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Tax/Subsidy (Fiscal) Policies And Fiscal Management

Executive Summary

· As the central authority of tax policy and administration in Bangladesh, the National Board of Revenue (NBR), plays a critical part in the development of the country.

· In recent years, Bangladesh’s tax collection has recorded an impressive growth averaging 20% per annum. Despite this good achievement, a lot remains to be done. Bangladesh’s tax-GDP ratio at 9.3% remains quite low when compared with other similarly placed countries in South Asia.

· Less than 1% of the population pays income tax and tax evasion is persistent even though a significant amount of tax revenue is given up in the form of tax incentives.

· Together, curbing tax evasion and dealing with tax incentives could add 5 percentage points to the tax-GDP ratio, potentially adding about 40,000 crores to the revenue collection.

· Most of the processes are manual and there is little in the nature of taxpayer service and taxpayer education. The NBR and the taxpayers also face problems in their functioning due to the current administrative structure.

· Despite being under the same board, the different wings of the NBR (Income Tax, Value Added Tax (VAT) and Customs) operate almost independently providing little support to each other in combating tax evasion and providing a unified front to taxpayers.

· The system faces problems of acute shortage of trained manpower as well as physical infrastructure. These weaknesses have not gone well with the business community and individual taxpayers.

· The GoB has embarked on far reaching reforms both on tax policy and tax administration.

· As part of the government’s Digital Bangladesh agenda, the NBR has undertaken several initiatives on automation of its tax processes to improve its efficiency and provide better taxpayer service. But the reform agenda appears to lack proper sequencing, prioritization and comprehensiveness and at times leading to duplication of efforts.

Introduction

Fiscal policy generally refers to the use of taxation and government expenditure to regulate the aggregate level of economic activity in a country. Fiscal policy in Bangladesh basically comprises activities, which the country carries out to obtain and use resources to provide services while ensuring optimum efficiency of the economic units. The policy influences the behavior of economic forces through public finance.

Major objectives of the fiscal policy of Bangladesh are to ensure macroeconomic stability of the country, promote economic growth, and develop a mechanism for equitable distribution of income.

The main tools to achieve these objectives are variation in public revenue, variation in public expenditure, and management of public debt. These are reflected in the budgetary operations of the government, prepared and implemented on year-on-year basis. While the Government’s fiscal strategy emphasizes the need for maintaining overall Macroeconomic stability and fiscal sustainability, the government is investing substantially in building physical infrastructure especially in the communication and Power sector as well as in developing human resources for achieving growth and augmenting the development process – necessary conditions for reducing poverty.

The present government has planned to raise the level of investment to 30-32 percent of GDP in order to achieve a GDP Growth rate of 8 percent by 2013 as envisaged in “Vision 2021”. This investment may come from the government, the private sector as well as FDI. (Finance, 2011)

Fiscal policy consists of measure related to central and local government revenue and expenditure. The use of taxation and government spending influences the economy. This may work via changing tax rates or the rates about liability to tax or via changes in government spending or real goods and services or transfer payments. Fiscal policy is formulated in line with the government’s National Strategy for Accelerated Poverty Reduction (NSAPR). Excess expenditure over revenue collection (fiscal deficit) may have adverse impact on the other sectors of the economy.

Tax policy and administration in Bangladesh

In a large majority of developing countries, the government is principally responsible for the process of economic and social development. Since its independence in 1971, Bangladesh has been striving to achieve economic emancipation for her people. One of the main cornerstones of this goal has been to attain self-sufficiency in providing for her various socio-economic objectives from her own resources. This requires the maximum mobilization of all available internal revenue while gradually diminishing the dependence on foreign assistance. Consequently, public expenditures have grown rapidly, and taxation has become the main source of finance. So if capital formation and higher growth rates are to be achieved, it is essential to step up the tax efforts.

