Outline of Modernization Plan (2011-2016) National Board of Revenue (NBR)

Table of Contents

Executive Summary 1. NBR Modernization Plan

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2. Progress made by NBR in implementing the Plan 3. Indicative timeline

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Executive Summary The National Board of Revenue (NBR), as the central authority of tax policy and administration in Bangladesh, plays a critical part in the development of the country. During the current fiscal year (FY 2010-11), NBR is expected to collect Taka 75,600 crore, providing much needed support to the governments development efforts. In recent years, Bangladeshs tax collection has recorded an impressive growth averaging 20% per annum. Despite this good achievement, a lot remains to be done. Bangladeshs 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 crore to the revenue collection. Most of NBRs processes are manual and there is little in the nature of taxpayer service and taxpayer education. The NBR also faces problems in its functioning due to its 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. Moreover, the NBR faces the problems of acute shortage of trained manpower as well as physical infrastructure. These weaknesses of the NBR have not gone well with the business community and individual taxpayers. In response to these challenges, the NBR has embarked on far reaching reforms both on tax policy and tax administration. In addition, as part of the governments Digital Bangladesh agenda, the NBR has undertaken several initiatives on automation of its tax processes to improve its efficiency and provide better taxpayer service. The NBR is also being supported by several bilateral donors and the multilateral organizations on reforms on tax policy as well as administration. While, all these efforts have supported NBRs reform efforts, the reform agenda appears to lack proper sequencing, prioritization and comprehensiveness and at times leading to duplication of efforts. In March 2011, the NBR took the decision to chart out a comprehensive modernization plan, encompassing all components of NBR reform efforts under one Plan that could be implemented with a view to achieving the intended goals over the next five years. Two retreats were organized, the first in March and the second in May, 2011, to bring together the senior NBR officials from the different wings towards a common purpose of motivating them about reforms. The goal of these retreats was to update the NBR rank and file on the current reform efforts as well as to chart in an inclusive manner, the goals, the direction as well as future direction. Through these retreats, the NBR attempted to bring together the action plans of the different wings of NBR under one common plan. 3

This modernization plan outlined in this strategy paper is essentially based on the deliberations that took place during the two retreats on the background studies presented by different task forces on the key issues. The document is organized as follows; Part-I deals with the tax policy initiatives; Part-II deals with reform of the business processes; Part-III includes the digital NBR agenda; Part-V deals with the architecture of the NBR, how the different parts work with each other and the place of the NBR within the executive and its relation with the government Part-VI looks at improvements to taxpayers service; Part-VII focuses at efforts to improve tax compliance through audits and a quick appeals process and, Part-VIII looks at human resources (HR) and institutional development. This document is a summary that outlines the goals under the different parts and the broad timelines for implementation. A more detailed document that includes the mechanism to implement this plan, a detailed timeline as well as resource requirement is expected to be prepared by September, 2011 and put before the government for approval. This final document would then guide NBR reform agenda over the next five years, e.g. the 6th five year plan period. Overarching goals NBR expects that the modernization plan, when fully implemented, would enable it to: Reach a tax-GDP ratio of 13% by 2016; Provide exemplary customer service to all taxpayers through a web enabled tax administration from e-registration, e-filing of tax returns to epayments/refunds by 2016; and Reduce the tax pendency in the courts by 80% by 2016.

1. NBR Modernization Plan 2011-2016 The National Board of Revenue (NBR) is the apex national tax policy and tax collection and tax systems administration agency of the Government of the Peoples Republic of Bangladesh (GOB). The NBR is responsible for end to end oversight and superintendence over both direct taxes as well as indirect taxes. These include Income Tax, VAT and Customs. The NBR in turn reports to the Internal Resources Division (IRD) of the Ministry of Finance, Government of the Peoples Republic of Bangladesh. The Secretary to GOB in the IRD also serves as the Chairman of the NBR. Other Members of the Board include professional tax cadre officers from the three tax wings under NBR control. The NBR has undertaken an aggressive and comprehensive organizational renewal program that seeks to put in place an efficient, effective, fair and responsive tax regime which is benchmarked against international best practice. The envisaged reform program covers all the three taxes i.e. Income Tax, VAT and Customs. The reform will review and modernize both, (i) the tax policy (tax laws and statutory rules) and (ii) tax administration (business process, organizational design, HR policies, taxpayer services etc.). Tax performance in Bangladesh has been registering a steady incremental annual improvement over the years with an average 20% growth over the last four years. However the gap between tax policy expectation and tax performance is significant. This gap is going to become far wider in future as the GOB expects the three taxes to deliver revenue outturns that would be more than 200% higher than the current tax performance over the next five years. The macroeconomic framework underpinning the budget envisages the Bangladesh economy to grow by 7% in FY 2011-12. This outcome is predicated upon a significantly enhanced revenue outturn by allowing the government to finance a much larger Annual Development Program. However, the NBR faces several challenges in fulfilling this goal. The tax base in Bangladesh is very narrow with fewer than one million income tax filers. Non-reporting and under-reporting of taxes afflict all the three taxes. The present tax information gap between what the taxpayer knows and what the three tax departments know about their taxpayers is very wide. In effect, the taxes that get paid are what the taxpayer chooses to pay and not what he/she is obliged to pay under law. The NBR is woefully short on administrative resources in terms of manpower, finance as well as physical infrastructure. Its tax management procedures and business rules are desperately in need of review and improvement and its processes are cumbersome, being largely manual and paper intensive. There are obvious leakages of tax revenue from even tax filers on account of inadequate accounting procedures. 5

