Bangladesh's taxman tries a different approach

Bangladesh is trying the softly-softly approach to get citizens to pay what they owe: the government has held a friendly income tax fair.

Tax evasion is endemic in Bangladesh, as in a number of other south Asian nations, with the country's 8.5 per cent tax-revenue-to GDP ratio the lowest in the subcontinent. Michael Hughes / Bloomberg

Instead of raiding delinquent taxpayers to sniff out undeclared cash, the Bangladeshi government this year sought another approach to increase its collections from those who shirk their tax obligations: it organised an income tax fair. The five-day event, which ended on Thursday, was organised in Dhaka, the capital, and Chittagong by the National Board of Revenue (NBR), Bangladesh's central authority for tax administration. The event, a one-stop destination for the taxpayer and the taxman, was aimed at boosting the number of Bangladeshis who pay tax.

Those who attended were given numbered tokens that were tracked on a central display board. Each token routed a visitor through a panel of tax officials who explained how to calculate the amount of tax payable on income. More than 17,560 first-time taxpayers obtained the taxpayer's identification number (TIN), a 10-digit ID. But the fair also allowed people to file tax returns. In the first four days of the event, 55,707 people filed returns, and the NRB collected taxes worth 1.17 billion taka (Dh61.7 million), said Nasiruddin Ahmed, the agency's chairman.

The end of the tax fair was meant to coincide with the expiry of a deadline for the submission of individual tax returns, but it was extended to Thursday of this week. Dr Mashiur Rahman, the economic affairs adviser to the prime minister, Sheikh Hasina Wazed, inaugurated the fair in the capital and emphasised the need for every Bangladeshi to dutifully pay tax to make the country "self-reliant" and overcome its dependence on foreign aid.

Buoyed by the rush of tax-filers, the government said it would arrange similar fairs in all major cities from next year. "The tax fair generated a very good response," says Sanjay Kathuria, the World Bank's lead country economist for Bangladesh. "Imparting education to the taxpayer is a part of the [government's] multi-pronged strategy in revamping its tax structure." In Bangladesh, as in a number of other south Asian countries, tax evasion is endemic, starving the government of revenue and retarding the pace of economic growth and social development. Tax evasion has also spawned a shadow economy, with most of the country's elite believed to be stashing away wealth in their homes or in foreign banks.

Bangladesh has only 2.7 million TIN-holders out of a population of more than 150 million. And of the small number of TIN-holders, only 757,000 remitted taxes in the past fiscal year, the NRB says. Bangladesh's tax-revenue-to-GDP ratio is 8.5 per cent, the lowest in south Asia. By comparison, Pakistan's tax-GDP ratio is reported to be 10.6 per cent and India's between 17 and 18 per cent. "Tax evasion is a serious problem in Bangladesh", resulting in huge revenue losses for the economy, says Dr AKM Matiur Rahman, an associate professor of business administration at American International University-Bangladesh (AIUB) in Dhaka. For various social and economic reasons, and because of widespread governmental corruption, many citizens "do not believe that paying taxes is a civil and social responsibility", Dr Rahman says.

People fear harassment from tax authorities and avoid them as much as possible, Dr Rahman says, but for many people, evading taxmen to prevent their hard-earned income from falling into the hands of corrupt officials is "a matter of pride". Transparency International's Annual Report 2009, its most recent, ranked Bangladesh at 139, in a tie with three other countries, out of 180 countries on the Corruption Perceptions Index.

This year's tax fair - and those in subsequent years - will use education to address rigid social attitudes against tax compliance, Dr Rahman says. "As a teacher, I find my students are averse to the idea of paying tax in their first class. By the end of the semester, their attitudes change as they understand that tax is a necessary evil in building a nation," he says. In Bangladesh's large, uneducated population, the propensity to evade taxes is compounded by the perceived difficulty of filing returns. The fair was meant to assure first-time taxpayers about the ease of filing returns.

"Many Bangladeshis thought filing tax was a lengthy, bureaucratic procedure," says Mr Kathuria. "But the fair has shown them that it is largely a hassle-free process." But the fair, while targeting the poor and the middle class, will not "induce [Bangladesh's] rich to report their income truthfully", says Faheem Haider, a political analyst in Dhaka. A veil of secrecy shrouds the financial affairs of Bangladesh's wealthy, who own most of the country's taxable assets, he says.

In a country with a self-reporting income tax system - known locally as the Self-Assessment System (SAS) - the rich are not under enough pressure to disclose their hidden wealth. "As a result, the government loses a large share of the revenue it would have gotten had it enforced its tax code," Mr Haider says. In a 2008 research paper released by the AIUB, Dr Rahman and a co-author, Sabera Yasmin, wrote: "Since wealthy people, in general, live in urban area where a least level of dodging can result [in] a huge amount of revenue losses, they mostly use SAS in filing their tax-returns. Therefore, the evasion problem is more severe in urban than that in rural even though over 80 per cent of the population live in rural areas."

Mr Ahmed said recently the ministry of finance was drafting a scheme of incentives for taxpayers in Bangladesh. But that alone may not be enough to remedy the problem. "The poor, who earn less taxable income, are left to bear the burden of the wealthy profligates of the country," Mr Haider says. Between 2005 and 2007, multinational companies trading in clothing and personal accessories, telecommunications equipment, textiles and seafood evaded taxes worth £186m (Dh1.08bn), according to a 2009 study, False Profits: Robbing the Poor to Keep the Rich Tax-free. The study was commissioned by the anti-poverty charity Christian Aid and conducted by Simon Pak, an associate professor of finance at Penn State University.

The companies also illicitly removed £600m of capital from Bangladesh between 2005 and 2007, according to Prof Pak's study. "If the duty rate is low in Bangladesh, [multinational corporations] increase the price of imported goods to fly capital from the country, and if the rate is higher they lower the price to dodge tax,"a senior central bank official told Bangladesh's Financial Express newspaper in April last year.

"Bangladesh has neither expertise nor resources to fight back such malpractice."