Tax GDP ratio is a crucial determinant in assessing the vibrancy of the government to meet the various socio-economic needs of a country to ensure both growth and equity in the distribution of income. The countries with the highest tax GDP ratio are Norway, Sweden and Denmark [over 50 per cent] and many countries in Europe belong in the range of 25-40 per cent, the average is above 30 per cent. However, oil exporting countries such as Saudi Arabia, Qatar with a low tax GDP ratio can afford to have decent life with programmes financed by the bonanza of oil revenue. Simply, stated tax GDP ratio measures the ability of the government in tax collection as per cent of GDP. Thus, tax GDP ratio 32 per cent of Canada indicates that the government can mobilise 32 per cent of its GDP as tax contribution.
There are many issues related to tax GDP ratio; two important considerations are probable source of government revenue and the expenditure pattern. Countries with high tax GDP ratio such as Norway, Sweden and Denmark set generous programme for the welfare of the common people such as free schooling, health insurance and generous social safety nets for people without work. The quality of expenditure and the type of projects for socio-economic development is crucial here since accountability of the government in expenditure process is very important. A higher tax GDP ratio is feasible with a relatively wider tax net; a mechanism that ensures fairness in tax collection, an inbuilt tax structure that provides incentives to tax payers, transparency in transactions supported by appropriate documentation.A higher tax GDP ratio with a narrow tax net imposes a burden on the honest tax payer; tax evasion may be rampant and the revenue target may not be achieved. Tax GDP ratio of Bangladesh was below 10 per cent a couple of years just after independence. During the last ten years, the average tax GDP ratio was marginally above 10 per cent though the 7th Five Year Plan [2016-220] projects tax GDP ratio of 15.3 per cent. The current target of tax revenue of Tk 3.25 trillion would elevate the ratio to 12 per cent but still below when compared with India and Nepal whose tax GDP ratio is close to 20 per cent.
The narrow income tax net in Bangladesh is one of the reasons for low tax GDP ratio. Unfortunately, about 1 per cent of the population pays income tax and many investors confuse between corporate taxes and personal income tax. Now, even with a very conservative estimate on the assumption that average households is 4.5 persons, the eligible income tax payer households may not be less than 6 million, close to 3 per cent of total population. This 3 per cent of the population tallies with India, where also 3 per cent of the population pay income tax. When you bring more people in the tax net, reasonable tax rate slab may be designed and tax payers will have an incentive to pay taxes. There are now new drives by the government such as third party reconciliation and the recruitment of volunteers to bring more people in the tax net.
Tax mechanism should have an inbuilt incentive structure. The incentive structure may be remodeled in different ways. Let us consider the ceiling level of income for tax exemption. The ceiling level of income was raised from Tk. 2 lakh to Tk 2.20 lakh in 2012-2013 and revised again in 2013 -2014 at Tk. 2.50 lakh. The current level of exemption in 2019-20 is still Tk. 2.50 lakh for tax payers below 65 years and the ceiling level is Tk. 3.00 lakh above 65 years. This ceiling level should be revised in each year with inflation; indexation with change in Consumer Price Index may be an incentive for tax payers. Thus when inflation is 6 per cent, the ceiling level of income during 2015-2016 should be Tk. 2.65 lakh and on a compound rate basis [on average 6 per cent inflation level], the ceiling should be Tk. 3.35 lakh for tax payers below 65 years during 2019-20. The continuation at a static level penalises the honest tax payers whose income has increased in the next year. The ceiling level of income for tax exemption should also be based on pragmatic criteria and be tied to total income level.
Tax exemption on account of investment in designated instruments penalises tax payers with higher level of income when lower marginal rate at higher investment level reduces the amount of net investment amount for tax exemption. The arithmetic is queer and gives an idea that the government encourages an incumbent to conceal higher level of income for which he enjoys the privilege of higher level of investment rebate. Again, a uniform exemption on house rent irrespective of basic salary puts individuals on higher income bracket at a higher level of income tax slab. Exemption level on house rent should be tied to the income tax slab that the individual is paying to provide incentives to reveal his true income and it is appropriate to collect tax with more tax slab. Even instead of initial slab of 10 per cent, a slab of 5 per cent may be a wise decision to bring some of the marginal taxpayers in the net.
An optimum tax GDP ratio is a binding requirement for every government to meet government obligations towards its citizens. Transparency in all transactions reduces the size of the black economy. The extent of prevalence of black or shadow economy encourages tax evasions which often get a catalytic effect thorough the government policy on the whitening criteria. Given 35 per cent of the economy in Bangladesh is shadow, simple arithmetic tells that tax revenue may be augmented by at least 35 per cent with less corruption.
The writer is a Professor of Economics, United International University.