Escolar Documentos
Profissional Documentos
Cultura Documentos
Taxation
who have a legal requirement to file a tax return, but do not file on
time. The underreporting gap is the tax owed by taxpayers who file
returns on time, but underreport the amount of tax they owe. The
underpayment gap is the loss of revenue owed by taxpayers who file
returns on time, but do not pay their reported tax due on time. The
largest component of the tax gap is expected to be underreporting.
1.0 Prologue
The difference between the amount of tax legally owed and the
amount actually collected by a government is called the tax gap. In
the economics of tax gap, Nobel laureate economist Gary Becker
(1968) theorized the economics of crime stating as long as the
countrys laws fail to plug loopholes of taxing system, the misdeed in
government revenues remain alive ( Allingham and Sandmo,1972). In
this outlook, the purpose of taxation is to take out as much money as
possible from the population to serve the sovereign with the least
possible fuss and bother. That which could not be collected at least
not without a lot of hissing and other unpleasantness is
handpicked left interrupted by further law. Yet as citizens of a
democratic system every one expects that the burden of financing
the public services that citizens demand should be allocated in a fair
way among the people. Unanimously mostly agree that tax liability
should be allocated in a way based on peoples ability to pay tax. As
citizens of a democratic state, every concern people believes that the
tax laws peoples elected representatives have enacted meet peoples
standards of fair dealing. Thus, all able and conscious citizen should
do care about taxes owed, reported and paid, albeit overpaid taxes
benefit the sovereign.
This paper addresses issues related to measurement of the tax gap
the difference between tax liability under the National Board of
Revenue (NBR) tax rules and taxes paid by the payers. In view of
doing this, we review the main components of the tax gap in present
perspective and retrospect, and go and get how the NBR estimates it.
With the succeeding parts, some major issues in national policies for
ballpark figure of tax gap are drawn. Probable inherent
* Mr. Md. Abdul Based Mondal, B. Sc., FCMA, Additional Director, Education, ICMAB, Dhaka
** Mr. Mohan L Roy, M.Com (Fin), M. Com (Mgt), M. Com (Acc), Associate Professor, Finance
and Accounting, IBAIS University, Dhaka.
Tax gap by sources in absolute Taka and percent figure with respect to
the total gap are presented in table-1. The biggest single line item in
the tax gap is customs income comprising import duty,
supplementary duty, and excise in the business and individual income
tax, which amounts to Tk. 65 billion or almost a 41 percent of the
estimated tax gap4. Adding in the underpayment of value added tax
(VAT), the underpayments of business income on individual income
tax returns contributes to 58 percent of the total tax gap; over half of
the underpayments gap attributable to total taxpayers. Based on the
NBR estimates, the tax gap crisis is primarily a crisis of underreporting
of tax by individual taxpayers with income from businesses, rents and
royalties, farms, partnerships, and other flow through entities (Sarker
and Kitamura , 2002). Most of the tax gap comes from noncompliance
by individuals and businesses participating in officially recorded
economic activities, who are either failing to file tax returns,
underreporting tax owed on tax returns, or failing to pay taxes due on
time (Rahman and Yasmin, 2008). But the tax gap also includes tax
evasion by participants in illegitimate activities in the subversive
financial system (Rashid, 2007), that is, the portion of economic
activity that goes unrecorded in official economic statistics. These
partakers are informal suppliers, such as moonlighting professionals
who work off the books and do not report income or taxes owed
(Chowdhury, R. A. 2008). The tax gap, however, does not count unpaid
taxes by people engaged in the portion of the subversive economy
consisting of all illegitimate activities.