The present tax administration structure, methods and business processes were designed for a manual paper based work environment and are inadequate. These do not equip the NBR to deliver on its ambitious service and compliance improvement goals, which in turn are critical for the NBR to fulfill its revenue outcome / tax performance vision. Hence the NBR has chosen to embrace ICT as a key driver in its comprehensive tax administration reform effort. This part of the reform is the program, Digital NBR which in turn is a subset of the national program, Digital Bangladesh. The NBR does have pockets of computerization in some work areas. However, this is largely on standalone PCs and does not produce strategic value for the NBR. In fact, the disaggregated computer programs run side by side with the legacy manual processes have not replaced any significant part of the legacy tax management work. There is no integrated information system and different functions even within the same building do not communicate with each other. The present weaknesses in tax laws and tax administration severely limit the capacity of the NBR and its field formations. Thus the NBR cannot expect to deliver the desired growth in revenue outcomes without first fixing the tax laws through a comprehensive policy reform and supporting such policy reforms with concurrent tax administration reforms. The NBR has accordingly put in place a major reform agenda that seeks to push across the broad reforms in the three national tax systems through several concurrent short-term and long-term reform tracks. The purpose of this document is to link these different parallel/sequential tracks or proposed tracks into one comprehensive master plan that sets out a critical path with milestone dates for different tracks to converge on the critical path. The short-term objective is to ensure early wins along the critical path while pulling together the different components of the policy/administration reform for the full blown reformed tax systems in the context of the overarching revenue improvement and other goals under the Modernization Plan. The Modernization Plan of the NBR is the result of a series of engagements that the NBR has had with its rank and file and key stakeholders to address the problems outlined above. It covers a period of five years and has well defined goals and sub-goals under nine strategic areas. 1. Tax Policy Reforms This covers a new Income Tax Act, a new VAT Act and Customs Tariff rationalization and modernization of the Customs Act 2. Integrated Revenue Management Program Business Process Reform This component aims to streamline the business processes across the different taxes for greater efficiency and better tax compliance. This 6

component is closely dependent on the automation process as well as the reform that re-organizes the NBR by function and size. 3. Integrated Revenue Management Program Automation of the Tax Processes This component includes the automation of the different wings of the NBR. A key part of this is the allotment of Taxpayer Identification Number (TIN) and Business Identification Number (BIN) for income tax payers and VAT payers respectively. The other major components are the setting up of an NBR Data Center, Centralized Processing for Income Tax and VAT Returns, Tax Information Network and installing a Integrated Tax Administration Software that would help tax officials perform their functions in a computerized environment. 4. Redefining the Status and Regulatory Power of the NBR This work stream addresses the overarching administrative structure of the NBR. This includes strengthening the Headquarters including autonomy of financial and personnel management, modifying reporting lines for greater efficiency and the place of NBR within the executive and its relation with the government. 5. Restructuring NBR according to Function and Size This component looks at means to improve the efficiency of the tax administration by organizing it to deal with taxpayers by size (The Large Taxpayer Unit, Medium Taxpayer Unit and Small Taxpayer Unit). Efficiency could also be derived by merging functions (such as tax collection, and filing of tax returns) across the different taxes. 6. Strategic Communication and Taxpayer Outreach, Education and Assistance This part includes designing a comprehensive communication strategy for the NBR, devising taxpayer education modules, supporting taxpayers through direct face-to-face assistance provided in taxpayer service centers and through call centers, and a Web interface that provides comprehensive support to taxpayers. 7. Enforcement Improvement Program This component focuses at efforts to improve tax compliance through better audits, better investigation including combating international tax evasion, improving collection of tax arrears and addressing taxpayer grievances through quick disposal of tax appeals including alternative dispute resolution (ADR) mechanism. 8. Human Resources and Institutional Development Program This component looks at the various resources to successfully manage the implementation of the Modernization Plan. It includes human resources (HR) management such as performance measurement, integrity 7

management, developing a research wing within the NBR and upgrading the training infrastructure including the two tax training institutions. 9. Infrastructure Development Program This component looks at the requirement of the physical infrastructure such as building and furniture as well as the IT hardware requirements to support the automation of the tax processes. The goals of the Modernization Plan are: i. A sound tax policy in line with the international best practice while also being consistent with the local conditions in Bangladesh as well as the higher economic and fiscal policy goals and imperatives of the GOB. Significant growth in revenue performance through widening and deepening of the existing tax base across all the three taxes. Enriched and enhanced taxpayer experience through an array of easily accessible taxpayer services available at multiple remote/ customer facing touch points. Reducing compliance cost for the taxpayer by reducing unnecessary paper works and contacts between tax administration and taxpayers thereby establishing a regime that makes the relationship between the tax departments and the honest and diligent taxpayer incident free. Shifting tax compliance management from the traditional subjective audit selection approach to a computer assisted intelligent selection approach based on efficient data mining and revenue risk management tools. Setting up an efficient, integrated national tax accounting network that will correctly account for, reconcile and record tax payment information at a transactional level for all the three taxes and make visible this information in real time basis to taxpayers and to all stakeholders including GOB, NBR, tax officers, Bangladesh Bank and taxpayers. Reassignment of tax personnel from non priority routine work to priority compliance and tax collection work through separation and consolidation of non-priority non-taxpayer facing high volume low knowledge, tasks like return receipt and processing, tax accounts, taxpayer registration with TIN/BIN, record keeping etc. in a remote centralized mass processing center. Creating an administrative and legal framework that ensures the collection of sovereign taxes in a fair / accurate manner while also supporting the competitiveness of Bangladeshi businesses in a transnational global economy. Strengthening of tax evasion detecting unit like Central Intelligence Cell (CIC) and other intelligence units. 8

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Increased cooperation and coordination with other government and non-government agencies. Human resource development through effective training.

