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