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 2011-12 tax year (July 1, 2011–June 30, 20112) the top corporate rate was 45%. However, publicly traded companies registered in Bangladesh are charged a lower rate of 27.5%. Banks, financial institutions and insurance companies are charged the 45% rate. All other companies are taxed at the 37.5% rate. (NBR, 2011)

The following chart shows the government revenue collection scenario as a percentage of

Revenue sharing:

Figure 1: Government revenue collection scenario (% of Revenue Sharing)

Source: National Board of Revenue (2010), Note: SD: Supplementary Duty

Still only one percent population out of 160 million people of the country is under the tax net. However, the main tax burden is shouldered by low percentages of the registered taxpayers. The chart below shows that not more than 4% of taxpayers’ pay almost 40% of the tax revenue while more than 50% of the taxpayers’ are paying less than 1% of the total tax revenue. (NBR, 2011)

Figure 2: Tax Burden to Different Income Groups in Bangladesh

Source: National Board of Revenue, Bangladesh (2010)

Revenue collection for the first eight months of this fiscal has been 28% higher than the same period in the previous year. Yearly revenue collections have been increasing for some time, thanks to some necessary moves by the National Board of Revenue (NBR). It is expected that revenue collection for this year will exceed target. Revenue collection has historically been seen to peak at the end of a fiscal year, leading us to expect revenue collections to peak even further.

Figure 3: Percentage of Tax Collections – July 2009 to Feb 2011 (BDT bn)

Source: Bangladesh Bank (2011)

Income tax and VAT are the largest contributors to total revenues for the government. Income tax composes about 23% of total revenue while VAT carries a larger weight of 29%. Both these components have fared well for the year so far, and should continue to drive revenue growth in the long run as well. (Baree, 2010)

Tax Management

National Board of Revenue (NBR) under the Internal Resource Division is dispensing with the twin responsibilities of formulation of tax policy and its implementation. During FY 2009-010, various steps were taken to rationalize direct and indirect taxes with an aim to mobilize adequate domestic resources for investing in infrastructure development. This will help attain higher growth to reduce poverty at a faster rate, achieve self-sufficiency in food production and ensure food security, expand export-oriented industries, develop domestic industries, enhance industrial productivity and create employment opportunities.

Measures under Direct Tax system

Tax exemption limit remains unchanged at Tk. 1, 65,000/- for individual taxpayers

• A separate exemption limits of Tk. 1, 80,000/- has been introduced for female taxpayers, senior citizens of 65 years and above and a new limit of Tk. 2, 00,000/- has been introduced for retarded taxpayers.

• Tax rates remain unchanged at 37.5 percent for private limited company and at 27.5 percent for public limited company. However, tax rate has been reduced to 42.5 percent from 45 percent for bank, insurance and financial institutions. Tax rate for Mobile Phone Operators remains unchanged but publicly traded mobile operators would pay tax at a rate of 35 percent

• Investment ceiling for individual tax payers to avail investment rebate has been increased from Tk. 5,00,000/- to Tk. 10,00,000/-

• In case of compensation money accruing from land acquisition, the rate for tax deduction at source has been reduced to 2 percent from 6 percent

• Foreign income of ships carrying Bangladeshi flag operating overseas and carrying goods is made final on the condition that tax is deducted at source at a rate of 3 percent and the money is remitted to Bangladesh through banking channel

• Provision for tax deduction on export cash subsidy is cancelled

• 8th schedule containing different tax deduction rates in a tabular form is inserted in the Income Tax Ordinance in order to simplify the ordinance

• To encourage new taxpayers, provision has been made in the ordinance to indemnify the business capital shown by a new taxpayer if he/she admits income at a rate of 25 percent of the show business capital and files under section 82BB (Universal Self)

• For the benefit of taxpayers, section 121A has been inserted in the Ordinance giving revision power to the Commissioner of Taxes

• New provision has been inserted in the Ordinance making payment of tax at the rate of 10 percent of the total tax demand mandatory before filing reference case to the Hon’ble High Court. However, a provision for waiver still remains.