1.1. Tax Policy Reforms Underpinning any tax modernization plan is a sound tax policy that is efficient equitable and that can be easily administered. The Income Tax Ordinance of 1984 has become out of date and complicated over time due to several amendments through successive Finance Acts. The VAT Act of 1991 is badly in need of reform to move it from an excise based system towards a true VAT. The Customs Tariff is also in need of restructuring and the Customs Act, 1969 needs to be modernized. 1.1.1. Formulation of Income Tax Law There are several weaknesses in the current Income Tax Ordinance. These include, the excessive discretion provided to tax authorities on policy issues, the proliferation of tax incentives and concessions, poor compliance arising due to weak enforcement, limited use of information of taxpayers from other taxes as well as third party information from other agencies, and over dependence on presumptive taxes as a final tax irrespective of taxpayer size. The NBR is undertaking a comprehensive review and re-casting of the Income Tax Ordinance through a new Income Tax Act. The policy framework for the proposed Code seeks to simplify and streamline tax laws, reduce opportunities for disputes and litigation, correct and check transfer of national tax resources to locations outside the country and move to a full-fledged self-assessment tax regime in line with international best practices. The Code will also rationalize and streamline work distribution pattern and enable and support centralized operations and return processing, electronic filing, gathering of third-party information and improved compliance management methods. The Code will do away with desk audit and other manpower hungry procedures and assist in reallocation of administrative resources for tax compliance and customer service. The new Code is likely to be signed into law within the next one year. 1.1.2 Formulation of VAT Act The VAT Act of 1991 suffers from several weaknesses that several Finance Act amendments have not been able to rectify and requires a comprehensive and new law. The main problem is that the existing VAT is primarily built around the old excise system that it replaced. The problems are, excessive use of physical monitoring of businesses rather than the use of secondary information, treatment of each unit of a multi unit business as a separate business entity, use of deemed value added based on a percentage of sales (truncated VAT), tax liability based on approved prices rather than actual prices, over reliance on presumptive VAT, etc. A working draft of the new VAT Act has already been prepared and is under discussion with the key stakeholders. The proposed statute seeks to replace the existing VAT Act and will rationalize the operation of the law as well as facilitate 10

country-wide administration of the VAT regime. The proposed statute will facilitate electronic interface for taxpayers and a national tax accounting platform for VAT credits and refunds/adjustments of input/output tax. It will also facilitate centralized processing of returns and effective flagging and reporting of exceptions for compliance intervention by field staff. The new VAT Act is also likely to be signed into law in the next one year. 1.1.3 Customs Tariffs Restructuring and Rationalization including modernization of Customs Act This program will seek to improve the policy content and framework of the Customs Act, 1969 in the context of the national vision of Bangladesh as well as the required operational efficiency of the customs interface in the country. The reform of the Customs Act would include, (a) Provision for full implementation of Revised Kyoto Convention (RKC) (b) Introduction of WCO SAFE Framework of Standards (FoS) (c) Review of related SROs (d) Introduction of Authorized Economic Operators (AEO) (e) Tariff rationalization to promote investments and prevent mis-declarations and eliminate distortions The modernization program, at the policy level will also factor in the mutation in the role and mandate of the customs authority from being a pure revenue collecting agency in the era of the high tariff walls to a multi-role organization in the current era of borderless movement of goods, services and currency flows. The modernization of the Customs Act also envisages improved risk management techniques, de-congestion and sharp turn-around cycle times at port facilities for customs clearance, remote centralized pre-arrival processing of duty payment and customs clearance with intelligent selection methods for full audit and verification in high risk cases. The proposals will streamline the tariff structure and bring the customs statute and practice in line with international practices. 1.2 Integrated Revenue Management Program: Business Process

Though Income-tax, VAT and Customs Departments function under the NBR, there is very little data inter-change among the three tax departments and the possible synergy among the three is entirely absent. An integrated revenue management program seeks to connect the three departments at transactional level by linking the taxpayer identification numbers i.e. TIN and BIN in the data base. The three departments substantially deal with the same client base or sub-sets of the same base. Hence it makes good business sense to create a data mining facility with modern risk management techniques to enforce better tax compliance. The methodology for setting up such an integrated system is to first 11

