withdrawal of tax holiday and
incentives for such new and extended units might be difficult for the government in
the interest of rapid industrialization, their might have trade off in taxing such
27
CONCLUDING REMARKS
This article has tried to analyze the existing situation of tax incidence of income
income taxation in Bangladesh is very poor. There is rampant evasion and allegation
of corruption is widespread. We should understand the fact that any tax reform must
not feel they are sitting ducks for the exchequer to rip them off. Thus the government
must be very cautious in taxing people so that the burden of taxes could be justified.
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