Table-1: Tax Gap by Sourcesa (2009-10)
Sources Tax
The gross idea tax gap leads two meaning2tax evasion and tax
avoidance. The tax evasion also translates two meanings as (a)
understatement, concealment by the tax payers of the income and
the tax due on it or simply of the taxable object, or (b) failure to pay a
tax voluntary and on time. The second, tax avoidance on the other
flip, is the use of shortcomings in the existing fiscal laws to evade
taxes unintended by the legislators. The most recent tax
administration ballpark figure of crores taka that some car importers
dodge by manipulating the ages of used cars. The NBR estimates this
gap of import duty is an extra Tk.1000 crores earnings likely3. The net
tax gap is the gross tax gap in any tax year less payments of that
years tax liability that come in later through either voluntary late
payments or NBR enforcement activities. Payments of interest and
penalties associated with late payments or underreported tax liability
are not counted in either the gross or net tax gap measures.
Income tax
VAT
Custom
Others
Total
The gross tax evasion and avoidance have three components nonfiling, underreporting of tax owed, and underpayment (see table-2).
The three components are mutually exclusive and add up to the total
tax gap. The non-filing gap is the tax not paid on time by taxpayers
1. BNP, Caretaker and Bangladesh Awami League (2005-06; 2006-08;2008-09)
2. Baree, M.A. (1992), p.371
3. The Star Business, Dhaka Friday, June 4, 2010.
Target
Tk (in billion)
165.6
227.89
232.36
4.69
630.54
%
27.5
33.99
38.09
0.77
Collection
Up to April 2010
Tk (in Blln)
%
112.5
68
188.5
83
167.3
72
3.142
67
471.4
75
15
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 Shilpi, 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 tax
payers, exchanging information, etc.
5.3 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.
5.4 Special watch-dog 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 tax
payers. 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.
5.5 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.
5.6 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
19
taxpayers who do not file returns on time or on how much tax would
have been due if they had filed. The NBR has yet to anticipate such a
non-filing gap for taxes; howbeit it would not be irrational to assume
that a large portion of prospective returnable numbers is unlikely to
file tax returns. The non-filing gap for the tax revenue is anticipated to
be 1.2 to 1.5 billion USD (Sarker and Kitamura, 2002). It is reported
that the NBR has taken a move to locate 1.2 million taxpayers who
remain unidentified for years despite having the TIN. Currently there
are 2.238 million TIN holders, but only 1.0 million of them file tax
returns every year5. Thus it can be conservatively estimated that TK
200 billion were left in non-filing income tax return that leaded a
grand total of TK 314.4 billion for the fiscal year 2009-10 (see table -2).
Taxation
responsible of such dodging in taxes revenues. In addition to this,
corruptions in levy system are another defaulting cause of
underreporting. International borders in this country are inherently
lack customs offices or similar facilities that could effectively control
the movement of any goods carried in private vehicles from one
jurisdiction to another. The respective districts and divisional
authority simply lack the manpower and resources to pursue and
prosecute every case of sales tax evasion arising from purchases
which do not cross borders other than for major purchases (Sarker
and Kitamura, 2002).
Taxation
Non-filing
(%)
200 (64)
100(32)
10 (3)
0.5 (0.1)
0.0(0.0)
2.0(0.6)
2.0(0.6)
314.5
Components
Under reporting
(%)
150(33)
200(44)
100(22)
0.6(0.13)
0.5 (0.10)
2.0(0.43)
2.0(0.43)
455.1
Total
(%)
350 (45)
300(39)
110(14)
1.1(.14)
0.5(.06)
4.0(.52)
4.0(.52)
769.6
5.
In a pre-budget discussion meeting the NBR chairman has given this information (FE
report June 9, 2010).
6. The NBR vows DIFD to launce a new project - The Administration Capacity and Tax
Payers Services (TACTS) to increase tax base.
7. The estimation has been made considering only income tax return recorded in the fiscal
year 2008-09.
8. The projection has been made on the basis of fiscal year 2008-09 and reported
statement in the daily news papers.