centralize the data base and transaction processing of the three departments at one location and then to build an information system that can mine data in the three data bases and thereafter process the same for exception reports. The separate Modernization Plans under the different tax wings should not be seen as independent verticals but limited to tax specific activities that cannot be integrated across the different taxes. The integrated revenue management program will enable the desired flow of information and consequent synergy among the three tax wings of the NBR. 1.2.1 Direct Tax Modernization Program The policy content of the new Direct Tax Code will put in place an efficient and modern direct tax regime in the country. The design will seek to encourage wide voluntary compliance by the over-whelming majority of taxpayers. This is sought to be achieved by making it simple for the honest taxpayer to meet his/her tax obligations with minimum inconvenience and with no additional compliance cost. The design will also seek to increase the cost of non-compliance and make the likelihood of detection of evasion much higher. This will be achieved by a strong and efficient third party reporting system. This will enable an integrated platform for capturing, analyzing and disseminating information after identifying logical inconsistencies between such information and information reported by a taxpayer in his/her tax return. Improved risk management methods will enable focused deployment of compliance resources in high revenue yielding cases and this in turn will produce a compelling compliance regime that will widen the tax base. Tax administration reforms will segregate and consolidate non-customer facing non-discretionary, high volume mass tax tasks in a centralized processing centre for efficient processing and closure. The manpower released from this redesign will be re-assigned for compliance, customer service, collection, market surveys, intelligence gathering and other customer facing activities. The policy and administrative procedure will seek to widen the taxpayer base to at least two million taxpayers from the present one million. 1.2.2 VAT Modernization Program The objective is to modernize the VAT administration in order to improve voluntary compliance and customer convenience in meeting tax obligations under the law. The Act and procedure as well as business process will also establish an efficient risk management regime for compliance intervention to ensure wide adherence to the VAT Act, which is capable of significant improvement in revenue outcomes. The Draft VAT law being discussed envisages a markedly different way of administering the VAT from the current excise-type system. This implies restructuring of the VAT administration to take advantage of the efficiencies provided through automation that enables information exchange across the different taxes. The officer-jurisdiction centric administration would need to be changed to more flexible arrangements that would help in meeting the challenges posed by understatement of sales in evasion prone sectors, 12

improper valuation of value added on services as well as loss of tax from internet based marketing. 1.2.3 Customs Modernization Program The customs modernization program will incorporate the latest ICT technology for better compliance in all its land, sea and air ports. This includes evaluating the practice of Pre-Shipment Inspection (PSI) and its gradual phase out. PSI adds to cost of doing business in Bangladesh and reduces the competitiveness of national businesses as similar costs are not imposed on businesses of neighboring countries. The replacement of the Pre-shipment Inspection will entail training of the customs officials in modern valuation techniques. The Customs Modernization Program has several components; a. Develop policy units at the NBR with strong and reliable MIS support and statistical capability; b. Formulate and update Standard Operating Procedures (SOP) on Risk Management, Post Clearance Audit, Assessment, Physical Inspection, NonIntrusive Inspection, Passengers' baggage handling at ports etc.; c. Develop audit manual for regular audit of activities and performance by internal and external agencies. (this is in addition to CGA audit); d. Strengthen and modernize intelligence and risk management, improve valuation and audit capacity; e. Redefine scope of work at customs stations through reduction in discretionary powers redesigning working process; f. Strengthen and modernize Customs Training Academy and review HR policy for retention of core competences (risk management, PCA, valuation, classification etc.) at respective offices; g. Redefine the role of PSI Agencies to procure support services like conducting investigations against customs fraud at overseas locations, gather trade data (price, forecasting etc.) for valuation database, quality certifications etc; h. Establish connectivity with important partners for providing Single Window Services; and i. Recruit new officers and impart training.

1.3

Integrated Revenue Management Program : Digitization Program

This program will seek to set up a country-wide integrated ICT platform to support the capture of all tax payment information from tax returns, banks, TDS deductors, third party collection agencies etc. It will also reconcile such payments through a two-way or a three-way match with information reported by 13

the taxpayer in returns and other filings with the department. It will further reconcile this with the version of the payment available with the Bangladesh Bank. This is to ensure that there is only one version of the truth and the information with the taxpayer, the NBR, Bangladesh Bank, Sonali Bank and other collecting banks about a particular payment is the same and there is no other version of this truth as is possible under the present circumstances. The integrated revenue management system will also receive third party returns i.e. TDS returns, Annual Information Returns (AIR) etc. and generate MIS reports, exception reports etc. It will make clean tax payment information available to the NBR and its three tax wings in a clean, reconciled and confirmed online format. The system will also establish a revenue performance dash board accessible online to all authorized NBR/GOB users to view revenue collection figures at the national, zonal or office levels on real time basis. These goals would be achieved by the following work streams: 1.3.1 Taxpayer Identification Number (TIN)/Business Identification Number (BIN) Project The Taxpayer Identification Number (TIN) is the foundation for any automation of tax administration. The TIN enables the maintenance of a single taxpayer account, enables the exchange of information of taxpayer transactions across the different taxes and high value transactions outside. This ensures that taxpayers have the correct status of their tax liabilities and also ensures that the tax evaders are targeted based on the information collated from multiple agencies. The existing TIN is a manual registration program that suffers from many defects including representation errors, duplicate numbers, incomplete database and inconvenience of a decentralized registration procedure. The NBR is in the process of replacing this number by an efficient nationally unique number or new TIN which will also be linked with the national ID Number. The program will centralize the database, the transaction processing and allotment process and maintain high service standards. It will also allot a TIN card to each TIN applicant under a promised service turn-around time. The program will also set up 100 or more TIN Facilitation Counters (TIN FC) in all districts of the country to enable ease of application and service for applicants. It will also set up an efiling portal for remote online application and also put in place an express service for urgent cases. The program is to be launched under a managed service model in a public private partnership framework. The Business Identification Number (BIN) program for registering businesses and branches of businesses for VAT administration is also being revamped and a new series of VAT is being allotted that would follow up, and be derived from the TIN. This will enable proper management of VAT payers.