• The provision regarding a person seeking approval of a plan of construction from RAJUK, RDA, CDA and KDA must have a TIN has been inserted to broaden the tax base. Similarly, obtaining TIN has been made mandatory before getting drug license

• With a view to developing the local software industry, Bangladeshi users of locally developed software will enjoy 50 percent allowance of depreciation

• Income accruing from high-rise buildings (four storied or above) with 10 or more flats are exempted from tax on the conditions that the house property is constructed between July 1, 2009 and June 30, 2014 and outside the limits of all city corporations, all cantonment boards, Narayangonj Sadar, Gajipur Sadar and Tongi Sadar upzillas and pourashabhas of Dhaka district

• Income from Pensioners’ Sanchaypatra has been exempted from tax

• With a view to realizing the vision of a Digital Bangladesh, individual taxpayers are allowed investment rebate on the purchase of computer or laptop worth up to Tk. 1,00,000/-

• Tax rate for deduction at source from capital gain arising from land sale has been reduced to 2 percent from 5% due to re-fixation of land value by the government

• Taxpayers can now pay tax of up to Tk. 10,000/- instead of the previous amount of Tk.5,000/- through challan

• Owners of private vehicles are to pay taxes at the time of registration and renewal of fitness of the vehicles based on engine CC

• Existing presumptive tax rate on AC Coach, minibus, microbus, truck, bus, covered van carrying goods, water vessels carrying passengers/goods, cargo, coaster, dump barge etc. plying on hire is refixed

• Certain industries to be establish between July 1, 2009 and June 30. 2012, have to pay taxes at a reduced rate for a period of five to seven years depending on the location of the industrial set-up

• As a pre-condition to availing tax holiday status, private power generation plants have to commence its commercial production before June 30, 2012

• As a step forward towards a Digital Bangladesh, Large Taxpayers Unit (LTU) has already introduced e-filing of income tax returns to facilitate the process. This facility will be introduced in all taxes zone in Bangladesh in phases (NBR, 2011)

Measures under Indirect Tax System

Customs duty

• The five tier customs duty structure has been kept unchanged. The highest duty rate of 25 percent remained unchanged and Capital Machinery and ICT sector’s duty has set at 3 percent. In FY 2009-10 customs duties on basic raw materials have been reduced to 5% from 7%. While customs duty on intermediate goods remain unchanged at 12 percent.

• Five tier supplementary duty rates (20%, 60%, 100%, 250% and 350%) has been readjusted to eight tiers (20%, 30%, 45%, 60%, 100%, 250%, 350% and 500%)

• Specific duty on raw sugar was first reduced to TK. 4000.00/MT and has waived fully later on. Specific duty on refined sugar initially reduced to Tk. 3,000.oo/MT from TK. 7,000.00/MT. And it was further reduced to Tk. 2,000.00/MT

• Specific duty of Meltable scrap and MS Billet/ingot has been set at TK. 1,500.00/MT and 2,500.00/MT respectively while those of Silver bullion and Gold Bullion has been set at TK. 6/11.664 gm (1vori) and TK. 150.00/11.664 gm (1vori) respectively.

• Regulatory duty at the rate of 5 percent has been imposed on finished goods and luxury items

• All import duties and value added tax were withdrawn from the parts of energy saving lamps in order to encourage energy efficient lights and bulbs production in Bangladesh

• To encourage the use of solar energy, all duties and taxes were withdrawn from the import of solar panel

• Full exemption of duties and taxes in FY 2009-10 was granted on phosphoric acid, one of the basic raw materials of chemical fertilizer

• For the expansion of insecticides industry in Bangladesh, raw materials and packaging items have been given duty exemption and other facilities to facilitate import at a concessional rate.

Value Added Tax (VAT)

• Definition of export has been included in the VAT law

• Procedure for appeal against any adjudication order (section 42) has been simplified

• Definition of a Divisional Officer has been amended

• To prevent VAT evasion, regulation described in section 55 has been amended

• Inclusion of the provision is made to allow installment facility for tax evaded amount in addition to the fine penalty.

• In order to facilitate SMEs, the threshold for annual turnover of VAT has been increased from Tk. 2.4 million to Tk. 4.0 million.

• The use of Electronic Cash Registers (ECR) by medium and large traders and service providers in all the city corporation areas and districts has been made mandatory from the July 01, 2009

• Updated compilations of all the SROs related to explanation of services are in place

• Scope and area of Izaradar and survey agency have been redefined.

