Taxes and the budget 2018

An important source of revenue is customs duties and VAT collected on imports. These collections are lower than they should be due to pervasive under invoicing

With the new budget only a few weeks away what should we look for in the tax area?  There are always many details but here I focus on some of the big issues.  There are two aspects of taxes:  Tax policies that set the type of taxes and the rates that apply.  Tax policy will cover important points in determining the calculation of the tax base.  The second aspect is the collection of taxes—the administration etc of how the taxes are to be determined and then paid to the Government.  In this note I will cover four aspects of tax policy.
First, what level of taxes should the budget aim at achieving.  The tradition in Bangladesh is to exaggerate the development expenditures that can be achieved.  One reason for doing this is propaganda, telling the nation how much development can be done.  Another reason is that it enables the Government to avoid choices it does not wish to make, it approves more projects than can be financed. This is a very dangerous procedure and is responsible for tremendous waste of resources.  The targets should be realistic.  If the development budget is allowed to be larger than what can actually be carried out it will authorize too many projects and then when the money is not available many projects cannot achieve completion.  As a result projects take longer, costs are higher, and benefits are delayed.  This is classic Bangladesh budget performance and comes from unrealistic targets for the development budget.  Such unrealistic targets then turn into unrealistic targets for revenue collections.  Unrealistic targets for revenue in turn lead to unfair tax administration as officers struggle to attain their goals. Setting the level of revenues should be linked to realistic expenditure targets.  For years the budget process has failed to do this, setting unrealistic development targets and unrealistic revenue collection targets.  At the end of the year their are big shortfalls in revenue collection and big shortfalls in expenditures for development.  The costs are the distortions in tax collection procedures and in poor project implementation.  In my view this is a significant factor slowing down the development of infrastructure. It also undermines the integrity of the tax collection process.  
Second, how should a revenue target be set. Revenue should cover: Debt service, direct expenditures of the government such as for administration, the military services, the police etc.; the transfers [including subsidies] that are government policy and 25 pert cent of the actual expected development expenditures.  These total about 10 pert cent in the current budget. The other 75 pert cent of the development budget should be borrowed.  These are reasonable targets.  There is a lot of talk about raising the tax/GDP to 13-15 pert cent.  Governments love to spend money and they encourage other governments to spend.  But most government expenditures are less efficient than private expenditures and everyone is better off with a small government.  We should think very seriously about the costs of driving up the tax/GDP ratio.  The ratio will increase as the transfers grow.  For Bangladesh a good policy is to keep the transfers as a percent of GDP constant, reducing subsidies for agriculture and exports while increasing social welfare transfers.  Reducing the dependence on government financing moving away from the high cost NSD instruments will curtail growth of the debt service costs.  In my opinion the constant demands from the IMF and the World Bank for higher revenue/GDP ratios reflects the big government bias of these organizations.  High taxes take resources away from private investment and private consumption and generally will slow economic growth.  
The third point of this article deals with collections of revenues linked to imports.  An important source of revenue is customs duties and VAT collected on imports.  These collections are lower than they should be due to pervasive under invoicing.  If imports were assessed at their true value revenues would increase about 2 pert cent of GDP.  NBR has systematically refused to take effective action to overcome under invoicing.  Chinese imports are probably the greatest abuser; it is easy to overcome this if NBR insisted on the export tax receipts issued by the Chinese Government to be part of the documentation and then based valuation on this documentation rather than the exporters’ invoices.  Overcoming under invoicing is probably the most important task for NBR to undertake in the coming year.  There are a lot of vested interests here so it will not be easy, nevertheless this is the quickest way to achieve revenue increases.   
The fourth area is corporate taxes.  The system of corporate taxation makes no economic sense and is extremely poor tax policy.  Rates differ from one sector to another.  In effect the government says—if you are really profitable like banks or telecommunications then we want to use a higher tax rate.  The impact of this is to decrease investment in those sectors that provide the highest returns.  This is truly stupid growth policy to discourage investment in those sectors that are most productive.  Corporate tax rates should be low and uniform.  No exemptions, not for exports or friendly power projects such as Rampal.  A reasonable rate is 15 pert cent on profits.  No tax holidays, let companies depreciate at any schedule they want.  In early years they can take low depreciation when profits are low; then as profits increase they can increase depreciation.  This works like a tax holiday but gives the company freedom to select its own depreciation schedule.  These changes would mean all companies are paying company tax at the same rate.  There are no special rates for company taxes, no exemptions, everyone pays.  Is this complicated?  It requires a much tougher supervision of the auditing firms to insure that their estimates of profits are accurate and not subject to adjustment to suit the client.  This is also a necessary step to insure better growth of the capital market. I note in passing that many of the devices used for exports— low or zero taxes on export companies, subsidies to exporters, failure to handle under invoicing are ones that the Trump administration is going to make objection as not conforming to WTO rules. These rules appears as unfair competition to American companies.
In brief I suggest realistic estimates of expenditures underlying the estimates of revenue targets.  The Bangladesh Government is increasingly competent.  The old spirit “we do not know what we are doing so we just give some higher numbers for expenditures and revenues and everyone works towards goals they can never achieve”.  That approach to public administration should be abandoned.  Next NBR should make a major effort to reduce under invoicing.  Finally, reform of company taxation is needed to lower the rate and broaden the base; this will soon have a positive impact on private sector investment.
But most important of all is to allow the private sector to consume and invest with taxes kept as low as possible.  Bangladesh does not need big government it needs a competitive growing private manufacturing sector able to export and produce for the domestic market.  The present policy of allowing widespread under voicing and maintaining very high company tax rates do great harm.  