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1.3.2 Centralized Processing of Income Tax and VAT Returns program A modern tax administration makes the maximum use of technology to relegate routine tasks to the background to be outsourced with high quality data that would then be made available to tax officers. A big part of such routine tasks involves the data entry and arithmetic processing of tax returns. Under this program, a Central Processing Centre is to be set up for processing all Incometax and VAT returns, whether e-filed or paper filed at one integrated processing centre. The entire database and transaction processing will reside at the NBR Primary Data Centre (PDC) and the economies of scale achieved will enable quick service turn-around time as well as efficient information management for all the three taxes. This centre will draw tax payment information from the tax record keeping accounting agency or CRA and deliver products and services to taxpayers, to NBR and other key stakeholders. The centralization of high volume low knowledge, repetitive jobs like receipt and processing of returns and accounting for taxes etc. will free critical trained manpower of the NBR for attending to the highly neglected tax compliance activities. This change in management of tax work will support significant improvements in revenue mobilization. 1.3.3 NBR Data Centre The NBR will set up centralized hardware architecture to cover the whole country. This will establish a Primary Data Centre (PDC) at the data centre of the Bangladesh Computer Council in Dhaka. The Primary Data Centre will be linked to a Business Continuity Centre (BCC) located in a different building in Dhaka. This in turn will be connected, along-with the PDC to the Disaster Recovery Centre (DRC) to be located in an NBR building at Rajshahi or within another seismic zone. This will serve as a backbone for ICT for the NBR and this in turn will be linked to client machines across all locations covering the three taxes under the NBR. The entire database and transaction processing will be carried out at the PDC and will be mirrored and mimicked at the BCC/DRC. The data centre and the network are intended to be established through a Systems Integrator (SI) Project, possibly under a BOT model. 1.3.4 Tax Information Network Under this project, it is planned to establish an integrated tax accounting system which will be able to verify tax payment claims against actual receipt by the government in banks, consolidate tax accounts and support field formations with accurate tax payment information online. It will also support the NBR and the government with real time accurate revenue performance information. A Central Record Keeping (CRA) Agency is to be established on a managed service model as a public private partnership to serve all the three tax wings of the NBR with an efficient accounting system. The system will also produce output reports and 15

actionable compliance information for correcting delinquency in income tax, VAT and customs payments. This intervention is likely to significantly improve revenue performance and compliance environment in the three taxes under NBR control. The program can be implemented and stabilized within a period of 3 6 months. The compensation to the CRA for the service can be on per transaction basis to be paid partly by the NBR and partly by third party return filers. The Tax Information Network would allow taxpayers to have real time access of their tax accounts and automatic crediting of refunds to their bank accounts. This would considerably reduce compliance costs of taxpayers as they would have less need for costly accountants to ensure that their tax records are in order or, having to visit the tax office from time-to-time. 1.3.5 Integrated Tax Administration Software (ITAS) Project The Tax Information Network, the Centralized Processing and the Data Center are key ingredients to generate the required data for tax administration to function. There is a need for front-end software that would take this data and provide for risk based audit modules for audit, managing tax assessments, manage tax appeals and adjust tax liabilities, prepare reports for senior management, manage the HR, etc. The Integrated Tax Administration Software Project will look for customized or off the shelf solutions to address these issues. This is the software that will be on the desktops of the tax officials and senior management for managing a lot of their day-to-day work. 1.4 Redefining the Status and Regulatory Power of NBR

The Modernization Plan intends to re-orient NBR away from the traditional department of the government to one that is run as a corporate entity with the focus on management rather than administration. This requires the redefining the role of the NBR and its relation with the government. With this end in view, the project would look at the needs to redefine the status, role and regulatory power of the NBR in light of the necessary modifications of the Presidential Order 76 of 1972 or through the enactment of new Act of Parliament based on ongoing international best practices. The objective is to give the NBR a corporate entity with autonomy of financial, organizational and personnel management and performance matters and also empowering it to make investments from revenue collection, implement transparent tax policies in an integrated manner. Under the scheme, the Tax Policy Unit of the NBR is to be separated from tax enforcement. This project would look at strengthening the NBR to support its new and refined role.

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1.5

NBR and Field Formations Restructuring (By Function and Size) Program

The existing officer-centric administration while most appropriate in a manual environment with little information exchange across offices and taxes is unsuitable in todays more complex environment. Taxpayers undertake transactions that have implications across the various taxes and bringing this information together provides the assessing officer with valuable information to assess the tax liability without having to resort to time-consuming physical inspections. Further, moving several routine tasks such as, collection of tax forms, arithmetic checking of tax returns, automatic processing of refunds/sending of notice for deficiency, to be outsourced releases the administrator to do more useful high end tasks. As several of these tasks are cross cutting across the different taxes, these tasks could be merged by function saving precious resources by not duplicating these tasks. Taxpayers benefit by having to deal with one interface of the NBR rather than its three different tax wings separately. Presently, NBR tax offices are designed along the traditional jurisdictional system where cross-functional authority is vested in the Circle Officer or corresponding first line functionary in VAT or Customs. This design has severe limitations, particularly of scalability. Increases in workload never correspond with increases in manpower and other administrative resources like financial outlay or physical infrastructure. The consequence is growing inefficiency and neglect and collapse of several prescribed tax tasks like accounting, record keeping etc. Moreover, the design encourages one to one relationships between taxpayers and tax officials and generates a discretionary rent seeking environment. It also crowds out serious compliance effort as offices tend to get swamped with routine low knowledge jobs. It is recognized that there is a strong case for functional distribution of tax work at the line level so that economies of scale can be achieved and more efficient and specialized approach to tax management is possible. It is also not possible to efficiently and effectively computerize the legacy manual administrative design and procedure that supports cross-functional responsibility for all tax work in a given territory with only one individual. Hence, the NBR is moving towards distribution of work according to function and size in order to achieve a more balanced re-assignment of administrative resources across functions. For example, in the front offices of the NBR, audit assessment, collections, customer service, risk profiling, investigations and intelligence will all be separate functions that would encourage specialization and professional excellence. Similarly in the back office or Central Processing Centers and CRA, return receipts, return processing, tax account reconciliation, exceptional handling, refunds, call centers and customer facilitation, problem resolution, record keeping/archiving will all be separate specialized functions. The integrated information system and ICT platform will create a seamless environment for inter-function and intra-function flow of information. 17