• Issuance of a new explanation letter in order to clarify the controversy related to Advance

3.2.3 Trade VAT

• VAT exemption at import stage covering the import of manganese ores and concentrates, pulp parts of compact energy saving fluorescent lamps and photovoltaic cells

• VAT exemption at the manufacturing stage has been allowed for Photovoltaic cells, Handmade cake, Electricity, Fabrics made by power loom, hard board, Drugs for cancer, Electric generator, Trailer for carrying goods and Refrigerator, Freezer, Motor cycle manufacturing plan for FY 2009-10 only

• VAT exemption has been introduced for internet service providers and specialist doctors at the service stage

• Maize seed enjoys VAT exemption facility

• Supplementary duty on skimmed milk powder at the manufacturing stage has been withdrawn

• Supplementary duty has been imposed on Jarda and Gul at the manufacturing stage at the rate of 10 percent

• Supplementary duty increased to 10 percent from 5 percent on ceramic tiles and mosaic, ceramic bathtub, sink, basin and other bath room fittings at the manufacturing stage

• Supplementary duty on soft drinks at the manufacturing stage has been increased to 15 percent from 10 percent

• The price slab and supplementary duty of cigarette has been increased

• VAT exemption facility has been withdrawn from plastic made furniture (manufacturing stage) indenting service (service stage) and travel agency (service stage)

• Turnover tax exemption facility has been withdrawn on goods such as candy, energy drink, juice, chanachur, hair care products and biscuits

• VAT collection at source has been made mandatory for services like decorators and caterers, travel agencies, auctioneers, courier and express mail service providers, architects, interior designers and graphic designers, chartered plane or helicopter renters

(NBR, 2011)

Issues in Tax policy

Currently, the main problem areas of the income tax system in Bangladesh can be categorized as:

– Narrow tax base;

– Tax evasion;

– Inadequacies of law; and

– Inadequacies of administration

Narrow tax base

The tax base in Bangladesh is one of the lowest in the world. Out of a population of 160 million, only about 1.8 million or about 1.12% of the population are registered taxpayers. Of these registered taxpayers, only a few actually file a tax return and pay tax. Urgent steps are needed to expand the tax base. 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 remaining untaxed due to tax amnesty is a problem too for 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 and paid by them. (Tapan, 2010)

Tax evasion

Tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting. Besides these, non-disclosure of actual income, non-payment of income tax, underhand agreement with the tax authority, gross abuse of the tax holiday provisions may be mentioned under this category. Tax evasion in Bangladesh has reached alarming proportions and the immediate victim is government revenue. It also leads to a parallel black economy, which in Bangladesh is said to be to the tune of USD 1.2 – 1.5 billion. The causes of tax evasion are numerous and include complex tax laws, lack of social security, coordination deficits among different government agencies and financial institution, inefficiency and corruption. (Chowdhury, 2006)

Inadequacies of law

Ideally, law should be clear, and should have obvious purposes and effects. If someone is contemplating starting or investing in a business, or locating an operation in Bangladesh, it is a great help if the effects of the tax regime can be explained in few words. The current Bangladeshi Income Tax Ordinance dates back to 1984 and since then it has undergone numerous changes that the laws, now need to be rewritten. Many tax provisions are loosely worded, leaving room for a wide exercise of discretion by the tax officials and therefore scope for corruption. The present taxation system lacks simplicity and transparency and provides too many loopholes to evade taxes. (Islam, 1999)

Inadequacies of administration

Simplicity is an important element in any successful administrative reform. The administration must be provided with simple and hence potentially enforceable laws to administer. In order to attain this goal, the current structure of the administration needs to be completely overhauled. It was observed that the tax filing and payment procedures were by and large tedious and cumbersome and many rulings were made arbitrarily by the tax authorities, which forces taxpayers to take recourse to appeal to courts at a further cost of time and money. For example, in the US, the taxpayer submits his/her tax forms. If there is any discrepancy, the taxpayer will receive a letter from the tax authority. But in our country, the taxpayer has to appear or he has to hire a tax lawyer which is another burden. For that, people in our country are not motivated to pay tax. (Khan, 2008)

Issues related to Govt. expenditures

Infrastructural bottlenecks holds back potential:

Bangladesh is expected to have a GDP growth rate of 6.3% for FY2011. This estimate is close to the World Bank’s estimate of 6.2%. The acute power crisis has been one of the main deterrents to a higher growth potential. Some estimates show that 2-3% of added growth could have been achieved had there not been a power crisis. This fiscal year’s (FY2011-12) budget had allocated a large portion (15.3%) of expenditure under the “Energy and power” head. The expenditure had been allocated for power generation, grid expansion and gas exploration. Steps have already been taken to address the power shortage, with more than 30 projects being awarded for power generation – to raise output to 11,000 MW by 2015. (World Bank, 2011)