16
collection
Gap (-) %
Import duty
8279
8154.76
-1.50
VAT (import)
6252
6311.17
+0.90
SD (import)
1231
1196.63
-2.79
Excise
185
183.49
-0.816
VAT (local)
7425
7471.13
+0.621
SD (local)
4864
4846.09
-0.368
--- (2010). Annual Budget 2010-2011, Ministry of Finance, GOB Part I and Part II, 10 June.
9186.95
2339.24
20856.78
238.26
10943.10
6172.55
4.55
17358.46
13889.34
415.06
0.13
415.19
14304.53
52519.77
-1.84
-2.20
-2.18
+0.53
+1.78
-8.26
-9.00
-2.05
+2.59
+0.46
-87.0
-0.67
+2.49
-0.91
0.00
Income tax
8924
8721.24
-2.27
Travel
311
326.91
+5.11
Other
1.9
-5.00
Total (grand)
37479
37219.32
-0.700
Target
9300
8240
1845
19385
213
8767
6125
6
15111
11005
467
2
469
11474
45970
Gap (-)
Collection
9619.19
8474.66
1752.86
19846.71
212.79
9090.35
6016.41
4.61
15324.16
11579.65
448.82
1.59
450.41
12030.06
47200.93
%
+3.43
+2.85
-5.01
+2.38
-0.10
+3.69
-1.77
-23.17
+1.41
+5.22
-3.89
-20.50
-3.96
+4.85
+2.68
Import duty
Collection
9330.59
Gap (-)
%
-2.50
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.
9360
2392
21322
237
10751
6729
5
17722
13538
417
1
418
13956
53000
Turnover tax
Taxation
VAT (import)
SD (import)
Subtotal
Excise
VAT (local)
SD (local)
Turnover tax
Subtotal
Income tax
Travel
Other
Subtotal
Total direct taxes
Total (grand)
Taxation
be adjusted, but it is less likely that examiners will search hard for
potential deductions and other tax benefits that the taxpayer
overlooks. Clearly, this is an area where further research may be in order,
especially as the tax rules continues to be cluttered with new and more
multifarious incentives involving prickly options and choices.
4.3 Aptness of Data
For years, NBR anticipations have suffered from being based on
outdated sample data, extrapolated by the growth in overall tax
liability (Sarker and Kitamura, 2006). The changeover of 2006-07 to
2009-10 tax return data represents a major improvement in the
timeliness of the data on which the underpayment tax gap estimates
are based. But 2006-07 and onward database will rapidly become
outdated as well, as tax laws continue to evolve and as the age
composition of the countrys population, the composition of the
workforce, and the distribution of employment by industries and
occupations change. Short of constructing a random set of SME and
large firm taxpayers to audit and issues to examine in a new
corporate tax gap study, the most practical way to obtain more
updated estimates in a reasonable time frame at reasonable cost is to
use recent operational audit data to develop the new estimates.
For individual income taxes, the objective would be to update the
estimates on a regular basis. Ways need to be found to reduce the
annual cost of NBR if the program is to be sustained. To develop
timely estimates of individual income tax reporting compliance and
frequent updates of audit selection formulas, the NBR needs
comprehensive plan to perform random audits of smaller samples of
individual tax returns under the tax audit program every year. NBR
will combine results of these audits to develop tax gap estimates
over rolling three-year periods, with a new years worth of audits
added and one old year dropped every year.
Another possibility would be to include data from operational audits,
using econometric methods to adjust for the non-randomness of
operational data (Feinstein, J. S. 1981). Data from these operational
audits could supplement data from the random tax audits to perform
annually. The random audits would serve as a check on the method
of extrapolating from the operational sample to the population and
allow for identification of emerging issues that tax audits based on
past estimates of probable noncompliance might fail to detect. Use
of a blend of random and operational tax audits could effectively
expand the sample size and enable NBR to produce more compliance
estimates for more segments of the taxpaying population.