The LTUs have largely been a success as they ensure a highly trained workforce tackling the cases that generate about 80% of the tax revenue. Among the remaining taxpayers are those who are medium and small/micro taxpayers. The small and micro taxpayers require a very different approach from the medium taxpayers as they require a greater emphasis on service and assistance than on audit. The segmented administration by size ensures a customized approach to taxpayers that enable the tax administration to manage their resources accordingly. 1.6 Strategic Communication and Taxpayer Outreach, Education and Assistance

Bangladesh has a very narrow tax base and a very small percentage of the population bears the burden of taxation. Most of the direct tax revenues come from TDS whereas a larger percentage should be coming from corporate tax as well as from businesses and professions through advance tax (PAYE). The logical inference is gross under reporting or non-reporting from various eligible categories. The tax performance across the board is inconsistent with the GDP and economic growth in Bangladesh. Obviously, in addition to improved taxpayer experience and effective compliance, there is a strong case for educating eligible taxpayers with their tax filing obligations as well as with information on how to go about it. Centralization and automation of tax accounts and return processing coupled with an efficient TIN database will provide valuable tools for analyzing taxpayer profile and behavior. Such analysis and information will be used to undertake an aggressive taxpayer education program. This will assist taxpayers to behave as responsible citizens/residents and to meet tax obligations arising from taxable income and activities within the sovereign territory of Bangladesh. The taxpayer education program will make available a menu of offerings through remote outlets like websites, internet etc. as well as through customers facing one to one or group interface with the NBR Customer Service Wing. 1.6.1 Strategic Communication and Taxpayer Outreach and Education Tax reforms are not painless. Changes in tax procedures and new taxes are likely to be opposed by the public and important stakeholders frustrating reform efforts. Strategic communication is extremely important to obtain taxpayer and key stakeholder support for tax reforms. The NBR needs to strengthen its internal capacity to undertake such communication with stakeholders and where required use external firms to convey its message. The process should start with a communication strategy that at first maps out the key stakeholders such as the parliamentarians, the judiciary and the media and then recommends the appropriate communication needs and vehicles. 18

Another important aspect of communication is taxpayer education. Taxpayers need to be informed of the various tax procedures in a manner that they can grasp easily. Apart from the media, important intermediaries such as business associations, accountants and tax lawyers play a crucial role in educating taxpayers. The purpose of taxpayer education will also be to develop mutual trust between tax departments and taxpayers with the assurance that there will be intra-taxpayer equity and the NBR will work towards ensuring that every person pays his/her due share of tax. The NBR will also ensure that the relationship with taxpayers and the department will be incident free for all law abiding taxpayers. The NBR will, under this program, reinforce its position that it is committed to supporting the competitiveness of Bangladesh businesses at the national as well as international levels and will ensure that the time taken to meet tax obligations is the minimum and the same does not impinge upon valuable productive time of taxpayers and their businesses. This program will also explore the use of providing relevant information to taxpayers through their cell phones. 1.6.2 Website Development Project The NBR has a reasonably informative and useful website. The NBR is working towards building strong back end systems and data management capacity through its effort of centralizing accounts, centralizing returns receipt and processing, centralizing transaction processing, centralizing taxpayer registration and rationalizing tax laws. Once these are in place, the quality and experience of accessing a range of the NBR taxpayer services through the official website will achieve a much superior level and will in effect make the website an interactive forum that would allow taxpayers to find links to a range of tax facilitation offerings. 1.6.3 Taxpayer Service Centre Project This program will work towards providing direct support to taxpayers through conveniently located facilitation centers. This program will also include the setting up of call centers that could provide answers to taxpayers questions. These centers will assist taxpayers in preparation of returns, in calculation of tax liabilities, in understanding of tax payment milestone dates etc. The service centers will also coordinate taxpayer education programs at the tax offices, at commerce and industry association forums, at tax advocates/CA forums and at other community organizations. The taxpayer service center project will also provide remote service through mobile phone, internet etc. 1.7 Enforcement Improvement Program