Specific division-wise expenditures unsatisfactory:

Looking at expenditure performance by relevant ministries/divisions, it was found that according to the revised budget, the Power Division had been allocated 13% of the total budget, of which 28% (BDT 14.14 billion) has been spent till February. This is lower compared to the same period of the previous year, where 28% of the allocated fund under ADP had been implemented. At the same time, Energy and Mineral Resources Division, which has been allocated 3% of the total budget, has implemented only 16% (BDT 1.68 billion) compared to 76% in the same period of the previous fiscal. (Statistical Bulletin Bangladesh, 2011)

ADP implementation rate not up to the mark:

The figures stated above lead us to question the ADP implementation rate for FY2011-12. Initial ADP allocation was BDT 385 billion, but had to be cut down to BDT 355 billion as some foreign funds could not be mobilized. 36.8% of total allocation for ADP has been implemented from July 2010 to February 2011. This value stood at 38% for the same period in FY2010. Not only has ADP implementation been lower, we also have no way of knowing how much of the allocated funds have been utilized by the respective bodies.

Table 1: ADP implementation status

Expenditure (% of Total)
FY	Allocation of ADP (BDT bn)	Jul	Aug	Sep	Oct	Nov	Dec	Jan	Feb	Mar	Apr	May	Jun
2008	265.0	1.7%	2.8%	1.8%	4.4%	5.0%	5.0%	3.8%	5.7%	2.1%	2.7%	9.4%	25.1%
2009	256.0	2.4%	0.9%	5.4%	2.8%	6.9%	5.8%	6.6%	4.2%	6.0%	4.9%	11.1%	19.9%
2010	305.0	1.5%	3.4%	5.9%	5.7%	6.3%	5.7%	6.5%	2.9%	4.8%	7.7%	8.0%	25.4%

Source: Ministry of Finance(2011), Bangladesh

We have seen that historically that ADP implementation rate is highest in the last month of a fiscal year: 25.4% in FY2010 and 19.9% in FY2008. Hence we can expect the same scenario to persist for this year as well. A more important issue would be to see how much of the total ADP will be implemented for the fiscal year as a whole. Total ADP implementation has increased from 69.6% in FY2008 to 83.8% in FY2010. Achieving a higher implementation status for this year will remain a huge challenge for the government. We estimate that aggregate implementation of ADP may stand at about 82% for this fiscal year. (Economic Trends, 2010)

Subsidy pressures mounting:

Given the volatile situation of the international oil market, and the fact that most rental power plants are either furnace oil or diesel based, oil import bills and related subsidies are likely to soar. Official estimates have put oil subsidies to rise by 40%, mounting pressure on the current fiscal year. Furthermore, additional expenditures and subsidies are also required for farm and social safety, especially for supplying food to the poor at discounted prices. Such developments will be the force driving the current fiscal budget towards a larger deficit. (Alam, 2011)

Fiscal deficit to remain under control:

As of February 2011, the government has a budget surplus equivalent to 0.33% of GDP. This value however is intermediate and does not take into account the mounting subsidy pressure and ADP funds yet to be disbursed. Fiscal deficit for FY2010 was 3.9% of GDP. Given that revenue collections are up and large expenditures are also forthcoming, the extent of a fiscal deficit would depend on the size of these components. However, taking these developments into account, fiscal deficit is expected to remain less than 4% of GDP. (GoB budget:2011-12)

Recommendations

The tax gap measures can be developed and made completing ongoing work on flow-through entities, and setting in motion processes that would ensure continuous annual updating of individual tax gap measures, even if that involves fewer random audits per year, in place of the occasional large random audit study. A system should be devised to systematically identify firms and individuals who do not file any tax return. Survey, online return submission, electronic record management and enhancement of scope of withholding tax may be added with the system.

