Recommendations for NBR, Bangladesh
The major reform of tax administration occurred in the 1990s, in a democratic regime following military rule in the country. However, there is no study to measure the effect of democratic environment on the revenue administration and governance. Indirect taxes are still the primary source of government income and contribute the lion’s share of total tax receipts in Bangladesh. The administration of direct taxes is outdated and based on territorial and geographical administrative units.
As long as withholding taxes at sources has no central database, there is no way for the tax administration to follow up on additional tax payments and also administer the withholding agencies. The combined effect of all these deficiencies is the very low tax efficiency and the very low direct tax to GDP ratio in Bangladesh. The main recommendations are:
For Formal Businesses
The first and most important recommendation would be to improve communications with taxpayers. Businesses want a clearer picture of their legal obligations and the expected procedures, and straightforward answers to their tax-accounting questions. NBR has already undertaken this initiative by holding tax fairs which also allows businesses to obtain TIN on the same day. However, more rigorous steps should be undertaken to disseminate information about all tax procedures among taxpayers and information on their rights and obligations. This can be done through radio/TV (for brief messages about general obligations) as well as simple leaflets (for more detailed information about procedures) and regular seminars to answer questions from business taxpayers. These mass scale campaigns could be done in partnership with mobile communications service providers.
The next most important recommendation would be capacity development and sufficient manpower. Some NBR officials may need further training in tax accounting as it applies to business. In addition, small businesses currently in the fixed regime would surely benefit from guidance in basic bookkeeping.
In addition, NBR could also benefit from the following:
Findings indicated unhappiness amongst the businesses about the differences in tax rates. NBR may review the discriminatory tax rates and harmonize the same with a view to encouraging businesses, especially private LLCs, to report actual profits in the annual return, which in turn is expected to help increase revenue from business income tax. Tax harmonization is likely to encourage businesses, especially the proprietorship firms to register themselves with Registrar of Joint Stock Companies and Firms (RJSC&F).
Work closely with business associations and SME foundation to better understand how SMEs operate and how to best develop a tax regime more suited for them. For small and medium enterprises, perhaps if a presumption of a standard deduction of expenses is used instead of calculating the actual amount of business expenses, bookkeeping may be made easier.
Develop a methodology for “risk-based inspection” aimed at detecting businesses that are under-declaring large amounts of income (or turnover) based on objective indicators (e.g., sector, number of employees, floor-space, electricity usage, rent, assets, etc.) as well as more standard “risk-based audit” for medium and large businesses
Provide training targeted to medium businesses especially in terms of awareness of the functioning of the VAT because it is unusual that companies that are eligible for VAT refunds do not submit their claim. In addition, NBR should try to expedite VAT refunds for businesses that have a track record of good compliance.
Another outreach mechanism to facilitate small business compliance could also be the creation of special service centers for MSMEs. A small centre could be integrated into the small taxpayer offices or created as separate centers.
For Informal Businesses
The top priority for NBR for the informal sector should be outreach and education. Given limited resources, it may be most effective to build trust among small businesses before attempting more strenuous “enforcement” among informal micro- businesses.
The NBR in collaboration with the local government office such as municipal/city corporations as well as Union Parishads should embark on an information and outreach campaign to inform micro and small businesses not registered by the NBR but registered at the municipal level of their legal obligations with regard to taxation, how to register and how to comply.
NBR in collaboration with the local government offices should also inform micro-enterprises of the advantages of tax compliance, including improved reputation of a business, enhanced business opportunities, a broader (and wealthier) base of customers, and freedom from legal fears.