Enforcement will be entirely revamped and re-organized along modern and efficient lines. The traditional system of subjective selection and intuitive 19

enforcement with no measurement criteria for success will be replaced by a risk based compliance regime that will seek to make a distinction between honest and delinquent taxpayers. It will encourage delinquent taxpayers to join the voluntary compliance mainstream. The compliance system will be assisted by modern data mining audit selection tools that will identify and give a risk rating to different taxpayers and persons for enforcement action. The enforcement system will also be informed by the accounting CRA databases for identifying delinquency in TDS compliance. This will identify eligible non-deductors, deductors who deduct but do not pay, deductors who short deduct, and deductors who deduct and pay late. The exception reporting system will generate case specific compliance action information for the enforcement wing to help enforce compliance to the TDS regime. It is expected that efficiency in this regime will in itself, even under the current laws, produce additional revenue. Another area of increasing importance is the role of international tax avoidance and evasion through transfer pricing and the use of offshore financial centers. This program will train the NBR investigators in combating tax avoidance and evasion in these areas and thereby strengthen the CIC. 1.7.1 Audit: Skill (Training and Manual) Development Project; capacity build-up Since the Circle Officer handles every tax task in his jurisdiction in relation to every taxpayer, audit is only one of his/her several responsibilities. Hence, even competent and experienced tax officers have neither the time nor the opportunity to develop skills in effective audit work. In fact, the audit work has been largely crowded out on account of increase in workload and lack of manpower and other resources. Once routine and repetitive jobs are centralized in CPC, CRA, Centralized TIN administration etc., the Circle Officer will have the space and opportunity for quality audit work. An aggressive program for skill development and training in audit work is planned. Additionally, access to taxpayer specific third party information, TDS information, tax accounts information and industry specific performance information will enable the audit wing for moving to information driven audit of cases selected through an identity blind intelligent selection criteria. Skill development will include the latest techniques in combating international tax evasion, tax avoidance and transfer pricing. 1.7.2 Investigation: Training, Skill and Manual Development Capacity Building The function of audit is the right of the tax department to select a certain percentage of cases from the self-assessment basket for verification and intensive audit. This reinforces voluntary compliance by keeping taxpayers assured that their cases can be picked up for detailed and intensive audit. This process encourages taxpayers to report correctly and within time. Investigation is at a level higher than regular audit and cases selected for investigation will 20

also be based on identification through an efficient risk evaluation system. Investigations can be case specific, group specific or industry specific. The investigation wing will be informed by an effective evaluation and analysis of first party, second party and third party information in diverse data bases of the NBR. The investigation wing will also depend on field based enquiries and surprise checks and its operations will be evaluated and improved through a system of outcome measurement and feedback. 1.7.3 Collection: Organization and Structure and Development The NBR faces a serious problem with managing its tax arrears. This component would look into ways of managing the tax dues owed but not paid. Collection is a key function of any tax regime. Today it is a disaggregated and de-centralized operation with no clear information about who owes what or how much to the NBR. In the functional distribution of work, the collection function will need to be completely re-organized with a centralized database and a centralized/decentralized enforcement teams. All information related to taxes payable will be captured concurrently from diverse sources and will inform the collection enforcement teams automatically. The collection teams will run a reverse call center to call up delinquent taxpayers for payment of tax through periodic calls and reach them through reminder letters. All residual amounts not paid in spite of three calls and two letters will go to the front end enforcement teams for enforcement action to collect the tax through attachment sale etc. It is the experience that such an approach results in at least 70% of admitted tax dues being collected by just the remote actions and field enforcement is required only in 30% of the cases. 1.7.4 Litigation: Structure, Management Capacity Building, ADR Dispute resolution is a key issue in taxation. Currently, the dispute resolution mechanism within the NBR is inadequate and most of the disputes go up to forums outside the control of the NBR like Courts etc. The objective of the reform is to rationalize taxes at both policy and implementation levels and to discourage disputes as far as possible. In the event of disputes, the objective would be to settle disputes within the department wherever practical through a variety of tools including the ADR system. Improvement in voluntary compliance experience, taxpayer education, and an efficient information/risk-based compliance regime will itself reduce the volume of disputes. 1.8 HR and Institutional Development Program

A shift to a back office/front office format of tax management as well as a distribution of work based on function and size will call for a major overhaul in the HR approach to deployment and training of manpower. Since functional 21

distribution will encourage specialization amongst tax officials, the transfer and deployment policies will have to address supporting specialization and skill development in specific functions based on aptitude, flair, skill sets and ability. The HR policies will also have to address issues of intensive HR development and motivation as well as training. Since it is intended that at the senior supervisory levels, NBR officials will have cross-functional as well as functional responsibilities, it is proposed to expose officers of the NBR to different functions in the first few years of service and then to put them into function specific specialization before they are promoted to senior supervisory level. A comprehensive HR policy is to be designed to create congruence between aspirations and skill sets of individual officers and NBR organization goals. 1.8.1 Performance Appraisal, Integrity Management Development Project With the implementation of the organizational renewal and modernization plan, performance appraisal has to be strongly re-visited with emphasis shifting on established measurement standards for tasks performed by the NBR officers and staff. Presently, the appraisal is largely dependent upon subjective evaluation. Integrity needs to be reinforced and improved in any tax system and it is proposed to put in place an effective ethics management policy that encourages adherence to expected ethics standards and values across the NBR and also adoption of incentives/disincentives schemes based on quantifiable performance appraisal system. Since the NBR delivers an important publicly managed service that leaves a large imprint on the public face of the government as a whole, improving NBR services and efficiency to a much higher standard that reinforce and strengthen the trust of citizens in public services offered by the GOB is intended. 1.8.2 Research Wing Development Project Tax systems face several challenges in developing countries. These include a poor compliance environment and a wide tax information gap. These in turn result in under performance of tax systems. While these challenges have not been adequately addressed, globalization of the economy and dismantling of trade and tariff barriers have thrown up further challenges of transnational jurisdiction shopping and transfer of national tax resources to other countries and tax havens. In order to address these challenges through an institutional mechanism, this program would look at developing a research wing which will carry out in-depth research. These will include international tax jurisprudence, inhouse data analysis, market survey and research both within and through outsourcing. The effort is to support the three tax wings of the NBR to intervene with policy options as well as administrative re-adjustment for dealing with existing and emerging challenges. This support will help reduce the tax gap which is the difference between taxes legally owed to the State and tax actually 22

