Nbr reforms and imf conditionalities

http://www.thefinancialexpress-bd.com/2015/02/01/78760

VOL 22 NO 82 REGD NO DA 1589 | Dhaka, Sunday, February 01 2015

NBR reforms and IMF conditionalities M S Siddiqui The share of taxes in the gross domestic product (GDP) is an imperfect indicator of the quality of a tax system. The National Board of Revenue (NBR) continues to be characterised by a weak policy framework, very limited administrative modernisation, a high degree of administrative fragmentation, significant human resource constraints and weak enforcement mechanism.

The persistent weakness of reform efforts is rooted in informal institutions, norms and networks sometimes referred to as a 'political settlement' and discretion and corruption.

According to the World Bank, the tax revenue (percentage of GDP) in Bangladesh was last measured at 9.98 in 2011.The tax-GDP ratio is very low with about 10 per cent in Bangladesh, but it keeps improving at a slow pace. Both tax and non-tax revenues as percentage of GDP have been increasing over the years. But the status is the worst among the SAARC countries. The taxGDP ratio and revenue-GDP ratio are the lowest in Bangladesh among the eight SAARC member-states too.

The country's revenue-GDP ratio is one of the lowest in the world and it is even lower than the revenue-GDP ratio of Nepal. The average SAARC tax-GDP ratio is about 15 per cent. The revenue-GDP ratio during the 1970s increased steadily with the exception of the period from 2001 to 2005. It increased by more than 3 percentage points from 7.5 per cent during 1973-1980 period to 10.8 per cent during 2006-2008 period. About 80 per cent of public revenues in Bangladesh are derived from tax sources and the rest 20 per cent from non-tax sources. The total tax-to-GDP ratio has increased by 2.8 per cent during this period. In contrast, the non-tax-GDP ratio has relatively been stable between 1973-1980 period to 2006-2008 period.

The corporate taxpayers are the highest income taxpayers. The projection of total revenue collection from income tax, VAT and customs duty for the year 2013-14 was Tk. 1,360.90 billion which was revised downwards to Tk.1,250 billion recently. Collection from VAT has always been higher.

The International Monetary Fund (IMF) has reform priorities for Bangladesh focused on stepping up revenue collection, strengthening the state-owned commercial banks (SoCBs) and state-owned enterprises, and improving public financial management. Steady progress is being made on the implementation of the new value added tax (VAT), with the international tendering

process for automation software already completed and on track for final selection of the software provider by end-June 2014.

The IMF suggested export tax rates (from 0.8 per cent to 0.3 per cent for ready-made garments exports, and from 0.8 per cent to 0.6 per cent for all other exports), effective from April 23, 2014 through June 2015. The cost is estimated at about Tk 20 billion in foregone revenue in FY14 and FY15. To offset this, we will have to undertake revenue-enhancing tax policy measures in the FY15 budget and improve tax compliance through administrative measures. Over the medium term, we will have to continue to rationalise import tariff structures (reducing the level and dispersion of tariff rates), and work on a plan to overhaul the corporate income tax by gradually reducing the rate while broadening the base, with the aim of increasing overall corporate income tax collection.

The IMF has suggested modernisation of tax administration system, reduction of energy subsidies and strengthening of transparency of subsidy policies, preparing cash flow forecasting in public finance and other many issues.

The Fund also wants the government to rationalise our trade policies by reducing dispersion and average level of protection, as well as incidence of waivers and exemptions. We will also have to expand public investments in areas with high expected social returns, in particular those that reduce supply bottlenecks and the cost of doing business.

Until the early 1980s, the IMF conditionality was largely focused on macroeconomic policies.

Subsequently, the complexity and scope of structural conditions increased, reflecting the IMF's growing involvement in low-income and transition economies, where severe structural problems hampered economic stability and growth.

Over the last 20 years, some form of revenue conditionality has been included in the 441 approved IMF-supported programmes. This revenue conditionality has supported the implementation of structural tax measures in a country's reform programme. In recent years, the use of revenue conditionality has increased.

Fiscal adjustment has been an important element of IMF-supported programmes. Conditionality typically covers both the design of IMF-supported programmes-that is, macroeconomic and structural policies-and the specific tools used to monitor progress toward the goals outlined by the country in cooperation with the IMF. All conditionalities under an IMF-supported programme must be critical to the achievement of macroeconomic programme goals. The member-country has primary responsibility for selecting, designing and implementing the policies that will make the IMF-supported programme successful. Over the years, programme conditionality has become better tailored to individual country needs, more streamlined, and focused on core areas of IMF expertise (IMF, 2012).

Conditionality can take different forms including prior actions (PA), quantitative performance criteria (QPC), indicative targets (IT), or structural benchmarks (SB). Prior actions are measures that a country agrees to take before the IMF's Executive Board approves financing or completes a review.

The NBR has donor-financed and very costly reform and modernisation plan, and hopes to reach a tax-GDP ratio of 13 per cent target by rendering 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 to reduce the tax dependency by 80 per cent by 2016. The reform will review and modernise both (i) the tax policy (tax laws and statutory rules) and (ii) tax administration (business process, organisational design, HR policies, taxpayer services etc.).

Upon advice of the IMF, the government is in the process of updating the Income Tax and Customs Acts. A new Value Added Tax Act has been passed and waiting for implementing the law but it has already created some debates. At present, revenue mostly depends on trade-related taxes. The share of customs duty is 25 per cent of the national revenue collection. Trade taxes are easier to collect, especially in developing countries.

Donors including the IMF expect the government to strengthen revenue collection as part of the agreed fiscal adjustment in the context of the donor-supported programme so as to give a positive signal to creditors and investors.

Since 2008, Bangladesh has been facing mounting concern about long-term fiscal management, which has motivated increased demands from donors for more aggressive tax reform efforts.

These demands have focused on the implementation of a major VAT reform with a secondary focus on reform of the Income Tax Act. Both reform measures have become formal conditions for new IMF lending. In response to this external pressure and the mounting need for additional resources, the government put in place plans to introduce new VAT and Income Tax laws.

The exiting VAT Act has many anomalies such as package VAT, advance trade VAT at import stage and truncated system of VAT and tariff-value system to determine the VAT amount approved by VAT officials. Again the new law does not have the provisions. The new law should cover many sectors of business and maintain proper records for calculation of VAT but business persons are not in a position to keep their records as per VAT Act and rules to substantiate their legitimate positions. But the discretionary power has been increased in many folds ignoring the advice of the IMF to increase accountability of officials and transparency in operation. An Assistant commissioner can withhold bank account at discretion and penalty has been increased from the existing rate. A VAT official can block any transaction and also make the relatives of tax payers liable. The 'relative' is not yet defined, thereby making an uncertain risk for even distinct relatives liable for someone else's tax. The appeal to higher court has been made conditional (payment of 10 per cent of claimed tax before appeal) and ADR also conditional and biased towards the NBR as the arbitrators must be from selected and registered arbitrators of the NBR. These are the issues to be addressed to satisfy the business community to accept the new law.

The IMF is not happy with the new law and also slow reforms in NBR. By this time, the IMF postponed disbursement of the sixth tranche of the IMF-ECF credit which may be released together with the final installment in April 2015, subject to announcement of the roll-out of the VAT and SD Act in July 2016.

Business community and donors have similar requests for reform, although from different perspective. The NBR should improve good governance and reduce formalities of tax records and proposed punishment with existing tax administration and set-up in order to gain confidence of business persons and meet the conditions of donors. The government may evaluate the tax policies like tax laws and statutory rules and tax administration like business process, organisational design, taxpayer services etc.

The writer is a legal economist. shah@banglachemical.com