Black money–white money concept:

In this country tax evasion is an enlargement trade and the parallel and underreporting money has been conservatively estimated at Tk. 360 billion. This magnifies the socio-economic woe. What then may be the policy implications concerning tax underreporting? Tax amnesty means giving full legal approval to deliberate and systematic evasion of tax and also payment of tax at reduced rates (Baree, M.A. 1992). Any such provision is self-contradictory anti-compliance. Govt. rules are meant to create and maintain a weak balance between the conflicting and divergent interests of various individuals and groups in the society and as such, no law should contain such conflicting and opposing elements, which would tear down its very rationale and basics. The entire breadth of our fiscal law, rules and tax machinery becomes hollow and serves no purpose when such tax amnesty has been continued year after year. The justification to tax any income higher than the amnesty rate can be seriously questioned and may be termed a great slip in our fiscal discipline. It is reported that out of an estimated Tk.360 billion of black money in our economy only 2.98 billion have been declared not even 10% of the estimation. The invisible social cost of this policy is enormous and beyond any repairable limit (Khan, Z. A. et al., 2000). What government can do is to strengthen its machinery to catch the lawbreakers in the first place instead of opening the door and then beginning back to the thieves. Moreover, the practice does have a serious effect upon the morale of tax officials. (Khan, 2010)

Social awareness program:

Create awareness among the people and motivate the wealthy section of the society to pay taxes. Apart from the NBR, it must be ensured that the tax payers should be free from various complications and harassments in tax offices while coming to pay taxes. The NBR in alignment with the government-concerned department can initiate motivational campaign in raising consciousness explaining how regular payment of taxes serves the country and ensures justice in the society. This can be done not only by appropriate NBR personnel, educational campaigns and by seeking support and co-operation from professionals like chartered accountants, tax lawyers, etc. A strong fiscal and financial discipline in all the government departments, agencies or enterprises may increase its legitimacy (Rahman and Shelli, 1996). People must encourage regional and other types of co-operation among tax administrators to reduce the extent of tax evasion by individuals, domestic and transnational corporations. This may be achieved by arranging frequent meeting, seminars, education program for taxpayers, exchanging information, etc.

Broad band tax net:

A wide base and a low rate structure would maximize the tax revenue. Presumptive tax on professionals such as accountants, lawyers, doctors, engineering and management consultants, university teachers may be brought to the tax net. Assessments on coaching center, private university, English medium schools, and private educational institutions for professional development are still at large from tax net. The fiscal (2010-11) budget failed to bring them in tax notice. Special turnover tax (not VAT) may be imposed on coaching centers and private educational institutions including university and English medium schools. Certain tax administration measures, such as selectively increasing the audit frequency and audit thoroughness for upper bracket tax payers and for hard to catch individuals, firms or professionals such as doctors, lawyers, etc., use of cross checking procedures in line with other social or economic indicators of the assesses may be used to re-fix the presumptive tax pointed out earlier.

Special watchdog for excise and turnover taxes:

It presumes that the business houses and industrial firms are engaged in tax evasion in a significant scale. The success of government machinery for revenue collection is largely relied on administering the gamut involves in collection process, NBR policies and the honesty of the taxpayers. The national budget 2010-11 precludes cigarette, bidi, gul, zarda, chanachur, juice, energy drink and M.S products from cottage industries facilities is an appreciable step but policy formulation is not enough to plug the loopholes of the perpetrators movements.

Reengineering custom duty net:

Halting evasion of tax by means of under invoicing, proper valuation of should be placed at most important custom centers of the country. The present custom net is too poor to fish many cross borders trade. Tax evasion by multinational companies through transfer pricing is a global phenomenon. Revenue people in many countries including USA, India have been given special power and training to examine extensively the transfer pricing mechanism of those companies. In this country too, there is possibility of tax underreporting through this mechanism.

Simplified Income Tax system:

The present income tax system is too complicated to understand. Chartered accountants, tax lawyers and related professionals often allegedly are abusing this complexity. Their dubious roles as middle man help underreporting many income tax cases. People are likely to go for self-assessments are discouraged by the difficult system. The problem is more acute in a poor economy like ours with high illiteracy and poor record keeping and accounting habits. The demands placed on administration- very poorly staffed with poor pay and inadequate logistics support have probably resulted in greater dishonest practices than would have been the case otherwise (Baree, M. A., 1989; Sarker and Kitamura, 2006; Rahman and Yasmin, 2008). However, the current fiscal policy has proposed to introduce e-tax filing11, e-tax calculator on NBR web etc.