paid and collected. With strong and powerful back end systems being developed by the NBR for information and data management, the research wing will have enough width and depth for undertaking research and empirical studies to serve tax policy and administration. 1.8.3 Tax Academy Program The expanding training needs of the NBR require strong Tax Academies that would be able to provide year round training of international quality to tax officials of all tax systems. The current training infrastructure is sorely in need of improvement. The curriculum of the Tax Academies and their staffing and technology requirements has to be assessed and then upgraded. There is also need to tie up with international tax training institutions from around the world with the curriculum of the tax academies so as to keep their knowledge on tax matters up to date. 1.9 Infrastructure Development Program This project will look at the physical infrastructure requirements of the NBR offices throughout the country including buildings, support equipment such as backup generators, furniture, computer hardware, etc. 1.9.1 IT Infrastructure Project Since the IT platform will be an integrated data center with distributed client systems on the desktops of NBR staff as well as with several service providers (manning services like CPC, TIN, CRA, Customs, VAT etc.) inter-operatibility between different IT players (like SI, network, information systems, database, web server, application server, COTS providers, middleware providers and host of others) will be a key issue. These will have to be managed by a strong team at the NBR in order to ensure uninterrupted performance, functionality and uptime. Additionally, contract management for ICT and the management of licenses would become major administrative responsibilities for the NBR and it will require a full-fledged Directorate of Systems to manage these issues. 1.9.2 Estates and Building Management Project As a modern tax system, the NBR is committed to giving taxpayers the same experience in every office and outlet. This requires that the NBR has high quality physical infrastructure to facilitate customers as well as to keep the morale of the tax officials high. Hence a full-fledged Facility Management Group (FMG) is required to be set up within the NBR with wide responsibility for upgradation of present buildings and infrastructure and for development of new infrastructure in line with the re-design of the organization in the context of movement towards functional distribution as well as ICT enablement. The establishment of uniformity in interiors, furniture design, signage etc. will build brand equity for the NBR and make NBR buildings and facilities easily recognizable. 23

2. Progress made by NBR in implementing the Modernization Plan As mentioned earlier, this document has been put together from initiatives that have started within the NBR. The NBR has already made progress towards several parts of the Modernization Plan especially on the much needed tax policy reform. A draft Income Tax Act and a Draft VAT act have been put on the public domain for discussions. The NBR has met with several stakeholders all over the country to get feedback on the draft laws. The draft laws are now being modified in light of this feedback. On automation, the NBR has started a number of initiatives. The government has with the assistance of the Bangladesh Investment Climate Facility (BICF) prepared an IT strategy that is now guiding its IT policy. While there are existing initiatives under the different taxes, in light of a comprehensive IT strategy, some of these initiatives may need to be modified. The TIN/BIN project is going on steam with bidders submitting their final bids for implementing the project in a managed service outsourced model while ensuring full strategic control with the NBR. On the issue of reducing pendency of tax appeals, the NBR and the Ministry of Law, Justice and Parliamentary Affairs have finalized an Alternative Dispute Resolution (ADR) project. The draft law has been put out for discussion. Meanwhile, dedicated tax benches have been set up in the High Court Division of the Supreme Court. The NBR has put in place an automated tax calculator which is accessible to all taxpayers for easy and accurate tax calculation. This facility can be reached through the NBR website and has been very popular. The NBR website also provides for tax forms that could be filled up online, though it needs to be printed out and sent to the tax office. On the area of taxpayer service, NBRs tax fairs have been quite successful. In light of this NBR intends to have a similar fair during the tax filing season this year. The NBR has also automated the functioning of the Large Taxpayer Unit (LTU) Income Tax and the facility has created an efficient and modern office environment for taxpayers whose cases have been centralized with the LTU. Zone 8 of Income Tax Wing has also been automated. In VAT Wing, LTU (VAT) and Customs, Excise and VAT Commissionerate, Dhaka South have been brought under automation. Dhaka Customs House has already started its automation operation.

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3. Indicative Timeline of the NBR Modernization Plan

2011 2012 2013 2014 2015 2016

October

October

October

October

October

January

January

January

January

January

April

April

April

April

April

July

July

July

July

July

Short Term Revenue Improvement Program Tax Policy Reforms New Income Tax Law New VAT law Rationalized Customs Act Restructuring Customs Tariff Integrated Revenue Management Program - Business Process Customs Modernization Program VAT Modernization Program Income Tax Modernization Program Integrated Revenue Management Program - Automation TIN/BIN Project Central Processing of Income Tax and VAT returns NBR Data Center Tax Information Network Integrated Tax Administration Software Project Reorganizing NBR by Function and Size Restructuring NBR Administration NBR Architecture Reform Strengthening NBR Headquarters Separating Tax Policy and Tax Administration and IRD Taxpayer Outreach, Education and Assistance Taxpayer Outreach Program Taxpayer Education Module Taxpayer Service Centers Website Development Project Enforcement Improvement Program Investigation training Managing Taxpayer Debts and Collection Reducing Tax Appeals HR and Institutional Development Performance Appraisal, Integrity Management Program Tax Academy Modernization Estates/Buildings Management Program

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July