    The writer is an economist

Taxes and the budget 2018

An important source of revenue is customs duties and VAT collected on imports. These collections are lower than they should be due to pervasive under invoicing

With the new budget only a few weeks away what should we look for in the tax area? There are always many details but here I focus on some of the big issues. There are two aspects of taxes: Tax policies that set the type of taxes and the rates that apply. Tax policy will cover important points in determining the calculation of the tax base. The second aspect is the collection of taxesthe administration etc of how the taxes are to be determined and then paid to the Government. In this note I will cover four aspects of tax policy. First, what level of taxes should the budget aim at achieving. The tradition in Bangladesh is to exaggerate the development expenditures that can be achieved. One reason for doing this is propaganda, telling the nation how much development can be done. Another reason is that it enables the Government to avoid choices it does not wish to make, it approves more projects than can be financed. This is a very dangerous procedure and is responsible for tremendous waste of resources. The targets should be realistic. If the development budget is allowed to be larger than what can actually be carried out it will authorize too many projects and then when the money is not available many projects cannot achieve completion. As a result projects take longer, costs are higher, and benefits are delayed. This is classic Bangladesh budget performance and comes from unrealistic targets for the development budget. Such unrealistic targets then turn into unrealistic targets for revenue collections. Unrealistic targets for revenue in turn lead to unfair tax administration as officers struggle to attain their goals. Setting the level of revenues should be linked to realistic expenditure targets. For years the budget process has failed to do this, setting unrealistic development targets and unrealistic revenue collection targets. At the end of the year their are big shortfalls in revenue collection and big shortfalls in expenditures for development. The costs are the distortions in tax collection procedures and in poor project implementation. In my view this is a significant factor slowing down the development of infrastructure. It also undermines the integrity of the tax collection process. Second, how should a revenue target be set. Revenue should cover: Debt service, direct expenditures of the government such as for administration, the military services, the police etc.; the transfers [including subsidies] that are government policy and 25 pert cent of the actual expected development expenditures. These total about 10 pert cent in the current budget. The other 75 pert cent of the development budget should be borrowed. These are reasonable targets. There is a lot of talk about raising the tax/GDP to 13-15 pert cent. Governments love to spend money and they encourage other governments to spend. But most government expenditures are less efficient than private expenditures and everyone is better off with a small government. We should think very seriously about the costs of driving up the tax/GDP ratio. The ratio will increase as the transfers grow. For Bangladesh a good policy is to keep the transfers as a percent of GDP constant, reducing subsidies for agriculture and exports while increasing social welfare transfers. Reducing the dependence on government financing moving away from the high cost NSD instruments will curtail growth of the debt service costs. In my opinion the constant demands from the IMF and the World Bank for higher revenue/GDP ratios reflects the big government bias of these organizations. High taxes take resources away from private investment and private consumption and generally will slow economic growth. The third point of this article deals with collections of revenues linked to imports. An important source of revenue is customs duties and VAT collected on imports. These collections are lower than they should be due to pervasive under invoicing. If imports were assessed at their true value revenues would increase about 2 pert cent of GDP. NBR has systematically refused to take effective action to overcome under invoicing. Chinese imports are probably the greatest abuser; it is easy to overcome this if NBR insisted on the export tax receipts issued by the Chinese Government to be part of the documentation and then based valuation on this documentation rather than the exporters invoices. Overcoming under invoicing is probably the most important task for NBR to undertake in the coming year. There are a lot of vested interests here so it will not be easy, nevertheless this is the quickest way to achieve revenue increases. The fourth area is corporate taxes. The system of corporate taxation makes no economic sense and is extremely poor tax policy. Rates differ from one sector to another. In effect the government saysif you are really profitable like banks or telecommunications then we want to use a higher tax rate. The impact of this is to decrease investment in those sectors that provide the highest returns. This is truly stupid growth policy to discourage investment in those sectors that are most productive. Corporate tax rates should be low and uniform. No exemptions, not for exports or friendly power projects such as Rampal. A reasonable rate is 15 pert cent on profits. No tax holidays, let companies depreciate at any schedule they want. In early years they can take low depreciation when profits are low; then as profits increase they can increase depreciation. This works like a tax holiday but gives the company freedom to select its own depreciation schedule. These changes would mean all companies are paying company tax at the same rate. There are no special rates for company taxes, no exemptions, everyone pays. Is this complicated? It requires a much tougher supervision of the auditing firms to insure that their estimates of profits are accurate and not subject to adjustment to suit the client. This is also a necessary step to insure better growth of the capital market. I note in passing that many of the devices used for exports low or zero taxes on export companies, subsidies to exporters, failure to handle under invoicing are ones that the Trump administration is going to make objection as not conforming to WTO rules. These rules appears as unfair competition to American companies. In brief I suggest realistic estimates of expenditures underlying the estimates of revenue targets. The Bangladesh Government is increasingly competent. The old spirit we do not know what we are doing so we just give some higher numbers for expenditures and revenues and everyone works towards goals they can never achieve. That approach to public administration should be abandoned. Next NBR should make a major effort to reduce under invoicing. Finally, reform of company taxation is needed to lower the rate and broaden the base; this will soon have a positive impact on private sector investment. But most important of all is to allow the private sector to consume and invest with taxes kept as low as possible. Bangladesh does not need big government it needs a competitive growing private manufacturing sector able to export and produce for the domestic market. The present policy of allowing widespread under voicing and maintaining very high company tax rates do great harm. The writer is an economist