Penalty and Reward:

Appropriate design of a penalty rate structure also appears to be anti-evasive and anti-avoidance. The rate of penalty should be progressively higher with the amount of tax evaded and must also reflect the current market conditions. At present, the provision of penalty in the statute books isone sided. The taxpayers only to be penalized for an act of omission or default but there is no corresponding provision to penalize dishonest, inefficient or unjust tax officials (Chowdhury, R.A., 2008). Moreover, there is no reward for them who pays taxes regularly and on time. Highest tax payers or tax payers above a specified bracket are proposed to be awarded with a tax card providing civilian VIP status in all state programs and public facilities.

Standardization of public utility price:

The policy of taxation and user charges for services provided by nationalized state enterprises, i.e., PDB, WASA, DESA, GAS etc., should be well formulated. The latter when based on standard marginal pricing would collect more revenue and would generate less resistance by the tax payers. The result may be low income tax rate and lesser tax evasion.

Updating Anti-evasion Provisions in the ITO, 1984:

Income Tax Ordinance 1984 was equipped supposedly adequate legible provisions to tackle concurrent tax underreporting-evasion and avoidance, and penal provision for purported taxpayers. Section 19 deals with unexplained investment, Section 115 for detecting concealment, Section 123-124 deal with imposing penalty for tax evasion and chapter XXI for offences and prosecution. Special provisions are incorporated in Section 93, 104 and 106 for escaped income assessment or non-filing tax return; and Sections 117-119 empower NBR officials to raid, search, seize and retain the concealments of bullion or valuables required to be disclosed under the ITO, 1984. But long standing these provisions cannot be befitting of all time or age. For example, new cyber tax laws to book transactions through e-banking, e-commerce, and web-capital market etc. is a demand of time. The ITO 1984 offers a variety of exemptions and incentives and their continuation and misuse erode the tax base.

Conclusion

Despite some positive developments, excessive domestic borrowing has emerged as a major problem in recent years. Moreover, the country is burdened with large import payment and subsidy on account of greater impact of petroleum products. This has forced the government to borrow heavily from the banking system. Domestic public borrowing has already crossed yearly target within eight months.

Low dependence on foreign loan is not a bad option provided local funds do not carry high costs. An external receipt of $1.5 to 2.0 billion notwithstanding, the government needs to generate domestic fund to finance ADP of a small size which is equivalent to at least 5.0 per cent of the GDP. It must be considered a state obligation to care for the overseas workers who provide foreign exchange without repayment obligations. Meanwhile, the public infrastructures have become scarce to support growth because of the slow growth in public investment. It is high time to ensure benefit to taxpayers who have increased their contribution to the national exchequer. The on-going concentration on progressive direct tax is a rational option to expand the tax net and to reduce anxiety in public financing. What is needed is to curb tax evasion by simplifying the tax system, imposing rational tax burden on existing taxpayers and ending the game of making ‘compromise’ with the holders of black money.

The idea of the tax arrangement should be to develop a sycophancy liaison in which the tax controls work in cycle to create an ambiance wherein individuals and firms are aware of appreciative to pay assessment, find that they can afford to pay assessed liability, and feel justified in paying it by their fellow peer groups’ observance. Great care must be taken in drafting the tax laws, since some of the opportunities for tax evasion and avoidance arise from the poor drafting thereof. Moreover, once the laws are passed, prompt rules, regulations or circulars must be issued by the authorities requiring minimum compliance costs. Administrative producers for the resolution of disputes and controversies must be made clear and must be settled quickly. The existing tax structure should be tailored to the attainable efficiency in tax administration. While preparing annual budget, this point deserved special attention to keep government expenditure within tax collection efficiency of tax officials. Otherwise, arbitrary targets to collect tax revenue when imposed make them running wildly to fulfill the target which ultimately destroys theirs and tax payers’ confidence in tax administration. In fine we conclude by quoting the great words of Jean Baptiste Colbert (1619-1683), French Economist and Minister of Finance under King Louis XIV in this regard: ‘The art of taxation consists in so plucking the goose as to obtain the largest possible amounts of feathers with the smallest possible amount of hissing’