4.4 Estimating the Tax Gap in tricky Transactions
Tax gap comes from companies and wealthy individual taxpayers while
they use highly-paid tax lawyers and chartered accountants to work
out obscure design to reduce tax liability to a small fraction of their
economic income (Mahmud, et. al., 2009). The existence of large
underground economy is responsible for low tax base in Bangladesh9.
Tax shelter and tax haven: The tricky transactions involve shifting of
income between taxpayers and tax-indifferent entities through
composite chains of interrelated entities are of this type. The use of
offshore bank accounts in tax haven countries to hide unreported
income, which can later be accessed through credit cards to finance
personal consumption at home. For transactions that are clearly
outside the tax law, the only question for tax gap measurement is the
ability of NBR to find and identify them.
9 The Financial Express reports (June 20, 2010) citing the NBR chairman statement.
18
In 2009-10 fiscal year, VAT was targeted almost 34% of total budgeted taxes revenue.
References
Alam, D. (1999). Introduction of PSI System in Bangladesh: Facts and Findings. Desh
Prokashon, Dhaka.
Allingham, M.G. and Sandmo, A. (1972). Income Tax Evasion: A Theoretical Analysis,
Journal of Public Economics, Vol. 1, pp.323-38.
Baree, M. A. (1992). Law and Practice of Bangladesh Income Tax, UPL, Dhaka
Chowdhury, F.L (2006). Evasion of Customs Duty in Bangladesh, Desh Prokashon, Dhaka
-------- (1992). Unpublished MBA Dissertation, Graduate School of Management, Monash
University, Australia.
Chowdhury, R.A. (2008). The Tax Ombudsman: A new concept for Bangladesh, The
Financial Express (March 8)
Feinstein, Jonathan S. (1991). An Econometric Analysis of Income Tax Evasion and Its
Detection, Rand Journal of Economics 22: pages 14-35.
Islam, R. (1999). Structure, Administration of VAT in Bangladesh with special reference to
Evasion Control and Measurement of VAT Potential, NBR, GOB.
Khan, S.M. and Senhadji, S.A. (2000). Financial Development and Economic Growth: An
Overview, IMF Working Paper WP/00/209.
Khan, Z.A., Thronton, N. and Frazer, M. (2000). Experience of Financial Reforms in
Bangladesh, Public Administration and Developmnet, Vol.20.
Mahmud, M. M., Purahit, Kanchan K., Bhattacharjee, Milan K., and Rahman, M. A., (2009)
Taxation in Bangladesh- Theory and Practice; Padma Prokashani, Chittagong,
Bangladesh. pp.316-20
McGee, Robert W. (2006). Ethics and Tax Evasion in Asia, AIB South East Regional
Conference, Bangkok, (7-9 December).
Rashid, Mamun (2007). Combating Financial Crimes in Bangladesh, The Daily Star
Business Vol.5, No. 1037, (May 03).
Rahman, AKM Matiur and Yasmin, Sabera (2008). Estimating Revenue Losses Evolve From
Tax Evasions in Bangladesh, AIUB Bus Eco Working Papers Series;http://
orp.aiub.edu/FileZone/OtherFiles/orpadmin-8...BUS-ECON-2008-19.pdf
Rahman, H.S. and Shilpi F.J. (1996). A Macroeconomic Model of the Bangladesh Economy:
Model, Estimation, Validation and Policy Simulation, Bangladesh Institute of
Development Studies, Research Monograph No. 17, at www.bids-bd.org.
Sarker, Tapan K. and Kitamura, Yokinobu (2002). Technical Assistance in Fiscal Policy and
Tax Administration in Developing Countries: the State nature in
Bangladesh, Asia-Pacific Tax Bulletin (September).
Pasternak M., and Rico C., (2008). Tax Interpretation, Planning and Avoidance: Some
Linguistic Analysis, Akron Tax Journal, 33.at
http://www.uakron.edu/law/lawreview/taxjournal/atj23/docs/paternak08.pdf.
**
11 E-tax filing has already been implemented on a pilot basis in a specified tax zone.
20
15
16